麥當勞 (MCD) 2008 Q4 法說會逐字稿

Hello and welcome to the McDonald's January 26, 2009 investor conference call.

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

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

(Operator Instructions) I'd now like to turn the conference over to Ms.

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

Ms.

Shaw, you may begin.

Thank you.

Hello, everyone, and thanks for joining us.

With me on the call this morning are Chief Executive Officer, Jim Skinner, Chief Financial Officer, Peter Bensen, and for Q&A will be Chief Operating Officer, Ralph Alvarez, joining us via phone from Geneva, Switzerland.

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 on our earnings release and 8-K filing also apply to our comments.

Both documents are available on our web site at investor.McDonalds.com, as are reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.

And now I'll turn it over to Jim.

Thanks, Mary Kay.

Good morning, everyone.

I'm pleased to report that McDonald's sales momentum continued into the Fourth Quarter contributing to another very strong year.

Global comparable sales were up 7.2% for the quarter and 6.9% for the year.

In constant currencies, operating income grew 20% for the quarter and 14% for the year, excluding the effect of the 2007 Latin America transaction.

Our continued success is the direct result of our focus and alignment around five factors driving the Plan to Win; Menu variety and beverage choice, better restaurant operations, convenience in day part expansion, everyday predictable low prices and ongoing restaurant reinvestment.

Globally we offer unparalleled food and beverage choice across our entire menu.

We serve customers when and where they want McDonald's, and we provide value across the entire menu.

This remains a significant, predictable and attractive brand differentiation that's critical when consumers are feeling the pinch almost everywhere else in their daily lives.

Our growth began long before this recession and continued through 2008 with strong performance in December.

Now while we clearly prefer a more robust environment, today's market conditions play to our strengths.

In fact, our global comparable sales continue to be strong in January, with each of the area of the world's reporting positive results.

In the United States, comp sales increased 5% for the quarter and 4% for the year driving operating income growth of 11% and 8%, respectively.

We're very proud of these results especially considering the slowing economy and volatile commodity cost environment.

The US has grown market share in dollars and customer visits by leveraging its breakfast, chicken, beverage, and convenience strategies.

Value, of course, remains a top priority.

We continue to provide value oriented choices while managing the impact to mitigate the impact to the business.

That's why we added the McDouble, a double hamburger with one slice of cheese, to the dollar menu in December.

Customers can still enjoy the classic double cheeseburger at a tremendous value.

Now while it's still early, we're achieving the expected results from this change.

About 40% of the value burgers sold have been McDoubles and 60% are double cheeseburgers.

And while the dollar menu is an important component of our value strategy, in 2008 it accounted for just over 13% of sales, about where it has been since its beginning six years ago.

Value isn't the only reason customers choose McDonald's, however.

We also continue to make progress with our beverage strategy.

Hot and cold specialty McCafe coffees are now in more than 7,000 restaurants.

After completing the specialty coffee rollout in mid year, we will continue to build our beverage business by beginning to introduce smoothies, frappes, and bottled drinks.

Restaurant profitability remains a top priority.

Despite volatile commodities, labor, fuel and other pressures, we expect the average US franchise restaurant to see slightly positive cash flow growth in 2008, remarkable in this environment.

We will continue to focus on value across the menu and operational excellence with the goal of mitigating these cost impacts to the business.

Let's turn to Europe where comparable sales were up 7.6% for the quarter and 8.5% for the year.

In constant currencies.

operating income grew 13% and 17% for the quarter and year, respectively.

The number of visits customers are making to McDonald's has grown despite the decline in overall traffic within Europe's informal eating out category.

While many countries in Europe are seeing an economic slowdown, our European business remains strong.

France, the UK, and Russia in particular, have not felt this impact, but we are seeing some softening in Germany.

But as our results clearly show, Europe's three strategies to upgrade the customer and employee experience, build brand transparency and enhance local relevance through new menu platforms are resonating with customers.

Our three tier menu remains the main growth driver.

It provides customers with greater choice and great tasting food at everyday affordable prices.

Several markets have also been successful with the fourth tier between the value and core price points, with the Petite Plaisir in France and the new Little Tasters in the UK.

We also continue to make progress with the implementation of our bridge operating platform or BOT.

The platform enables restaurants to provide menu variety because it simplifies operations and helps improve quality.

With BOT, markets like France have been able to extend their premium product range.

Currently, it is in approximately 75% of our European restaurants and we expect BOT to be rolled out across most of Europe by the end of this year.

We also continue to upgrade the customer experience through our continued focus on convenience and reimaging, a focus on day part expansion is making McDonald's more convenient in providing incremental sales in an increasing number of European Markets.

80% of our restaurants currently offer some form of extended hours, and in markets like the UK and Germany we're seeing a halo effect on our breakfast business.

Drive through optimization is also playing a part in our growth.

We have a significant opportunity to grow this part of the business by continuing to maximize efficiency, capacity and order accuracy.

In the area of reimaging, we continue to make progress in many of our major markets.

For instance, the UK remodeled 177 restaurants last year and is planning to remodel about 200 more in 2009.

And in Germany we're closing in on our goal to reimage 100% of our restaurants with only about 200 remaining.

Last year, Germany also added 150 McCafes, an upscale area within the restaurant that offers cappuccinos, lattes and pastries, providing a place for customers to connect with each other.

Let's shift to Asia Pacific, Middle East and Africa, where comp sales were up 10% for the quarter and 9% for the year.

Operating income also continued to grow in this region, up 38% for the quarter and 28% for the year in constant currencies.

2008 results were primarily driven by our three largest markets, Australia, China and Japan, with most other markets positively contributing, as well.

Australia, one of our established markets had a great year, posting double digit comps every month in 2008, as well as double digit growth in operating income for the quarter and for the year.

APMEA success is based on five platforms for growth; value, convenience, breakfast, core menu and service.

In each case, our goal is to insure we're focused on the right customers and day parts to become our customers' first choice.

Value remains a key growth driver across Asia Pacific, Middle East, Africa.

In 2008, Japan broadened its granted affordability program to multiple price tiers while Korea and Singapore introduced value lunch programs with much success.

Convenience also continues to drive results in APMEA.

42% of APMEA restaurants are open 24 hours, a 30% increase over the prior year.

And our focus on extended hours is driving business during the morning hours.

Customers can now get breakfast in 70% of our restaurants throughout the segment.

It averages almost 14% of restaurant sales.

Core menu is also driving results across many markets.

For example, favorites like the new chicken line in Australia and New Zealand and the recent introduction of the Quarter Pounder in Japan.

Many smaller markets are also seeing success with important line extensions.

Now before I move on, I'd like to recognize a recent milestone in China, one of our high potential markets.

In November, we opened our 1,000th restaurant in China making it the fastest market outside the US to reach this milestone.

This year, we plan to open another 175 restaurants, the highest number of planned new openings for McDonald's market in '09.

This is clearly a testament to our confidence in China's long term potential.

Before closing, I'd like to share a few thoughts on our commitment to financial discipline and the ways in which we're enhancing shareholder value.

In 2008, we returned $5.8 billion to shareholders through dividends and share repurchases for a total of $11.5 billion toward our $15 billion to $17 billion three year target.

We remain confident we will meet this goal by the end of 2009 while also preserving capital to grow our business.

Last year, we invested $2.1 billion of capital into the business and, consistent with our approach in the past few years, we plan to invest a similar amount in 2009 balanced between reinvestment and new restaurants.

This year we plan to open about 1,000 new restaurants, specifically about 165 in the US, 245 in Europe and 475 in Asia Pacific, Middle East, Africa.

After routine closings the net new unit growth is expected to be about 650 which is right in the range of our 1% to 2% target.

Consistent with our philosophy to be better, not just bigger, we expect to open restaurants each year at a pace that allows us to continue to invest in our existing base and cash in new opportunities.

We continue to manage our business well in the current environment and I am optimistic about our outlook in 2009.

While we've exceeded our constant currency average annual targets of 3% to 5% revenue growth, 6% to 7% operating income growth and a return on incremental invested capital in the high teens during the past few years, these targets remain realistic and sustainable for a company of our size, especially given today's market conditions.

I believe our strength is driven by three things.

Our ability to execute, our focus on the customer, and the discipline in alignment of our system that we've put in place with the Plan to Win.

Our franchisees, suppliers and employees continue to provide an exceptional restaurant experience for our customers each and every day.

That's why I'm confident we will continue to deliver positive results for our system and our shareholders.

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

Thanks, Jim, and good morning, everyone.

As our fourth quarter and full year performance demonstrate, McDonald's global business is fundamentally strong.

When you look at our core operating results and strip away special items, it's evident our global business is firing on all cylinders, with earnings per share up double digits for both the quarter and the year.

At $0.87 per share, fourth quarter earnings increased 19%, 29% in constant currencies, after adjusting for the $0.33 per share of tax benefits recognized in the fourth quarter last year.

Full year EPS from continuing operations of $3.76 included a $0.09 gain from the sale of our investment in Pret A Manger and a $0.09 benefit from currency.

As previously disclosed, 2007 earnings from continuing operations of $1.93 per share included a net $1.30 charge due to the Latin America transaction, and a net $0.24 tax benefit.

After adjusting for these items, full year earnings per share from continuing operations rose 23%, or 20% in constant currencies.

This performance was driven by our ongoing focus on offering customers around the world choice, convenience, and value.

At the same time, we've taken action to further enhance our overall profitability and returns by controlling our G&A spending, which has declined as a percent of revenues over the last several years, by leveraging the entrepreneurial spirit of our owner-operators through refranchising and by delivering solid franchise and company operated margins.

All of these contributed to the combined operating margins increasing 320 basis points to 27.4% in 2008, after adjusting for the Latin America transaction.

The shift in our ownership mix benefited combined operating margin by 110 basis points.

As you know, refranchising has direct positive implications for the long term predictability and reliability of our cash flow.

In 2008, we refranchised 675 restaurants primarily in the US and Europe as part of our target to refranchise 1,000 to 1,500 restaurants by the end of 2010.

Refranchising impacts our financial statements in a few ways.

First, it reduces total revenue dollars because we collect rent and royalty income as a percent of sales from refranchised restaurants instead of 100% of their sales.

Second, refranchising transactions can result in greater fluctuation in other operating income as we recognize gains or losses on the refranchising transactions.

And third, refranchising can impact margin percentages, depending on the mix of lease versus owned locations and the cost structures of the restaurants that are refranchised.

As we transfer lease sites to our franchise restaurant portfolio, lease expense and occupancy cost shifts from company operated to franchise margins.

There is no corresponding operating cost for owned sites.

Consolidated franchise margins increased 50 basis points for the quarter, driven by strong comparable sales in every area of the world, partly offset by a franchise margin percent decline in Europe.

While Europe's franchise margin percent is down due to refranchising and costs related to reimaging and extended hours, total franchise margin dollars are up in constant currencies.

Experience indicates that reinvesting with our owner-operators in strategic initiatives like these benefits our business for the long term.

For the full year, consolidated franchise margins rose 80 basis points to 82.3%, the highest level in 13 years.

Turning to Company operated margins, consolidated Company operated margins were flat for the quarter and rose 30 basis points for the year to 17.6%, the highest level since 1999.

This performance is a testament to the continuing strength of our strategies, including refranchising, and our ability to execute successfully around the world amid challenging conditions.

In the US, we drove comparable sales and visits by staying focused on customers' ongoing desire for menu variety, beverage choice, everyday affordability, and convenience.

At the same time, effective initiatives to optimize our ownership mix and manage costs enabled our US business to deliver solid Company operated margins of 18.8% for the quarter and 18.5% for the year.

While this was down 20 basis points for both periods, we are pleased the US business attained this high level in an environment where we experienced significant commodity cost increases.

Our overall basket of goods in the US rose in line with our expectations, 10% for the quarter and 7% for the year.

In 2009, we project our overall basket to increase about 5% to 5.5% with more of this pressure occurring in the first half of the year.

The commodity markets remain volatile, but as recent sharp declines in commodities make their way through our suppliers, we believe there's opportunity for us to be at the low end of this estimate.

In Europe, our ongoing efforts to strengthen our brand relevance delivered strong fourth quarter and record high full year comparable sales growth, despite the softening economy.

Company operated margins rose 50 basis points for the quarter and 30 basis points for the year reaching 18%, the highest level since 2000.

Strong comparable sales and refranchising benefits were partly offset by higher commodity and labor costs.

Europe's company operated margin increase is impressive considering the continuing commodity cost pressures.

Our overall basket rose about 10% in the quarter and 8% for the year.

Our 2009 outlook for Europe is for our overall basket of goods to increase more modestly than in 2008 at around 4% to 4.5%.

Similar to the US, there will be more pressure in the first half of the year.

In Asia Pacific, Middle East and Africa, our momentum continued with nearly all countries posting positive comparable sales for the quarter and full year.

In fact about two-third's of them, including Australia, New Zealand and Hong Kong, achieved double digit comparable sales growth for the year.

This strength contributed to APMEA's full year Company operating margin increasing 90 basis points to an eight year high of 15.9%.

For the quarter, APMEA's Company operated margin declined 40 basis points.

Strong segment comp sales were offset by higher commodity costs and slowing comp sales in China.

While China's economy remains challenging, we have seen improvement in January sales.

Australia's comparable sales and margin performance remained exceptionally strong but its contribution to APMEA's fourth quarter Company operated margin was offset by the 25% decline in the Australian dollar.

We will continue to exercise disciplined financial management to further enhance our ability to deliver strong returns in a variety of environments.

This discipline is most evident in how we allocate capital to drive returns.

Over the last several years, a significant portion of our capital expenditures have been devoted to reimaging existing locations.

This has improved customer perceptions of our brand and helped drive sales, which has contributed to the return on average total assets reaching 21.8% at year-end, up about 800 basis points since 2004.

In addition, returns on incremental invested capital have been well above our high teens target.

Our financial discipline is also reflected in our healthy balance sheet and strong credit rating which remains the highest in the restaurant industry.

This gives us ready access to capital as our recent $750 million debt deal demonstrated.

It's also a positive for our owner-operators and suppliers who continue to have access to the credit they need to reinvest in their businesses.

We believe financial discipline is important for today and our future and can potentially enable us to seize opportunities when others cannot.

For example, as one of the few retailers adding new units in today's weak real estate market, we have the opportunity to be even more selective and get better sites that we believe will deliver strong returns in the future.

Finally, given the unprecedented levels of volatility in today's currency exchange markets, I have a few comments about FX.

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

What's unusual about the current environment is the magnitude and extent of the strengthening of the US dollar against nearly every foreign currency.

As a result, currency translation negatively impacted fourth quarter revenue by nearly $500 million and earnings per share by $0.07.

Of our major currencies, the euro declined 9% in the fourth quarter versus 2007, the pound declined 24%, and the Australian and Canadian dollars declined 25% and 19%, respectively.

These four currencies accounted for about $0.05 of the $0.07 impact.

Because there is so much volatility, it's not possible to predict the potential impact for the year with much certainty, but based on recent rates, the translation impact for the first quarter is expected to be similar to the fourth quarter and continue to negatively impact us for most of the year.

It is important, however, to remember that currency fluctuation is much more of a financial reporting impact than a long term economic one.

This is because we generally purchase goods and finance our local operations in the local currency, creating a natural hedge.

In addition, through capital expenditures, we reinvest a significant portion of our local earnings back into international markets.

Our primary short-term economic exposure is the royalties we receive from our international markets, which we typically hedge.

The amount of which approximates 20% to 25% of our international operating income.

As always, whether currency translation is helping or hurting us, constant currency results provide a more complete picture of the underlying strength of our business when evaluating performance.

A final thought before turning it over for Q&A.

It seems there isn't much optimism in the business world these days; however I'm optimistic about McDonald's in 2009 and for the long term, even in today's uncertain environment, and here is why.

The menu choices, convenience and value we offer continues to align well with busy consumer lifestyles.

We're a globally diversified company with a proven business model that operates well in Al economic cycles.

We are disciplined in our operations and our financial management.

And finally, we have a customer focused plan that works.

I believe that as we continue to focus on what matters most to our customers and remain nimble enough to adapt to their needs, our shareholders and the entire McDonald's system will continue to benefit.

Thank you.

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

Thanks, Pete.

I will now open the call for questions.

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

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

Looks like the first question is from Steve West at Stifel Nicolaus.

Hi, Mary Kay.

Just a quick question on McCafe, maybe you could clarify.

You're talking about it's helping to drive the beverages or helping to drive same-store sales camps.

Any idea yet on how much of an impact it is in driving the comps?

I know it's in about half the stores.

Are you seeing an impact?

And maybe you can quantify that and let us know are the 7,000 stores meeting expectations so far today and maybe when do you expect to really kind of start gearing up your TV advertising on this?

Steve, we are on track.

This is Jim, and I'd really like to have Ralph Alvarez weigh in on this since he's much closer to the plan in the US than we are in this room.

Ralph?

Yes, hi, Steve.

We finished, we got the 7,000, and we've been ramping up pretty fast, and as we said, we'll be done by mid year '09.

Obviously, we would not advertise nationally before that time frame.

And as to, we're an track with the projections we have.

We're not going to disclose how much is helping sales exactly and we wouldn't for competitive reasons, but we did a lot of testing and so we know what metrics we need to hit pre-advertising, local advertising, and then what we expect on national advertising.

Thank you.

The next question is from Keith Siegner at Credit Suisse.

Thanks.

Just a quick question on the pricing outlook.

In the past you guys have often talked about pricing in relation to the food at home and food away from home indices, but with the December food at home prices falling sequentially for the first time in two years and actually with a fairly meaningful decline, how does this factor into the pricing plans as we progress through the early part of 2009?

Well, we factor all that in, as you know, Keith, food away from home, and index it by country of course, and by segment.

And Ralph has just gone through this in the planning process.

Ralph, do you want to comment about the pricing around the world?

Yes.

Food away from home has always been, during I would say normal times, it's a great indicator because what we're trying to do is make sure we stay a better value, at least on the price side of the equation, than anybody else in our category.

When you get these type of swings like there's been so quickly, we definitely factor it in.

It's one of the conversations we've had in our planning sessions here in the last month.

It's something -- I'm in Europe, it's one of the main topics we're talking about tomorrow, so we probably will not be taking the level of pricing here in the first path that we normally would have of the year because you got to consider all of the, how the consumer is feeling.

And during these times the consumer is looking for deals and we want to make sure that we're out there.

The great thing is because we have our three and four tier pricing menus, we'll pull that lever harder.

We would not be into reducing price mode but we just pull that lever a little bit harder during these times.

Thank you.

The next question is from Matt DiFrisco at Oppenheimer.

Thank you.

Just looking at the plan on where to grow, and looking at where you grew in '08 as well, I guess Germany stands out as one of the larger markets for growth in Europe and then 136 or so in China in '08, and then it seems like you're looking for similar plans in growth in '09, yet both those markets seem to be a little bit softer.

Is there something you have to change maybe or keep a closer eye on in developing in such an environment where the comps are coming down a little bit, or do you think it might be prudent maybe to take a little bit of a slower time now to grow given the slowdown that you're seeing in the comps before you put more stores down on the ground?

Well Matt, good job on determining where our focus was in growth, you spelled it out for us.

We are very focused.

And as you know, when we look at growth around the world, you look at Europe and you look at the brick countries and where we're focused today, we're in this for the long term, and our committment is over the long term.

And so what you're seeing in Germany today in that slowdown is a result of the current environment and some tactical issues that they're dealing with there.

Maybe Ralph, you'd like to talk a little bit more about that but I don't think we're looking to slow there because of that particular issue today.

Yes, I'll speak Germany first and then China.

One of the things we look at is our new store metrics, and Germany has very strong metrics on even first year returns this year, on the openings we're doing.

Again, we're building these stores for 20 plus years and so, as Jim said, we do it for the long term, but we have very high volumes in Germany.

Our cost of opening up those restaurants, our investment relative to the cash flows that we generate, it's a very solid investment.

And the reason you see Germany grow like it has is we're building a fair amount of restaurants in Germany in unique locations -- train stations, highways -- that we were not in before that are producing excellent returns, and there's almost no cannibalization because it's a captive audience.

When you look at China, we have in the plan for next year 175.

We have a very deep inventory of sites.

We have scrubbed our sites inventory to make sure those that are in more green areas, the growth there of infrastructure is so fast we've seen a little bit of that infrastructure growth slow down.

We're going to slow some of those but our inventory significantly exceeds our 175 number and so today, we still think that's a pretty realistic number.

In fact, we opened over I think it was 45, 46 restaurants just in January.

And the returns again in China, also have been very strong.

We have over 20% return on total assets in China and it's mostly, as you know, been new store development pretty aggressively the last few years.

Thank you.

The next question is from Joe Buckley at B of A, Merrill

Thank you.

First, a clarification on the comments in the release about China.

The way it reads, my interpretation is that the China comps were negative in the fourth quarter.

I was wondering if you could comment on that.

And then, secondly, on the refranchising, particularly in Europe, what shifted that put some pressure on that margin, and it sounds like pressure may remain on the European franchise margin in '09 because I think you've been refranchising all year in '08 and prior to this we didn't see any pressure on that margin.

Yes, Joe, it's Pete, clarifying.

China was not negative for the quarter, they were positive.

And on the franchise margin in Europe, as I tried to highlight in my remarks, it really depends on the mix of the restaurants that we're refranchising.

So they've been executing these plans locally depending on which ones make the most sense for us to operate versus franchise.

And as they refranchise the restaurants that they don't want to operate, whether they're more concentrated in leased sites versus owned sites really has a dramatic impact on the franchise margin, and so we saw that be more of a swing in the fourth quarter of Europe.

Nothing that alarmed us or nothing that was inconsistent with our plan.

And at the end of the day, we look at the margin dollars and those margin dollars were up in constant currency and we know long term that this refranchising plan is great for the long term cash flows and profitability of the business.

Thank you.

The next question is from John Glass, Morgan Stanley.

Thanks, a question on the $15 billion to $17 billion in returning to shareholders.

To date you've given back between $11 billion and 12 billion which would imply you probably couldn't give any more back to shareholders in that framework in '09 versus '08, maybe less.

So Pete, or Jim, can you talk about your willingness to use your balance sheet in 2009 versus prior years.

Are you going to be more conservative with a realistic expectation?

And when is the next time you think you might revisit the return goals?

I think last time you upped it in the middle of the term.

What would you think now in terms of updating that guidance?

Well, John, first of all, we are on track to meet our commitment that we had talked about, the $15 billion to 17 billion.

It still remains to be seen exactly where we'll end up in that range but the fact is we're going to do that through the normal course of share repurchases and dividends to our shareholders, and we're in good shape to get that done.

And Pete may want to comment a little bit about leveraging the balance sheet in a different way but I think we're in pretty good shape where we are.

We'll revisit the target probably as we head toward the end of '09 because we'll know that you'll want to know what our expectation is beyond that.

John, we never pinned ourselves into a specific amount of leverage that we needed to hit our targets, and so as we move throughout the year and as we look at the credit markets we'll be opportunistic if it makes sense to use our balance sheet.

But as Jim said, we're very confident of hitting that $15 billion to $17 billion target and we have an analyst meeting at the end of the year that we'll use to update people on 2010 and forward.

Thank you.

The next question is from Jeff Amohundro at Wachovia.

Thanks .

I'm just wondering how the China competitive strategy evolves in the context of a slowing GDP in that country?

And if I heard you right, it sounded like there was a bit of a pick up in January.

What do you attribute that to?

Well, first of all, our competitive perspective on China, as we've said many times, Jeff, we're in these countries for the long haul and particularly in China for the long haul as you consider the enormous opportunity that there is there, and so our competitive positioning remains the same.

The pickup in the January numbers really relates a little bit to Chinese New Year and where that falls, but in general, the trend is better in January than it was in December.

Okay, thank you.

The next question is from David Palmer at UBS.

Thanks.

You've been very competitive with at home eating in most of your developed markets and I suppose a lot of that has to do with the everyday low pricing you have in place.

Regarding Germany, you do have that everyday low price menu but the market has been more of a struggle.

Could you perhaps share why that might be in your opinion, and I suppose there could be a negative thesis that this is just the first of other developed markets that may kind of reach a stumbling block where at home occasions really start to catch up with McDonald's.

Any argument against that would be helpful.

Thanks.

David, if I could just make an observation.

Particularly if you look at the strategies and tactics of the German marketplace with very high average volumes, as Ralph mentioned earlier, over the years I wrestled with it when I was the President of Europe, relative to a sustaining value proposition, everyday affordability, and I think we've just lost a little bit of sight of that.

It is not about the fact that we're going to have a stumbling block or not be able to be competitive of meals eaten at home.

And Ralph maybe you want to talk a little bit more about where we're headed at least with Germany or what our thinking is.

Yes, David.

First, we have positive sales and positive margins in Germany for the year.

They just weren't at the level that the rest of Europe was, and so I just want to make sure we clarify that.

The German consumer, as Jim said, is very sensitive to pricing.

We made a couple of moves that we felt we needed to make off of a very strong euro menu that we have there because of the high commodity cost increases and we paid a little bit of a price on traffic for it, but nothing that took us negative.

Obviously it helped margins and we are pulling that value lever a little bit more aggressively.

The German team I know is all over it.

I'm with them for two days here this week where we're going through in details of the '09 plans and our openings in '08, but it's again, we're not concerned.

It's a market a little bit more sensitive than that but we've got a lot of strength there and we don't think that's indicative of other markets in Europe.

Thank you.

The next question is from Karen Lamark at Federated.

Hi.

Could you talk at all about traffic versus, say, price mix by region, maybe how Q4 compared to Q3?

And then any comments you have on January would be great.

Thanks.

Okay.

We talk about, Karen, we talk about traffic in total for the year and what we're seeing for the year is consistent with what we've been seeing throughout, is that in the US, about 50% of the comp was driven by positive traffic.

In Europe, a little bit over 40% was being driven by positive traffic.

And then in Asia Pacific, Middle East, Africa, nearly 55% was being driven by traffic.

So all around the world we're getting a fair contribution to traffic growth and we like that combination of price and traffic, because that's really healthy.

Okay.

Next question is from John Ivankoe from JP Morgan.

Thanks.

Two quick ones, if I may.

Pete, you talked about, for franchise margins in Europe, it sounds like some incentives for franchisees to maybe put in extended hours and remodels.

If you could help us understand the potential benefit of that cost and timing of the benefit, if it's not already in the numbers for fiscal '08.

And secondly, if you could discuss the US regionally if there's any significant performance differences and why those performance differences may be existing, and whether you could apply that to anything that might be happening in the economy today.

Okay, John.

In Europe, those initiatives we talked about, the 24 hours and reimaging, about 75% of that is happening in the UK, and Germany.

And we've done programs like this in the US.

We've done them in Australia and other places around the world.

And we know in looking at our results over the last six years, those are two big contributors to our sales momentum.

So I don't have an exact sales target for you to pinpoint these but the contributions to the margin from the franchise margin are going to happen throughout most of 2009, but obviously, as that is ongoing, we should start to see a sales lift as well.

So we're confident that not only in '09 will we start to see some top line benefits but longer term, these are things that really enhance the brand and the customers' perception of McDonald's, the quality and the convenience specifically.

And in the US, we've really seen no significant deviation between regions.

Everybody is positive and doing well.

Let me add one thing.

We have three US geographic divisions and they were within 20 basis points of each other for the whole year.

And it's basically because we run a very strong national plan under the Plan to Win.

Obviously there may be some small pockets that are feeling the economic pieces, but we're a national brand and it reflects in the results.

Thanks.

The next question is from Greg Badishkanian from Citigroup.

Great.

Thank you.

Can you just talk about the state of franchisees in terms of getting financing for remodels, new units, anything that you're doing to assist them with financing?

Well, thanks for the question, Greg.

We are very pleased with where we find ourselves relative to the credit markets, particularly with the franchisees.

We're in good shape regarding our refranchising plans and we're also in good shape relative to any initiatives we have particularly with combined beverages and other investments that are expected.

We have over 90 regional banks that are lending to our franchisees, but like everybody in the credit markets today, if you want to go get credit, it talks a little bit longer and it might cost a little bit more, but we have access to credit and we're very pleased about that.

Thank you.

The next question is from Steven Kron at Goldman Sachs.

Great, thanks, hi guys.

I have bigger picture question.

It's related to some of the questions that have been asked.

Obviously, a lot of retailers and other consumer related companies on a global basis saw a negative inflection from a consumer in December.

We talked so far in this call just about a couple of the regions where you may have seen some softening and certainly not to be nitpicky, but US comps, while very strong, two year trend decelerated.

The question is, as a follow-up to a question earlier, can you comment a little bit more on what you're seeing in January to date?

And then secondly, do you think you've seen that modest inflection in your consumer and the behavior of your consumer, maybe even if the traffic is still there, maybe how they are using your menu and what kind of impact to margins we should be thinking about if you have to be a little bit more aggressive to get that consumer in the door.

Good question, Steve.

And first of all, when we look at the economic environment for 2009 that we're heading into, the recent data indicates the world's largest economies are sliding simultaneously into recession, first time since World War II.

You look at the US economy, there's a lot going on.

Unemployment is at 7.2% versus 4.9% a year ago, the commodity markets, recessionary forces putting discretionary income are at risk.

And yet when you look at all of those things and you look at the European outlook where we have similar economic challenges, our model remains recession-resistant.

I think it's clear when you listen to Pete talk about, and Ralph talk about, the balance between new visits and price impact on the top line, and the impact that we've been able to have relative to mitigating the volatility in the cost of the inputs in the environment we're operating in, then in fact I don't believe we're going to have an greater impact relative to any pricing issues in '09 than we had in '08.

As a matter of fact, I think the cost increase environment, as we talked about earlier, is going to go down.

Yet when you look at consumer confidence being at an all-time low, it's critical that we maintain value relationship.

But we have that across the menu.

People are trading in to McDonald's for more reasons than value.

And when you look at the dollar menu, as I mentioned earlier today, it has remained at somewhere between 13% and 14% since its inception in late 2002.

That's the barometer that I look at.

The rest is core menu, the value across that menu.

And where customers are getting pinched everywhere, they shouldn't suffer that same fate at McDonald's and I think we're on pace to be able to continue with that model as we move through 2009.

And Steven, regarding our comments around January sales, that means each area of the world that's similar or better than what we posted in December.

Thank you.

The next question is from Jim Baker at Neuberger Berman.

Yes.

Good morning, gentlemen.

I had a couple questions.

One, I noticed that your other asset dispositions, other operating expense,was the lowest this quarter and the lowest this year that we've seen for fourth quarter or year in a very long time, probably since the beginning of the decade.

I wonder if you could shed some light on what's going on there and what might happen going forward in '09.

And secondly I see you had a $5 million impairment charge in the quarter.

If you could just tell us which region that was attributable to or whether it was corporate or exactly what was happening there.

Okay, Jim.

This is Pete.

We've been now on our sixth year of revitalizing the business, and the strong results we had throughout that period, there's obviously been restaurants that we've had to close.

And I think what you're seeing on the closing and asset disposition line is fewer, as a percentage of our base anyway, fewer and fewer restaurants that we feel need to be closed.

In addition, you're seeing the gains from our refranchising activity.

So in that 1,000 to 1,500 restaurants that we plan to refranchise, these are good performing restaurants that we're selling at full value and so we're recognizing gains on those.

So I would expect, while we don't give specific guidance, that you'd expect to see the closings be relatively lower as we move throughout 2009 and see us continue to recognize gains on selling restaurants.

And regarding the impairment, that was one market in Europe, specifically Greece, and we're doing some reorganizing of that marketplace.

Thank you.

The next question is from Jeff Bernstein at Barclays.

Great.

Thank you.

Actually just one clarification and then a question.

Clarification being on the beverage platform rollout.

I think you reiterated comfort with the middle of the year for complete rollout or for the most part.

Just wondering whether there are any delays, perhaps in the second leg of it, the smoothies and frappes, whether or not the entire rollout will be done by the middle of the year or whether some things have been delayed.

And the primary question is related to G&A.

It looks like in your forecast you're looking for a decline in constant dollars in '09 very similar to the past two years.

Just wondering if you could talk about some of the major initiatives there, the biggest corporate opportunities perhaps, and how much of the contribution you're getting from perhaps the mix towards refranchising where it could ultimately go long term.

Thank you.

Well thanks, Jeff.

This is Jim.

First of all, when you look at the G&A and the efficiencies, it's something that we continue to drive.

And although our target shows a modest reduction in '09, it's a continuing effort around resource allocation and where we expect to get more efficient.

And what was the first question?

The beverage rollout.

Oh, the beverage rollout.

I believe that we are on track and it remains to be seen once we get to scale relative to the overall initiative, and as we talked about the bottled water and the frappes, and the other beverage initiatives exactly how quickly we get all of those online, but we're on track on an overall basis.

Yes, Jeff and just to clarify on the beverages, Phase I had always been to get the espresso based coffees in by mid 2009 and then roll with the frappes, smoothies, and bottled beverages, and so we're still on track to start that second phase, if you will, in 2009.

And you also had another part of your question on G&A, and the fact is, yes, as we refranchise more restaurants, they are less G&A intensive than Company operated restaurants.

So some of the G&A decline you see is because we're becoming more franchise versus Company operated.

Thank you.

The next question is from Jason West at Deutsche Bank.

Yes, one quick up front and then just a general question.

Just can you tell us what your average ticket is in Europe, in US dollars, and if you don't have it overall, then maybe just some of the major markets.

And number two, if you could just talk about general day part trends in the US, any change in the areas of strength that I think has been breakfast primarily, any change you've seen there?

Thanks.

Ralph, do you want to talk a little bit about the average check?

On the Europe average check, we don't give that information specifically and it varies significantly country to country.

Not just because of the currency but because of the group size.

So somewhere like France, our group size is much bigger, it's much more of a main lunch and dinner entree, a lot less of a snack business, so France has our highest average check but it varies significantly.

If you were to look from an exchange rate point of view, Europe is higher than the US by double digits.

When you look at day parts in the US, our performance right now is pretty even.

All day parts were up in the fourth quarter and in December and the performance has been pretty even including breakfast which continues to perform very very well.

Thank you.

The next question is from Mitch Speiser at Buckingham.

Thanks very much.

Just on the food cost outlook, which now you're consolidating into a grocery bill, in the US up 5% to 5.5%.

Sounds like it will be a little less in the back half of '09.

Can you give us a sense of what is still driving that food cost basket up so significantly, and is it possible to see you think lower year-over-year food costs in the back half '09?

Thanks.

Mitch, it's Pete.

It's primarily the proteins that are driving the basket higher for '09.

As you know, in the US, we buy from a lot of the big producers and they secure their input costs for significant periods of time.

And so I'm optimistic, we don't have it in our forecast yet because we haven't seen this materialize in the absolute pricing, but I'm optimistic as they work off those feedstocks and replace them with the pricing that we're seeing today, that some of that pressure will come off as we move throughout the year.

I can't yet say that I see a decline in the fourth quarter but obviously the trends are moving in our direction and we're optimistic that we'll have less pressure on the margins from the food cost side as we move throughout the year.

Thank you.

The next question is from Tom Forte at Telsey.

Great, hi.

Thank you.

I had two questions.

One was, we've noticed in the northeastern portion of the country, they've taken the McDouble off the value menu and wanted to know your thoughts on that.

And generally speaking what your thoughts are if you are going to see some sort of deflation in proteins, in particular in beef, what is your view on pricing especially for the McDouble and the double cheeseburger?

Ralph?

Did we take the McDouble off in the Northeast?

Absolutely not.

You may have an isolated store that has that, but we're in over 95% of the restaurants across the country.

And just like the double cheeseburger, it was never 100% because you have some unique situations in some areas.

We price for the long term, so the input costs on beef goes up or down just like double cheeseburger, we held that price for almost six years.

There's no intentions of moving McDouble or double cheeseburger along the way.

Thank you.

The next question is from Paul Westra at Cowen.

Thanks.

Just one question, one follow-up.

Was wondering, the question, if you can give us an update on Russia.

It's been hit pretty hard there and I think the last update was that Russia was continuing to outperform European markets.

And then just a follow-up question on the European franchise margins that was asked earlier, have there been any incremental or sequential acceleration programs that will boost rents sequentially here and hurt those margins in the fourth quarter more so than in the prior three quarters?

Paul, this is Jim.

I can talk about Russia for a moment and then let Pete talk about the margins.

If you look at the Russian market, they had double digit comp sales in the fourth quarter of '08.

That represents about 3% of our operating income.

They've got 211 restaurants.

We're going to open 40 in '09.

We're very bullish on that marketplace.

They've had a little bit of margin erosion because of the inflation in the market and the cost of goods and services but the fact is still performing very very well.

And Paul, regarding rent expense in Europe, as a percentage we have a higher percentage of leased sites across Europe, and unlike the US, a lot of those leases have basically inflation kickers so they adjust for the inflation rates every year.

So with what was some high inflation throughout 2008, we saw a lot of pressure on rents increasing in the fourth quarter that if inflation starts to moderate next year, obviously those increases won't be quite as bad.

Thank you.

The next question is from Larry Miller at RBC.

Yes.

Thanks very much.

I also had one follow-up and one question.

Just on the breakfast business, can you guys give us a sense of how breakfast performs in the past when there's been a rising unemployment environment like we have today?

And then secondly, we're seeing a lot of sub $1 offers out there and you guys talked a lot about this on this call, pulling the value levers and really not just in the US but around the world.

Is it still your view that you're going to avoid those price wars at all cost?

Can you comment on that?

Thanks.

I think the answer to the last question is yes but I'll let Ralph talk a little bit about breakfast during recessionary times and the pricing.

Our breakfast is even more convenience driven.

More of it is drive through and take out than the rest of our menu, and those things that are convenience driven are much less susceptible, they're much more of a necessity of peoples' every day lives than a variable visit or a destination visit.

So we have not seen an issue with breakfast at all during those times.

If anything it actually performs pretty well.

Thank you.

The next question is from Howard Penny at Research Edge.

Thanks very much.

As you think through the second half of 2009 and the rollout of your coffee strategy, there's an allocation to advertising that needs to be reallocated from other parts of your marketing budget.

If that's correct, what percentage of your marketing budget or thereabouts in round numbers, however you want to give it, is going to be reallocated to beverages?

And if that's not correct, how much are you going to take your marketing budget up in order to accommodate for the new paradigm with beverages?

Thanks.

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

Yes.

It's something we're very sensitive to, making sure that our core advertising, our core menu advertising stays strong.

The beverage strategy is very much about coffee, which is very much about breakfast, which is a big piece of our business, so it's a benefit that we have that we can talk coffee, as we have over the last couple of years with the drip coffee, and that has a corresponding positive effect on that business.

So we will advertise in the context of what we would allocate to breakfast, we'll have more on the drink side than the sandwich side, but the rest of the menu will have its fair share of advertising.

And in general, we stay within the same budgets that we've had.

One of the benefits we will have is there is a drop in the cost per gross rating point occurring in the US because of what's happening in the media markets and other advertisers that are not as prominent anymore, and we've been able to improve our buying efficiency and expect that to continue through '09.

Okay, looks like we have one last question from Keith Siegner at Credit Suisse.

Sure, just a quick follow-up for Pete.

I was just wondering if you could provide a little bit more detail behind the outlook for interest expense to be flat in '09 versus 2008?

I look at interest rates, especially given the debt offering that you just had, not really increasing all that much, FX from an interest expense perspective a little bit more favorable than a lot of '08, and your balance is below where it was for a lot of '08.

I'm curious why interest expense wouldn't be down in 2009.

Keith, it is going to be down just slightly but what you highlighted, the increase, if you look at what's happened to our debt balances, they have increased a little bit and so all of that stuff is actually washing out.

We're having a little increase in our average balance, a little bit of decrease in the rate, and a little bit of benefit from currency.

And when I get done with all that it's about a 1% decrease for the year which we consider to be relatively flat.

Okay, thank you.

We're out of time now so I'll just turn it over to Jim for a couple of closing comments.

Well thanks, everybody for joining us this morning.

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

Our Plan to Win is working in every area of the world.

We have the right strategies in place to grow the business for the long term and are taking the necessary steps to manage through the current environment.

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

With that, I remain confident and optimistic that we will achieve our revenue, income and return goals for the year.

Thank you so much.

Thank you.

And this does conclude today's conference.

You may now disconnect your lines.

Thank you.