麥當勞 (MCD) 2009 Q1 法說會逐字稿

Hello and welcome to the McDonald's April 22, 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.

At that time, investors only may ask a question.

(Operator Instructions)

I'd now like to turn the call over to Ms.

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

Ms.

Shaw, you may begin.

Thank you.

Hello, everyone and thank you for joining us.

With me on our call today are Chief Executive Officer, Jim Skinner; Chief Financial Officer, Pete Bensen; and Chief Operating Officer, Ralph Alvarez.

Ralph is joining us, via phone, from the US Regional Operators Association Meeting.

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 filings also apply to our comments.

Those documents are available on 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 turn it over to Jim.

Thank you, Mary Kay.

Good morning, everyone.

I'm pleased to report that McDonald's delivered strong first quarter results.

Global comparable sales were up 4.3%.

Operating income increased 5% in constant currency.

And EPS reached $0.87, a 17% increase in constant currency.

Our sales momentum is continuing, with April comparable sales trending at least as strong or better than first quarter in every area of the world.

McDonald's is well positioned for continued growth.

Our global system is aligned around the right strategies to manage in the current global economic environment and to seize future opportunities.

We remain focused on our customers and restaurants through our plan to win.

Every day, customer relevance is job one at McDonald's.

We all know the state of today's consumers.

They're scaling back and being more discerning about what they purchase.

This means a strong value proposition is critical, from price, to product, to experience.

y McDonald's offers strong value across our entire menu board.

Our value menus around the world offer predictable, every day affordability.

And our core menu, including iconic products like the Quarter Pounder, provide great value at the midtier.

This tiered pricing and across the board value means we are in a position to grow our market share, not only in the near term but in the long-term as well.

In addition to the great tasting core menu offerings, we continue to offer the choice and variety our customers want.

New sandwiches and beverages, from the McCafe coffees served in the US, to regional burgers like the [parmareg] in Italy, appeal to our existing customers and brings in new ones.

We're able to provide this quality, choice and value because of our global supply chain.

The collaborative relationship we have with our suppliers is a true competitive advantage, enabling us to obtain and secure quality and quantity of ingredients we need at competitive and relatively predictable prices.

To deliver the best experience to our customers, we have to get even better at the basics of our business.

That's why we continue to strategically invest in our restaurants, so we can continually improve both operations and ambience.

We know we're making progress.

Our customer satisfaction scores are improving in nearly all of our major markets.

Additionally, initiatives that make McDonald's even more convenient, such as extended and 24 hours, drive-thru enhancements and delivery, strength in our relevance and drive sales.

These strategies are playing out successfully in every area of the world.

In the United States, we're managing well in spite of the economy.

Our convenient locations and extended hours, great tasting foods, strong value and continually improving customer experience make us a part of so many consumers' everyday lives.

Our continued emphasis in these areas has served us well.

In Europe, we continue to see good sales results in most of our markets despite the negative impact of the Easter shift and less one day due to Leap Year.

Of the big four markets, France, the UK and Russia remain strong.

In Germany, our brand is strong.

We have a good management team in place and we continue to gain market share.

The sales in this country were soft for the first three months of 2009, primarily as a result of the economy, however, they improved month-to-month during the quarter.

In fact, March was positive, despite the Easter holiday shift and the sales trend is even stronger in April.

And I'm confident we will manage through the current European environment, as we have in the past.

Results remain strong in Asia Pacific, Middle East and Africa.

And we're led by continued strength in Australia, where most of our restaurants have been reimaged and represent our brand very well.

In addition, the majority of our Australian restaurants have a McCafe and we continue to have new product news.

Japan, as you know, is also performing well.

But we have seen a slowdown in China due to the economic environment there.

We remain confident, however, in the long-term growth potential of China and are doing the right things to drive sales and profit today and well into the future.

In addition to our plan to win strategies around customer relevance, strong financial management contributes to our profitability and returns.

Our disciplined approach to controlling costs and investing to grow the business provides flexibility and strength.

As a result, we have a healthy balance sheet and the highest credit rating in the industry.

This allows us access to capital when we need it and provides our owner operators continued access to the credit necessary to reinvest in their restaurants.

Our financial strength is also a positive for our shareholders.

We are on track to meet our three-year target of $15 billion to $17 billion of cash returned to shareholders by the end of 2009.

To date, we have given back $12.9 billion towards this target.

And in the first quarter, we bought back 14.6 million shares, totaling $823 million and paid a dividend of $0.50 per share, for an additional $553 million.

Looking ahead, I'm confident we will maintain our momentum by continuing to focus on our customers and restaurants and the financial discipline that drives our growth strategy of being better, not just bigger.

Thank you.

And now, I will introduce Ralph Alvarez, our Chief Operating Officer.

Ralph.

Thanks, Jim, and good morning.

We are pleased to report that each area of the world is contributing to our strong business performance and we grew market share in every major country.

In the US, comparable sales for the quarter were up 4.7% and operating income grew 6% to $725 million.

The strong comp sales drove both US, Company-operated and franchise margin improvements.

The Company-operated margin increased 50 basis points and the franchise margin was up 30 basis points.

Our McCopco margin growth benefited from the refranchising strategy, partially offset by higher commodity and occupancy costs.

Our support of iconic core products continued to deliver results.

First quarter advertising focused on the Quarter Pounder with cheese and we are still benefiting from the McNuggets promotion at the end of last year.

The emphasis on core projects has generated average check growth and increased restaurant profitability.

The US business also remains on track with the rollout of McCafe beverages.

This summer, we'll be advertising beverages, core favorites like the Big Mac and strong value offerings like dollar drinks, dollar menu and chicken snack wraps.

Our US business has excellent momentum and will continue to deliver results.

In Europe, we continued to take market share, despite a decline in Europe's informal eating out category.

Europe's comp sales for the quarter were up 3.2%, despite an almost 2 point hit from the shift of the Easter holidays and Leap Day impacts.

Their sales have been driven by three and four priced tier menus, limited time food events, as well as extended hours.

the restaurant reimaging and a strong focus on drive-thru execution is improving our brand performance.

While Europe's top line has remained solid in most markets, margins have been impacted by several factors.

On the franchise side, our refranchising strategy helped grow franchise margin dollars but negatively impacted the margin percent.

This strategy has the opposite effect on Company-operated margins.

It helped the percentage but reduced the dollars.

Europe's franchise margin declined 130 basis points in the first quarter, with 70 of those points due to the refranchising strategy.

This impact will lessen as the year continues.

Higher occupancy costs and sales building incentives also impacted margins, however, this impact will also decline in future quarters.

Europe's Company operating margin declined 70 basis points.

All of this and more was a result of the margin declines in Russia and our Eastern European markets.

While their sales were strong, commodity costs were higher because these markets import 30% to 50% of food products denominated in either euro or US dollars.

The net effect of these countries was a 200 basis points impact on Europe's margins.

While the currency volatility in Russia and Eastern Europe is challenging, the long-term opportunity remains strong.

We continue to capture market share and will grow new restaurants at an appropriate pace.

In summary, with Europe's strong baseline momentum and decelerating commodity costs, we are on track for another strong year.

Now, let's turn to Asia Pacific, Middle East and Africa.

Comparable sales were up 5.5% for the first quarter.

And operating income increased 11% in constant currencies.

The results were led by strong performances in Australia and Japan.

Australia's success was driven by a focus on chicken.

And Japan's reintroduction of the Quarter Pounder menu contributed to its momentum.

In addition, our convenience initiatives of 24 hours, drive-thrus and kiosks continued to positively impact the business.

Markets are also aggressively working to insure value initiatives are strategic, branded and support baseline growth.

In first quarter, the franchise margin in Asia Pacific, Middle East and Africa, improved 120 basis points.

This was driven by the relative impact of foreign currency translation and the comp sales growth.

Company-operated margins decreased 80 basis points, primarily due to softer sales in China.

Economic witness in China has impacted our sales and margins, especially in southern China where manufacturers have closed.

Still, our underlying business remains strong in China.

We are confident in this market's long-term potential and are insuring that we maintain traffic momentum through a strong focus on value pricing and strong operations.

We will continue to open new restaurants.

We opened 62 in the first quarter.

With an expectation that 140 will be built this year, slightly down from our previous estimate of 175.

In closing, our position as a strong market leader in just about every country where we are operate is an advantage we continue to leverage.

Our business momentum is strong, costs are moderating and we continue to reinvest in our restaurants for long-term success.

Thank you.

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

Thanks, Ralph, and good morning.

By now our headlines should be pretty clear, McDonald's global business is fundamentally strong.

Our better, not just bigger approach continues to deliver higher sales and improve profitability.

Against a backdrop of weak global economies, our consumer relevant strategies drove systemwide sales up over 6% in constant currencies in the first quarter.

This contributed to consolidated restaurant margin dollars reaching nearly $1.9 billion, up 3% in constant currencies.

Company-operated margin dollars accounted for 30% of this total and declined primarily due to the impact of refranchising.

As a percent of sales, Company-operated margins declined 30 basis points to 16.2%, as increases in the US were more than offset by declines in Europe and Asia Pacific.

As Ralph said, Europe's decline was primarily due to the impact of importing goods in Russia and eastern Europe and Asia Pacific's decline was mainly due to China.

Franchise margin dollars increased 7% in constant currencies to $1.3 billion, representing 70% of total consolidated restaurant margin dollars.

This is up from 67% last year and 64% in first quarter 2007, reflecting our evolution toward a more heavily franchised structure.

Since 2007, we've refranchised about 770 restaurants, including about 90 in the first quarter.

This shift explains, in part, why constant currency franchise margin dollars are growing at a faster rate than Company-operated margin dollars.

A pattern we expect to continue as we refranchise more restaurants.

As a percent of revenues, consolidated franchise margins in the first quarter were flat at 81.4%, driven by a strong global comparable sales, offset by the impact of refranchising and operator incentives.

Our evolution toward a more heavily franchised structure reduces total revenue dollars.

This is because we collect rent and royalty income as a percent of sales from a franchise restaurant, instead of 100% of sales from a Company-operated restaurant.

The benefit of such a structure is a more stable and reliable cash flow and improved profitability, as measured by combined operating margins.

In the first quarter, combined operating margin percent increased 150 basis points to 27.6%, benefiting from refranchising and ongoing G&A control, as well as currency translation.

G&A declined 2% in constant currencies in the first quarter and is expected to decline for the full year, although there will be fluctuations between quarters.

We remain committed to G&A discipline and further increasing combined operating margin over time.

Next, let me update you on a couple of other topics; our commodity and currency translation outlooks.

While commodity markets remain volatile, the global recession has dampened demand for commodities worldwide, creating opportunities to reduce costs.

In the US, this is beginning to work its way through our suppliers, as the quarterly increase in our grocery bill is down sequentially, from 10% in the fourth quarter last year to 6.7% in the first quarter this year.

We expect the cost increases in our basket of goods in the US to continue to moderate for the remainder of the year.

Our full year outlook remains for our basket of goods to be up 5% to 5.5% in the U.S.

It's important to remember that we manage our basket like a portfolio, seeking to achieve the best overall results.

Our goal here is to remain competitive and predictable.

The last couple of years, this strategy resulted in our costs not rising to the same degree as either the commodity markets or the food component of the PPI.

And it meant we could consistently deliver value across our menu, while achieving industry-leading Company-operated margins.

Consequently, you shouldn't expect to see the same level of decline in our grocery bill this year as you see in the cash markets, since our baseline is somewhat lower.

And the 5% to 5.5% increase is our best estimate today but opportunities remain within this projection.

We are optimistic, that we'll be able to finish the year at the low end of this range.

Europe's basket of goods increased 9% in the first quarter.

Similar to the US, we expect the cost pressures to lessen as the year progresses.

Our full-year outlook remains at 4% to 4.5% increase.

These figures represent the weighted average for total Europe, however, with 40 plus countries, a number of different dynamics come into play.

This was the case with Russia and Eastern Europe in the first quarter, where commodity costs were disproportionately impacted by the significant weakening of local currencies.

We take a number of steps to mitigate the impact of currency fluctuation, including purchasing goods and services in the local currency to the extent possible.

This helps to create a natural hedge.

However, due to the local supply chain infrastructure, Russia and many markets in eastern Europe, import 30% to 50% of their products.

These purchases, primarily beef and chicken, are denominated in either euro or US dollars.

As a result of this, these markets are facing a more challenging cost commodity environment.

Our opportunity to effectively hedge these exposures is significantly limited due to high cost and/or lack of an active market.

We remain confident in the long-term opportunity in Russia and Eastern Europe, even as we navigate these short-term economic challenges.

In addition to purchasing in the local currency where possible, we work to mitigate the impact of currency translation by financing our businesses locally, as well as reinvesting a significant portion of our local earnings back into our international markets through capital expenditures.

We also typically hedge a portion of the royalties we receive from our international markets.

These efforts help to lessen the economic impact of fluctuating currency rates but there will always be a financial reporting impact because of the need to translate international revenues and earnings to US dollars.

Since last year, the US dollar has appreciated significantly against virtually all foreign currencies and has remained at a relatively high level.

This resulted in a negative impact on first quarter earnings of $0.08 per share.

The majority of the impact, about $0.06, was due to four currencies, the euro, the pound and the Australia and Canadian dollars.

These currencies declined between 13% and 27% versus the US dollar since first quarter of 2008.

The next most significant impact was the Russian ruble, which was down 29%.

The currency markets remain volatile and difficult to predict but to give you some perspective, at current exchange rates, we project that currency translation will negatively impact both second and third quarter earnings per share by about $0.11 each.

Dropping to about $0.02 in the fourth quarter.

And we know rates will continue to change, however, we hope this gives you some idea of our current expectations.

History shows currencies tend to balance out over time.

Our focus remains on managing for the long-term strength of our business, as we navigate short-term volatilities.

In closing, I think our first quarter results are a testament to the strength of our business model and its flexibility to deliver in a variety of environments.

I'm confident we can sustain our global momentum and grow our business, not only in the current environment but beyond.

Thank you.

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

Thanks, Pete.

I'll now open the call for questions.

(Operator Instructions) The first question is from Jeff Farmer at Jefferies.

Thank you.

As relates to McCafe, I was just looking for a little bit more color as far as what you've seen in the past when a new product transitions from the preadvertising, to local advertising, to national advertising phase?

So asked another way, do the sales slowly build throughout all three phases, is it a step-by-step function, or do sales meaningfully accelerate when you go national?

Well, Jeff, thanks for the question.

This is Jim Skinner.

It varies by product and introduction.

We have a long history, of course, of introducing new products, both in terms of testing and then rolling out nationally, if you will, depending on what country you're in and then advertising when we get up to scale.

And it varies and it changes based on the marketplace.

Ralph, do you want to talk a little bit about our experience?

Sure.

That's -- we have that modeled in our testing, that we do for new product rollouts.

And usually, when we do go to national -- and like Jim said, it varies by products, depending if it's a completely new product that you're educating the customer, or one that they're already familiar and you're just educating them about our offering at McDonald's.

But there's nothing like national advertising because you get to be in program advertising on prime network TV.

That only happens on national and always stronger than what you could replicate locally.

Okay.

Thank you.

The next question is from Steve West at Stifel Nicolaus.

Hi, real quick, just kind of a housekeeping question.

How many McCafe's do you guys have right now in the US?

Well, right now, in the United States, we are right about the 10,000.

Okay.

10,000.

10,000 stores and moving toward conclusion sometime in the middle of the year, May or somewhere in that time frame.

Okay.

And then, the question I have with China, can you talk a little bit about what you're seeing in the shorter term?

You mentioned you've got some pressure there.

And we've seen some negative comps again in probably February and March.

And what is really your short-term outlook there for China and the same store sales results there?

Well, we really have a long-term outlook for China, I think, first of all, Steve, is the way we're looking at that marketplace, with enormous opportunity.

We opened our 1,000th restaurant there last November.

And even though there's a softening of the economy right now, we look at it for the long-term and we're opening about 150 restaurants there this year.

Our target was 175 but as the marketplaces develop around those additional sites, we'll be opening those as well.

But we've opened 62 already this year.

And we're in it for the long-term and managing appropriately relative to the environment we find ourselves in.

Thanks.

Next question from Matt DiFrisco at Oppenheimer.

Thanks.

Can you also talk about -- has anything changed with the timing, as far as the ice machines, for lack of a better term, smoothies or what's also going to happen with the frappuccinos or the frozen drinks in there?

The timing of that, would that be still middle of this year, starting to see them rolled out in greater scale and also greater testing?

Yes, I think, Matt, whatever we've said about that, I think we're -- we remain on track for rolling those additional items out throughout the remainder of the year.

Next question from John Glass at Morgan Stanley.

Hi, thanks.

Can you go back to the commentary on the European margins?

Should we expect the pressure that you experienced from importing food to Eastern Europe, does that occur until we lap it through next year?

Or are you able to do something about that, either hedging or somehow -- or getting alternate supply?

And then also, you mentioned that you've had some cost for sales building initiatives in Europe.

How long do those -- when did they start?

How long do they persist?

And maybe, what are those initiatives that you're presumably funding for the franchisees?

Hi, John, it's Pete.

I'll talk about the Company-operated margins there and then, Ralph will talk a little bit about the franchisee incentives.

We expect the cost of those imports to moderate as we move throughout the year.

The fourth quarter is when we'll start to see the greatest decline.

But as we mentioned, some of those costs are denominated against the euro, and those local currencies actually started depreciating the against the euro throughout the year last year.

So, it wasn't until late in the year that they started depreciating significantly against the US dollar.

So, we're probably seeing the peak of the impact from those imports here in the first quarter but it will still be with us, primarily for the rest of the year but to a lesser degree.

All right, John on the franchise side, the operator incentives we've had in place, they'll moderate throughout the rest of the year.

At the high end, they've been 30 basis points.

So it's not a significant piece of it but it's something that we do with our operators, being in there together, to drive new business.

Thanks.

The next question is from David Tarantino at Robert Baird.

Hi, good morning.

Could you comment on the breakfast trends that you've seen in the US, specifically?

And maybe more broadly, if you've seen any changes in the day part trends that you've been seeing as the Q1 unfolded?

Well, David, thanks for the question.

Breakfast has continued to contribute to our success here in the United States and wherever we're selling breakfast around the world, the various markets.

Ralph, do you want to talk a little bit about the breakfast day part?

Yes, our US breakfast business, as we've talked about, has been very strong for years.

It continues to be positive on sales and guest counts this year.

We're a leader in that area and if you've seen our advertising focus during the first three, four months, we've been advertising breakfast pretty heavily.

So, we continue to see growth in that area and it's a very profitable piece of our business.

Thanks.

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

Thank you.

I'd like to go back to the European margins again with a couple of questions.

You mentioned the refranchising activities there pulling down the franchise percent margin in Europe and could you elaborate a little bit on that?

Are you giving incentives to buyers of those properties?

Is that what's sort of playing out?

And then, just go back on the Company side.

So, if I understand what you said correctly, the entire Company-operated margin decline is related to the Russian and Eastern European pressure.

And x that, you would have been up in other Company-operated margins in Europe, in terms of percent margin?

Yes, Joe, it's Pete.

You interpreted those comments correctly on the Company-operated margins, that Russia and Eastern Europe were more than the total decline.

And on the franchise margin side, this is really -- looking at some of the sales building initiatives that have been successful around the world, things like reimaging and 24 hours, what these incentives typically are, are reduced rent for a period of time to provide additional cash flow for the operators to invest in these initiatives, which as you know, build really long-term sustainable sales for the future.

Yes.

And if I may add there, Joe, on the refranchising piece, the majority -- or there's a greater skew of restaurants we're refranchising that have underlying leased properties versus purchased properties and those have significantly lower margin.

And as those move onto the franchise side, it dilutes the franchise margin percent.

And so that's what you are seeing.

We'll start lapping against some of the large amounts of restaurants we refranchised last year and that's why you'll see that percent erosion moderate.

The net/net is significantly higher combined operating margin and a system that has more franchisees running our restaurants, which we believe is very helpful for the customers.

Thanks.

The next question is from David Palmer at UBS.

Thanks.

You've had the dollar menu since late '02 and that's seemingly been enough for the value credibility of McDonald's.

And you've stayed away from discounting your premium items and large degrees of couponing as well.

Do you think that might be ending and will have to end in markets where you see traffic weakening, like a Florida, Germany, where you're getting significant traffic pressure?

In other words, will you choose to defend share versus profit in select places?

And secondly, given that competitors such as Wendy's and Burger King will have declining food costs, we believe, in the second quarter, are you worried that others will push that sort of discount button more readily, heading into driving season?

Thanks.

Well, David, this is Jim.

I don't see our relationship of the everyday affordability in the dollar menu and the value across the menu changing relative to the strategy.

I think that we have value menus in every country around the world.

There are some markets where franchisees decide to do some additional marketing value around marketing orientation of products, depending on what their current environment dictates.

But I don't see us dictating any change in strategy around that.

And then, I don't see necessarily any concern, at least on our part, relative to what might happen with others and what they decide to do around this because of their declining food costs, if you will, even though I don't know the details around that.

But I don't really see anything changing there in our relationship in terms of how we're going to market our value.

Yes, David and just adding, first Florida.

Our business is very strong in Florida.

I don't know about others but ours is very strong.

And so, we just -- we pulled the predictable everyday value equation there now for the last 18 months, and we're taking significant market share.

And that's kind of what we do in all the areas of the world.

In Germany, we grew market share.

Our business in Germany is high volume and we're making sure that we protect traffic as we deal in these type of environments right now.

Thank you.

The next question is from Steven Kron at Goldman Sachs.

Hi, guys, thanks.

One follow-up in the McCafe and then a question.

Can you tell us what percentage of the product sales of the McCafe in the US are at the breakfast day part versus other day parts?

And then, my question is to Ralph.

On the US Company-operated margins, up 50 basis points year-over-year.

That, if I have my numbers correctly, is the first time it's been up year-over-year, since the December '06 quarter.

You mentioned refranchising, a contributor to that but yo've been refranchising a couple of years.

So, if you can just drill down a little bit more as to the contributing factors there?

Is there a product mix shift maybe with the, I don't know, double cheeseburger or the McDouble or are there levers that you're pulling on controllable costs and the sustainability of that increase?

Ralph, do you want to address both of those questions, including the coffee and the McCafe?

Yes.

On the McCafe, it's more than 50% of the coffee happens at breakfast, on the McCafes.

There is some seasonality relative to McCafe, as to the hot or the cold drinks, obviously, but it's definitely more of a breakfast, as you would imagine.

On the US Company-operated margins, the switch to McDouble from double cheeseburger helped the margins.

The core menu advertising, non-discounted, just our everyday strong values or Quarter Pounder with cheese and McNuggets helped.

We still had high commodity costs in the first quarter.

So that offset it.

That's why the rest of the year, we feel very good about the margins in the US, as costs moderate and we have both of these pieces.

And the refranchising continues to help us.

We refranchised, I forget the exact number but, around 400 or so restaurants last year in the US.

And again, most of those have underlying leases and so it's just a switch that these costs show up on the franchise margin side, not on the Company side.

Thanks.

The next question comes from Jeff Bernstein from Barclays.

Great.

Thank you.

Actually, just one follow-up on the discounting and then a separate question.

Specifically, the discounting, I'm just wondering whether you think perhaps casual dining, where they're doing significant discounting, perhaps would take back some share or whether on the other end you, might be losing to food at home where they're reducing prices?

And then, you guys are still running probably 4% plus the menu pricing.

So, I'm just curious on the outlook for that?

And otherwise, just on the balance sheet, you mentioned obviously, we're coming close to the end of 2009 and the $15 billion to $17 billion is on target.

I know you haven't put out targets beyond that.

But I'm hoping you could talk maybe broadly about whether or not those type of levels are sustainable if the markets remain at the current levels?

How about maybe debt paydown, just wondering your priorities?

Thanks.

Well, Jeff, thanks for the question.

I'll let Pete answer the question on the projections.

But when you're looking at the indexing of food away from home and the discounting that's going on by people who are selling products relative to food at home and all of the other indexing that we take a look at relative to our trends in the business and our traffic and guest counts in the business; We're not really seeing any signs of impact relative to our share.

As I had mentioned, I think we're -- not think we are, we're growing share in every market we're operating in today or virtually every market in this environment.

And so, we're not seeing any impact of that right at the moment.

And Jeff, regarding the cash return targets, I think it's premature to give any specific guidance beyond 2009.

But I think if you look at our business model, I think, we'll continue to generate a significant amount of cash flow.

We'll continue to invest significantly in the business at the great returns that we're generating.

And the cash flow after that, we'll use to pay dividends.

We've shown a commitment to dividends and we believe those are important and we'll have some share buyback as well.

And just to reinforce the traffic piece from Jim.

Every major market in first quarter grew comparable guest counts, if you consider the impact of Leap, having one less day.

And that's, again, why I -- and that's obviously -- market share is all based on traffic and we continue to grow market share, as Jim had said.

Thank you.

The next question is from Jason West at Deutsche Bank.

Yes, thanks.

I just wanted to touch on the international side a bit.

I wondering if you guys could talk a bit about what's different about the Chinese consumer and what's going on in Germany, what has gone on there versus some of your other international markets that remain very strong?

Just if you could talk about what the differences are and what gives you comfort that you're not going to see this kind of slowdown spreading to other places, as we move through the year?

Well, Ralph has just been in those markets recently.

Ralph, do you want to talk a little bit about our consumers in Germany and China and other markets?

Sure.

Yes, Jason on -- I'll take China first.

In China, we grew traffic on a comparable basis, besides the new stores, for the first quarter but we had average check decline.

And in China, there are other convenient alternatives that are less expensive than western QSR and obviously than McDonald's.

And so, that's a unique phenomena.

There's very few places of the world where you have that.

And so, we're doing what we need to do to continue our long-term traffic building there.

And as that economy turns around, those are loyal McDonald's customers.

So that's unique to China and some other smaller markets but none of our bigger markets.

In Germany, the German consumer -- first, Germany is the European country of the big three that has had the largest GDP decline.

And that's impacted the psyche of the consumer there and obviously, their pocketbook.

And so, we've increased what's on our one-year-old menu there to be more aggressive on that side.

And we will continue to advertise more heavily those type of items.

But it's been, again, unique to Germany.

That's the way their consumer is.

We had high volumes there, so we just looked at the market share numbers for first quarter and we grew market share in a strong way but just the IEO market in Germany declined at a pretty strong rate.

So, that's what we see.

We're not seeing the same effect in our other large countries in Europe.

Thank you.

The next question is from Greg Badishkanian.

Thank you.

Just keeping on Europe for a moment and Germany, it's a tough macro environment and you're gaining share.

What's the competitive landscape?

Are other people, other competitors starting to discount a little bit more and would you expect them to, in order to keep up their share counts?

Ralph?

Yes.

Again, the issue you in Germany is more the consumer sentiment and what they end up doing.

We've got a very strong position in the marketplace there.

More than three times bigger than the next competitor on a guest count basis.

So, it really is much more about what we're doing and how the consumer is feeling, than it is about competitive actions in the marketplace.

Okay.

Thank you.

The next question is from Larry Miller at RBC.

Yes, I actually had a couple of follow-ups, Ralph, on what you were talking about.

Why is it that we're not seeing sort of the weakness in the UK because consumer sentiment there isn't strong?

And then also, I think as it it goes back to China, you guys worked on a menu reengineering in terms of prices.

You're saying it's still weak there.

Have you seen an improvement in the comp trend?

I know it is a lumpy quarter because of New Year's trend but I'm just curious if, when you lowered those prices, if you saw the desired response?

And then, my question was, related to the Angus test market results, it sounds like that's a product that you actually might roll this year.

And can you kind of give us a little color about shifting between the burgers on the menu and what the test market read is on that thing?

Okay.

On the UK piece, we had a very strong quarter in the UK.

A couple of things are happening.

First, our brand strength there over the last two years, it's the best turnaround of our business anywhere.

We've got a very strong management team.

As you know, the media and the press there were not always on our side.

That's changed significantly.

We've reimaged a lot of restaurants and there have been some stimulus in the marketplace from government.

They did a temporary reduction of VAT, that 2% reduction that happened in late December.

That put a little bit more money out there for those that are spending.

And so, it helped retail sales.

And we're benefiting from that and continuing our trend.

And as I mentioned, we just were looking at first quarter market share numbers in the UK, very strong growth in market share for us.

When you look at China and the prices, the reason for what we have done in China is, as I mentioned earlier, the early signals are with some trend down from Western QSR down to Chinese QSR.

And their meal prices for Chinese QSR's were maybe 30%, 40% below what a traditional Western QSR meal prices were.

And so, we want to make sure at lunch, that we became close to competitive in that area, in order to limit trading out of the category into a different convenient option.

And so, we -- we like what we're seeing, with what we've done.

It's dilutive to margins, obviously, and to average check but this is a long-term gain.

And we're going to continue to make sure that we maintain that type of traffic.

And relative to Angus, we will have Angus out in the US market at some point this year.

We know what it can do from the different marketplaces and what -- as you've seen that we've done.

We significantly increased our advertising against our core menu, which has everyday great prices on our extra value meal, the Big Mac, QPC, chicken McNuggets.

And this is an option for those that are a little bit hungrier and want to spend a few more bucks but the rest of -- it will be supplemented by strong value advertising at the same time.

Thanks.

The next question is from John Ivankoe at J.P.

Morgan.

Actually, just quickly for me at this point, remaining on China.

Was the reduction in unit growth a function of less openings in south China or is there something else that I should read into that, given your positive long-term view of the market?

Are you changing formats, drive-thrus, what have you?

And secondly, on China, are you seeing the improvement in April, relative to March that you're seeing broadly in the region or is there something different with China?

Well, on the slowdown on the openings, it's 25 to 35 openings, John.

And much of it is in the south because a bunch of factories have been closed there.

But it's sort of across the board, really, when you look at it.

When you reduce openings from 175 to 150, we're really looking at each of the marketplaces.

And when the surrounding area is not developing appropriate to maintain pace with the opening, we have a slight pull back there.

Relative to your second question, Ralph, can you just talk about that for a minute?

I'm sorry, John, can you repeat that second piece of the question?

I don't know if he can get on, but it was about --.

Okay.

Can you repeat that Mary Kay, please?

April sales in China versus the rest of the country, as we mentioned, or the western --.

Yes.

Our trends are comparable.

They're not stronger in April in China.

And then one thing on the China development, like Jim said, it isn't necessarily we're pulling back on any format like drive-thru, we will actually open less drive-thru because those are usually in areas where we were counting on more infrastructure growth, homes, roads, et cetera.

And that's where some of the pull back has happened.

And so, there will be less drive-thrus but because of that, not because of we're changing the format of what we are opening.

Okay.

Thanks.

The next question is from Jeff Omohundro at Wachovia.

Thanks.

There's been a lot of discussion around value this morning but looking at the more premium side of the menu and thinking of Angus burger opportunity, do you see an opportunity for a bigger push on the premium side perhaps to capture, or further capture trade down share?

Thanks.

Thank you, Jeff.

I think the balance is going to remain about the same.

As you know, we've been testing the Angus for awhile now in several markets.

And we held off, actually, in terms of moving that product to a national rollout.

And whenever we decide to go for it, it's going to really continue to be an approach that balances out the menu relative to value across the menu, including premium sandwiches and our iconic core sandwiches and then the tiered pricing that we're using in the value menu.

So, it's not really a shift in strategy but a continuation of strategy.

Okay.

Thank you.

And the next question is from Tom Forte at Telsey.

Great.

Thank you very much.

I was hoping you could update us on the percentage of sales you're getting today from the value menu and from the dollar menu?

And then also, are you seeing any, if at all, impact from competitors who have rolled out their own dollar menus, Sonic or KFC?

And then lastly, when I think about same-store sales for the June quarter, can you talk about how difficult a comparison you have, given the rollout last year of Southern Style chicken for breakfast, lunch and dinner?

Ralph, do you want to talk about those two things?

Yes.

On the dollar menu, obviously, we've talked before where over 50% of the customers stayed with the double cheeseburger at $0.20 more, which dollar menu has dropped into the 10% range from the 14% type range we had talked before.

As I mentioned earlier, that's helped margins and it's maintained traffic.

We're not seeing the competitive impact.

We look at CREST data, which gives us a pretty good look at what other folks are doing and our value menus are one with traction.

And so -- and we continue to advertise it, so customers know that their favorites there are available and need to be top of mind.

Pete, do you want to talk about the projection comparison and the --?

We don't project comps.

And while we had a successful launch of the Southern Style chicken last May, we have a tremendous amount of momentum in the US business and we feel comfortable that momentum will continue.

Yes, and last here, Pete, the reality is if you look at our US comp sales last year, they were 3% in the first quarter, 3.5% in the second, 4.5% in the third and 5% in the fourth.

Slight increases each quarter but not significantly different.

The range is from 3% to 5%.

And so, we're really going against very steady baseline growth in the US and we're building on that.

We had a 4.7% in the first quarter of this year, even with the Leap Year impact.

Thank you.

The next question is from Mitch Speiser at Buckingham.

Thanks very much.

Just a question on beverages in general and the McCafe.

Just relative to that 18.3% Company-operated margin in the US in the first quarter '09 and about 18.5% for all of '08, will the incremental sales of specialty coffee products improve that margin?

And secondarily, just on the allocation of advertising dollars, where do you see that coming from to market the specialty coffee initiative?

Thanks.

Well, thank you.

I think if you take a look at the accretion to margins relative to McCafe, there's no question if we sold 100% of our sales were at McCafe, it would be accretive to the margin in a big way.

But we haven't really sorted out the product mix yet relative but what will happen, is we go to advertising on a macro basis.

And so, it remains to be seen.

But the expectation, of course, would be that the beverages would be beneficial to the margins.

And the second question, Pete, do you want to --?

It was about advertising dollars.

And obviously, we're seeing softness in the advertising markets, not only television but across all medias.

And we're going to use that as an opportunity to stay aggressive in getting our message out there and use that as an opportunity to do even more advertising.

Mitch, there's been a resetting, really, of the base media costs across the industry.

And we're taking advantage of that opportunity to take a look at where our spend can either increase or remain the same and still get additional GRP's and reach to our customers.

And to add a couple of things there, Jim.

On the Company-operated margins, an 18.3% in the first quarter, which is obviously winter, is very strong margin in the US.

And so, it was a great performance by our US business.

And on the advertising, we are very conscious of making sure that we are strong on our core menu advertising.

At the time that we're rolling out a new product, that we do not get distracted on that.

And we're fortunate, with the current media environment, that we'll be able to do both.

Thanks.

The next question is from Howard Penney at Research Edge.

Thank you.

If you could just add on Angus to that, as the, from the media question.

And then, I have a question as to the composition of your comps.

When you say your comps are up 4% and change and you attribute that to chicken, breakfast and beverages.

Can you sort of provide us, of that 100% increase, 50% is breakfast, another 25% beverages and chicken has the balance?

And when you talk about beverages, the Mccafes being 50% of the mix coming at breakfast, is that included in where you look at the allocation of breakfast and how well breakfast is doing, or is that -- do you wholly separate out beverages when you look at what it contributes to your comps?

Howard, it's Pete.

We don't get into that level of detail in terms of providing the drivers of the US.

I think it's fair to say that all of those items are working together.

And as you know, that they're consistent with the strategies that the US business has followed because those are areas that we see huge opportunity in.

We're going to continue to focus on those and we think, together, those are going to continue to be big drivers in the US business.

And on the Angus.

Angus is much more part of our core offerings.

It's burgers, it's beef.

That's who we are.

And so we look at that as an extension of our burger line and something that's very close to what McDonald's stands for.

Okay.

Thank you.

The next question is from Keith Siegner at Credit Suisse.

Just really quickly to follow up on one last question on China.

Given the weakness that you've seen kind of along the southern regions, does this change at all kind of the strategy for how you approach the country?

I think back in December, at the investor day, you talked about going after the top 150 markets.

Does this maybe change the focus, broaden out the scope a little, to really go for the long-term and get into some of the smaller regions?

And maybe use the franchisees a little bit more heavily as part of the growth?

How might you approach that, given what you've been seeing there?

Well, thanks for the question, Keith.

And we, at the moment, are not changing our strategy.

It remains the same.

And it's -- when you look at China and we're in this for the long-term, just opening our 1,000th restaurant and yet, it only represents about 2% of our operating income.

So the long-term strategy there remains.

We're looking at the big cities and we're not franchising there yet on a whole sale basis because we're still working on franchise laws and making sure that we have a viable franchising model before we do that.

And so, we continue to be pretty much a Company-operated system there in China today.

Okay.

Thank you.

The next question is from Paul Westra at Cowen.

Great, thanks.

I have a follow-up question on the US margins.

I was hoping to get maybe a little more detailed update on maybe what line items you see as the greatest opportunity to deliver improved margins, say, over the next year or two?

Perhaps, there's some specific efforts underway that can just try to gauge how much more upside there might be to the McCopco margin number?

In light of the fact that I think that 18.3% number is better than a 20-year high, it might theoretically limit upside.

But on the other hand, we're seeing some significant leverage elsewhere in the restaurant industry by other competitors who have significantly worse business trends do you.

Paul, it's Pete and then, Ralph, could maybe chime in.

But obviously, we think our biggest opportunity is to continue to drive comp sales.

And our focus on the top line is going to give us the most leverage in the US business.

And with the momentum we're seeing and the pipeline, we're very optimistic around the top line.

But structurally, as we've said also, we expect commodity costs to moderate as we move throughout the year.

So these higher commodities, as they work their way through the supply chain, will provide us some additional benefit.

And we're always looking at ways to be a little bit more productive from a labor side.

And probably from a head wind perspective, there are national minimum wage increases coming later in the year.

Now, a great majority of our system is already over the minimum wage, so we don't see that as being a huge impact but it is something on the radar screen that we're looking at.

But again, driving the top line is going to continue to be our greatest opportunity and we don't see the margins hitting some theoretical peak.

Yes.

Really, Pete, not much more to add, other than, we don't expect the inflationary year we had last year, this year.

Or it's not the long-term trend.

And so, that will always help in a business where we have a fair amount of fixed costs and get leverage off of sales growth.

Okay.

We have another question from Joe Buckley.

Thank you.

I'm going to ask two and they're kind of opposite sides of the globe.

But in China, going back to China for a moment, if the count was negative for the quarter, I think the sense I got is that January and February on a combined basis were up.

So did sales get materially worse in March?

And if so, I'm kind of curious, what you think might have driven that?

And then separate from that, going back to the US, Europe too but US on the food costs side, are you locked in on food costs?

Is there a reason you're not going to benefit from declining food costs?

Because it seemed like through 2008, the food costs inflation numbers kept rising pretty dramatically.

So, it's definitely worse, it was susceptible to what was going on in the commodity markets in 2008.

And I'm wondering why you wouldn't be benefiting from that, at some point, here in 2009?

Well, Joe, I did say -- I think we did say that we, over the course of the year, will benefit from it, as it passes through our supply chain on the food costs to the United States.

And yes, we do some out contracts and some hedging, as we've communicated in the past.

But we expect to see some benefit incrementally as we move through the year.

And what was your second question?

What was his second question?

China.

It was really about -- specifically about March in China and trends.

And maybe, Ralph, you can talk about that.

Yes.

So adding to -- on the commodity costs, for one second is, proteins have not moderated in cost and that's a big piece of our menu.

They're not growing it at the pace that they were but there's less supply out there of beef and chicken and that's not allowing for the benefit that there is in some of the other commodities.

And so, that's what you will see.

But it will definitely get better throughout the year.

In China, March was not as strong as the combination of January and February.

Thank you.

The next question is from Jim Baker at Neuberger.

Yes.

Good morning.

I wanted to ask you about the other countries in corporate line, where it seems like you had about a $20 million reduction in restaurant margins and about a $14 million reduction in operating profits.

If you could comment on what's happening in Latin America and Canada, particularly and also the corporate expense?

Ralph, do you want to respond to that?

Yes.

Our Canadian business is really the -- we don't have any Company-operated restaurants in Latin America anymore.

But our Canadian business had a good sales and guest count month.

They got impacted by the commodity costs a little bit more up there.

And we've been stronger on our value proposition for both breakfast and rest of day, as we're building our traffic.

So, Company-operated margins in Canada were dilutive to last year and that's what would show up in that area.

And then also, at the corporate side, the corp G&A expenses are down as we continue to just exercise good G&A discipline and keep a watchful high over that spend.

Okay.

Think I we have time for just one more question.

John Glass.

Thanks.

It sounds like as you're rolling into summer, you're going to start nationally advertising the specialty coffee or the McCafe business.

Right now, five of the seven products or a majority, at least, of the products are hot beverages.

And I think last summer, you had indicated that you'd seen the cups per weeks slow down materially in the summer, given that hot coffee doesn't sell as well during that period.

So, the question is; Is summer the right time to nationally advertise those products or is it a better time to wait until fall?

Should we at least moderate our expectations of the initial impact of that advertising, at the very least, or do I have it all wrong?

Well, we're not going to tell you when we're going to start national advertising.

It's proprietary information.

But there's never a bad time to nationally advertise a high-quality product.

So, we'll make that determination as we move through this period and as we get closer to what could be considered the time we'd be able to launch this new product.

In addition to that, we've got a strong mix of iced coffee and frappas that are part of the -- and the other cold drinks.

And we're going to be strong on drinks this summer, on cold drink advertising, as we were last summer.

And so, we'll make sure we strike that right combination but our business -- definitely don't sell more of the hot items in the summer.

But our business is much steadier than the rest because our customers are very regular.

And so, like Jim said, we'll be out there all year, when we've got a new product, supporting it on a strong basis.

Okay.

I think we're about out of time.

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

Well, thanks, everybody, for joining us this morning.

In closing, I want to emphasize that our global business is fundamentally strong and we are well positioned for continued growth.

Our financial discipline remains in line with our growth strategy of being better, not just bigger.

And we are successfully controlling costs, at the same time investing, to grow the business.

Our system's ongoing alignment around our plan to win is producing measurable results in every area of the world.

Customer relevant strategies around food, value, convenience and experience have earned us a place in consumers' daily lives.

I'm confident in our ability to sustain our momentum and continue to deliver long-term profitable growth for our system and our shareholders.

Thank you.

Thanks.