麥當勞 (MCD) 2009 Q2 法說會逐字稿

Hello, and welcome to the McDonald's July 23, 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 call over to Miss Mary Kay Shaw, Vice President of Investor Relations for McDonald's Corporation.

Ms.

Shaw, you may begin.

Thanks.

Hello, everyone, and thank you for joining us.

With me on the call today are Chief Operating Officer Ralph Alvarez and Chief Financial Officer Pete Bensen.

Jim Skinner is traveling today and will not be joining us on the call.

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

Before I turn it over to Ralph, I want to remind everyone that as always, the forward-looking statements in our earnings release and 8-K filing also apply to our comments.

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

Now I'll turn it over to Ralph.

Thank you, Mary Kay, and good morning, everyone.

Our solid business performance continued in the second quarter.

Global comparable sales increased 4.8%, consolidated operating income increased 11% in constant currencies.

Every area of the world contributed it our growth, and EPS reached $0.98, a 3% increase in constant currencies.

Excluding last year's $0.10 benefit from the sale of Pret a Manger and this year's $0.01 benefit from both the Red Box and Indonesia transactions, EPS increased 13% in constant currencies.

Today we'll talk about the strategies driving our momentum.

We'll also share a few highlights from each our geographies, the US, Europe, and Asia-Pacific, Middle East and Africa or APMEA as we call it, and then Pete will go through the numbers in greater detail before we open it up for Q&A.

The financial wing continues to serve as the foundation as we remain focused on our strategy of getting better, not just bigger.

Our strength continue to be driven by every day predictable low prices, menu choice, better restaurant operations, convenience, and our ongoing restaurant reinvestment programs.

Now turning to the US, comparable sales for the second quarter were up 3.5%, and operating income grew 5% to $835 million.

Our share of the US informal eating out or IEO category is up about 50 basis points year to date.

That's the strongest IEO share growth that the US has experienced in more than six years.

A balanced marketing calendar has contributed to the increases.

In the second quarter, we advertised Big Mac, Dollar Menu, the McCafe launch and breakfast.

And now for an update on McCafe.

We've grown our coffee business from 2% to 5% of sales over the last two years.

And this has largely been driven by McCafe.

The national advertising launch in May drove excellent awareness and drove significant incremental unit movement.

Results are at or exceeding our expectations, and are also accretive to our restaurant margins.

As a result of our balanced approach, sales remain positive across all our day parts.

While comps did slow in June we were positive.

While the IEO category, however, was negative, and thus we continued to grow share.

Our US July comp sales are trending similar to or better than they did in June.

We have now started the rollout of the Angus burger during the month of July, but won't advertise it nationally yet.

Early results are strong, and customers are telling us they love the products.

The Angus burger line will also be accretive to our margins.

Now let's turn to Europe, where our momentum continues.

Sales and guest count increases were strong with comp sales up 6.9%, resulting in an operating income increase of 10%, in constant currencies.

Europe's strategies to upgrade the customer and employee experience will build brand transparency, and enhance local relevance will continue to deliver results.

Our share of IEO visits continues to grow in Europe also.

In fact, we experienced 6% to 8% greater momentum in customer visits than the branded competitive set in Europe's top five countries.

The UK may be the best example of our brand continuing to get stronger.

The combination of balanced marketing efforts, beautifully reimaged restaurants, a focus on operations excellence, and the introduction of great, new products that are affordable continues to produce outstanding results.

For the second quarter, the UK delivered an impressive 13% comp sales increase, resulting in double-digit operating income growth.

Our French business also remains strong.

Families are choosing to visit McDonald's for an experience that offers quality food at an affordable price in great surroundings.

Starting in July the French government has reduced the VAT for all in-restaurant meals.

Which will effectively increase our sales going forward.

The VAT reduction also enables us to reduce the price of some of our menu items and accelerates the exterior reimaging of our restaurants over the next couple of years.

It will also translate into more benefits for our crew.

Now let's talk about Germany, Europe's most price-sensitive market.

It also delivered positive comparable sales and guest counts for the quarter, in addition to significant share growth.

But business in Germany does continue to fluctuate.

We are seeing a shift in our product mix to more core menu items and entry-level products, which is impacting our average check.

While our margins are up, we must continue to grow traffic to produce results in this economy.

It is a market share battle, and McDonald's is winning.

Consolidated, Europe's July comp sales are currently trending stronger than they were in June.

And we are confident our emphasis on convenience, menu choice, combined with value, will continue to produce excellent results.

Now let's turn to APMEA where comparable sales increased 4.4% and operating income grew 34% from constant currencies.

Our markets are aggressively working to ensure value initiatives are strategic, branded, and supported based on growth.

Going to start out with Australia, which continued to deliver double-digit sales comps.

We have reimaged nearly all of our restaurant including the addition of McCafes to freestanding locations.

We continue to offer Everyday Value while introducing relevant new products and improving our operations.

Our ability to collectively execute on these aspects is what's driving our business in this important market.

In fact, over the last five years, Australia has grown the average guest count per restaurant by 105,000, and now exceeds 500,000 per store.

Let's talk about China, where comparable sales have been negative.

We have been most impacted in the south where 40% of our restaurants are located.

Significant factory closings and a hurting economy are causing millions of people to relocate back to their home provinces.

We continue to have confidence in China, though, and believe this situation is a temporary one.

We have strong in-restaurant controls and lower commodity costs which are both helping us to continue to grow margins.

Our business remains solidly profitable with excellent returns.

And we remain on plan to open 140 new restaurants in 2009.

Overall, APMEA delivered a solid quarter with great growth and operating income.

Looking ahead, July sales also continue to trend positive.

Australia continues to remain strong, China is soft, and Japan has been slower.

In closing, McDonald's continues to win.

In an economic environment where GDP is declining and unemployment is increasing, we are growing share.

In fact, comp sales, guest counts, and operating income all were stronger in quarter two than they were in quarter one.

Our brand is getting stronger, and we continue to deliver.

Now I'd like to turn it over to Pete.

Thanks, Ralph.

And good morning, everyone.

It's clear to us that consumers today are much more discerning about their money and time.

They count on McDonald's for friendly, convenient service, variety, and value across all tiers of our menu.

We're meeting their needs and in turn, and gaining sales, guest counts and market share around the world despite the current economic environment.

As a result, second-quarter revenues, operating income, and earnings per share all increased in constant currencies.

And we strengthened our operating profitability with year-to-date combined operating margin up 200 basis points to 28.7%.

This performance demonstrates our success at driving restaurant margin, dollar growth as well as our ongoing control of G&A spending, which declined in constant currencies.

As a percent of sales, consolidated company-operating margins increased 20 basis points in the second quarter, due to solid comparable sales and refranchising partly offset by higher commodity costs.

This performance demonstrates our success balancing price increases, product promotions and costs to manage restaurant profitability.

For example, in the US, our refranchising efforts along with the launch of our McCafe specialty coffees and a focus on the Big Mac at full price contributed to second-quarter, company-operated margins increasing 50 basis points to 19.6%.

This improvement came even as we took only nominal menu price increases during the quarter.

US company-operated margins also reflect moderating commodity cost pressures.

In the second quarter, our basket of goods increased 4.4% versus 2008.

This is down sequentially from the 6.7% increase experienced in the first quarter.

We've continued to leverage our collaborative supplier relationships, scale, and risk management practices to take strategic advantage of opportunities to effectively manage the impact of fluctuating commodity costs.

As a result, we're adjusting our outlook for the US food and paper cost.

We now expect a 3% to 3.5% increase in our basket of goods for the full year, which implies an increase of about 1% for the second half of the year.

In Europe, company-operated margins rose 10 basis points, thanks primarily to strong sales in the UK and refranchising in both the UK and Germany.

This was partly offset by margin declines in some eastern European countries, which continued to feel the effect of weak local currency on commodity imports.

Due to the local supply chain infrastructure, many of our eastern European markets import 30% to 50% of their product.

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

We remain confident in the long-term opportunity in these markets as we navigate these short-term challenges.

For Europe overall, we're also seeing an easing of commodity cost pressures.

In the second quarter, our basket of goods rose 6% versus last year, down sequentially from the 9% first-quarter increase.

For the full rear our revised outlook is for Europe's basket of goods to increase 3 to 3.5%, resulting in relatively flat costs in the second half of the year.

In Asia-Pacific, Middle East and Africa, company-operated margins increased 60 basis points driven by positive comparable sales in many markets.

Australia continues to benefit from our premium menu offerings and convenience initiatives, including 24-hour operations and drive-thru.

In China, while sales continue to be negatively impacted by economic weakness, our margins are solid, and we're up in the quarter, primarily due to lower commodity costs and improved operating efficiencies.

Turning to franchise margins, consolidated franchise margins as a percent of revenues were strong at 82.3%, due to positive global comparable sales, offset by the impact of refranchising and higher occupancy costs.

We have evolved to a more heavily franchised structure.

Now 80% franchised worldwide.

In the second quarter, about 200 restaurants were either refranchised or transitioned to the developmental life of the structure.

This has direct, positive implications for the stability of our very substantial and growing cash flow.

Our first priority for this cash continues to be reinvesting in our business to build returns and enhance shareholder value.

After capital expenditures, our next use of free cash flow is to fund dividends and then finally to repurchase shares.

Through June, we've returned more than $14 billion to shareholders under our three-year, $15 billion to $17 billion cash return target.

We will likely end the year in the upper half of this range.

A key focus of our capital expenditures has been to elevate our brand in the mine of our customers to drive growth in sales and market share.

This can take many forms.

From building one of our new, modern design restaurants to reimaging existing locations to make them more comfortable and contemporary, or to enhance efficiency to take advantage of new business opportunities.

Today more than a third of our restaurant worldwide reflect a more contemporary design.

Our business will continue to benefit from these efforts in the year ahead.

It's important to realize that as we make these investments in our business, we are also upgrading our asset base.

We currently own the land for about 45% of our sites in our wholly owned markets, which is on our books at historical cost, and we've leased the rest.

Our preference is to own our sites where possible.

The fact that we own or control the leases for our sites is an important distinction that sets McDonald's apart.

It fosters a greater alignment with our our owner/operators.

Not only because we have a mutual best interest in optimizing sales performance, but also because our owner operators have a financially strong partner who shares in the cost of going into business with them.

As a result, our owner operators require less debt, have stronger balance sheets, and given our ongoing momentum, their cash flow is strong and growing.

Better enabling them to reinvest for the long term.

A financially strong franchisee base is reflective of McDonald's strong financial foundation.

With our healthy balance sheet, strong credit rating, and significant cash balance, we can be opportunistic in the current environment.

For example, as one of the few retailers adding new units, we are being even more selective to secure better sites that will deliver better returns in the long run.

Our strength also gives us an advantage as we negotiate leases.

On a final note, it's a good sign that I don't need to say much about currency translation this quarter, as going forward it appears the impact will lessen.

At current exchange rates, we expect the negative impact of currency translation in the second half of the year to be about $0.04.

A nice change from the $0.17 impact we saw in the first half.

More specifically, at today's rates we expect a negative $0.06 impact in the third quarter.

turning to a positive $0.02 impact in the fourth quarter.

for a net negative of $0.21 for the full year.

It's no question that the current economic environment is challenging, and we're not completely immune from its effects.

As we have said before, we are not recession-proof, but we are recession resistant.

We offer products and experiences that customers continue to want .today, tomorrow, and well into the future.

We're leveraging our unmatched operating, development, and financial strengths to continue to increase our leadership position around the world.

Thank you.

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

Thanks.

Thanks, Pete.

I'll now open the call for questions.

(Operator Instructions).

And as always, to give us many people as possible the opportunity to ask questions, please limit yourself to one question.

We'll come back to you for followup as time allows.

The first question is from David Palmer from UBS.

Hi.

In the -- well, in the US, the McCafe launch has been successful, you've said in terms of your own internal projections and goals.

In terms of sales mix, I'm wondering if you can talk about how that -- how that's turning out in terms of the overall top line.

Obviously you're gaining a lot of share versus the market.

But as you think about the balance of your marketing spend and your overall focus on this initiative, you think in some way this might -- there might be kind of a side negative impact that could be -- the lack of support that you're offering other core products and perhaps how could you -- when you think about lapping the Southern Style chicken sandwich's introduction last year, do you think that that product is perhaps coming off off of that honeymoon introduction period and that's perhaps providing a little bit of a headwind, again, as you're getting the -- the sales mix up on McCafe, maybe something else is dropping like the Southern-Style chicken sandwich's introduction last year.

Thanks.

David, we don't -- we don't think so.

Again, we don't have all the it will take six months before we can get the really -- good data to understand how much of the business on the McCafe is incremental, how much is tradeoff, et cetera, et cetera, since this just -- we just started advertising in mid May.

But what we did do is to ensure that didn't happen, and we were fortunate this year because of the media cost.

We had a stronger weight against core menu in supporting Big Mac as we had the year before supporting core menu.

So we did not give up weight -- at least on broadcast media.

Obviously you give up some, at the store level exposure, but on a broadcast media point of view we doubled up on -- on our advertising in order to protect the other 95% of the business, which is really what -- what drives everyday success.

So, when you combine all of that with what's going on economically, what's going on in IEO, it's hard to separate the pieces, and I'd only be guessing.

So just want to give you back popular information.

Thanks.

The next question is from Keith Siegner with Credit Suisse.

This is actually Karen Holthouse for Keith today.

We've seen some other retailers and restaurants that have been able to leverage the economy and in genera weak commercial real estate environment into rent reductions from their research.

Have you felt any pressure from your franchisees or your franchise subleases to do the same thing?

We have not.

We've got long-term agreements with our franchisees.

Their cash flows are at all-time high.

Obviously, we're growing our results.

What we have done is we've been out there very aggressively communicating with our landlords that potentially would prefer to have cash and sell a lot of that lease, and we've been a buyer in that marketplace, buying land that we then control forever.

On a secondary basis in markets like the UK, UK's the biggest one, where rents are set or reset every five years based on market, obviously the market conditions have softened, and that will help what those rents are going to be set at here over the next coming years.

Thanks.

Next question, David Tarantino from Robert Baird.

Hi, good morning.

Just wondering if you could give a little bit more perspective on the slowdown in comps you saw in Europe, and APMEA in June.

Was it broad based across countries, or were there specific areas of weakness?

And generally, with July getting better, is there anything you're doing tactically to make that happen, or do you think we're just starting to see a little bit more stability?

Thanks.

Yes.

David, I'm going to start with APMEA first.

The slowdown in APMEA was really Japan and China.

Japan, we don't consolidate those results.

It doesn't have a large operating income effect, but Japan was very weak in June and slightly better in July.

But still has brought the numbers down from where APMEA was in Japan in the first five month of the year.

China, as we mentioned continues negative even though they had been negative.

June was weaker than it had been the first five months.

Turning to Europe, our Europe businesses -- it is stronger in July than it was in June.

You get some of the holiday changes, and it was a hot June, but we had -- Germany was slightly weaker.

We knew that.

We had some coupons last year that we decided not to float at the same time this year.

And because of our emphasis on every day value.

And so we knew we were going to have a little bit of an impact.

But the rest of our Europe business is strong.

And continues strong -- actually stronger in July.

And so, IEO's down 4% in Europe for the first quarter with the second quarter data is not out.

But we don't think it's going to be much different based on the data we get from other sources.

And so we're not getting -- we're not getting helped by the IEO category, we're obviously benefiting from both -- we've got a very strong brand in Europe.

And we're basically the category from a QSR point of view.

Thanks.

Next question is from Jeff Farmer at Jefferies.

Thanks.

Coming back to coffee for a second.

I think in the past you guys have indicated that you expected your combined beverage initiative to add $125,000 per unit.

I guess I do recognize that you're right in the middle of that.

There's a lot of beverages in play.

Why weather do you stand in term of hitting that $125,000 target today?

We're on target, and that's why I said we're on target.

That eventually does include some level of fruit drinks, and smoothies, and the crushed ice drinks and frappes.

So those two are both, again, high margin, good sale items that we won't be into until next year.

But the -- the pieces of what we talked about in the 125, which does not include direct coffee, obviously, we had that already.

It's on -- it's on target.

Okay.

Next question is from Matt DiFrisco at Oppenheimer.

A little detail about, Pete, what you expect in the US with margins heading into the second half, given the minimum wage increase, what impact that might have on margins and do you expect to take price and then also if -- just a followup to that last question about the crushed ice drinks.

Can you update us on the timetable, when we should expect that to start to get to critical mass and begin the launch of a national program behind that again.

Just update us on the quarter that you expect that to occur.

Matt, it's Pete.

On the -- on the US margin question, we don't expect there to be a significant impact from the minimum wage increase.

Over half the states already had their state minimum wage set higher than the federal is moving to.

And our wages are pretty close to that in the other.

So we don't expect a significant impact there.

And so with wages not increasing that significantly and commodity costs moderating in the second half, we have less need to get to the menu board and do a lot with price.

So we don't see a lot of activity in -- that regard in the second half.

And regarding the rollout of the other beverages, we're going to start softly in -- in late 2009 and then start to get into that in 2010.

We don't have a fixed date exactly as to when those beverages will get in.

But we want to obviously reap the benefits of the investment we've made in the Espresso-based coffees.

Get that awareness up and let that product have time to get into the marketplace.

Thanks.

The next question is from John Glass, Morgan Stanley.

Thanks.

Maybe a bigger picture question, but your operating margins now are almost 30% which is just astounding and absolute.

They're up over 1,000 basis points since you began this restructuring back in 2004.

So how do you think about what a target is considering there's really nothing that you could compare it to in your history or another company.

And maybe just specifically one is what are the key drivers going forward that would get it higher than it is today, and in what's the risk that you need to reinvest?

I guess maybe to make it specific to this quarter, you talked about Germany and the need for value and a trade down there.

Is there a risk we might see near term margin compression because of that negative mix shift particularly in Europe either because of customers creating that or because of your own promotional activity creating that?

No, on the second one, we don't see -- we think our margin are going to be better for the second half of the year.

We don't have -- the market where we have had some of that tradedown as I mentioned, that is more obvious in Germany.

We've had some tradedown throughout all the economies.

We're not pushing the premium products as heavy as we were before, not as big a part of our marketing calendar.

Honestly, the other piece is, we're getting a lot less price increases next year than we did the last two years because, of what's happening with commodity costs and what's happening with just inflation in general.

And so, we don't expect that to -- and price increases are the other things that create more tradedown, we ourselves won't be driving that.

So we -- we feel that margins are actually going to grow based on the stability of commodity cost that we see in the second half of this year and going into 2010.

And John, in terms of a -- a target, we really don't have a target in terms of the operating margin.

We think we can continue to grow that, and as Ralph said, the margin will be key and driving comp sales off of that is really the key to our business in terms of our profitability and as we move to more franchising, it's less G&A intensive.

So we get a benefit from that as well.

Thank you.

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

Thanks, a bookkeeping question.

I think in the June release you were expecting a gain on the Indonesian transaction, and from what you said here today it doesn't look like there was one.

I wanted to verify that.

Secondly, talk a little again about the transaction counts.

I saw the footnote here and you indicated they were stronger in the second quarter than the first.

What kind of consumer activity are you seeing, is the consume trading down in the menu, or have you run off enough price that that's a restraint on the kind of comps we should expect going forward?

Joe, it's Pete.

I'll talk about Indo and then Ralph can get into the transaction counts.

But really we had a gain but it was smaller than we originally anticipated.

And when we included that with the Red Box gain together, they rounded to $0.01 instead of $0.02.

And so there was really nothing significant there.

Yes.

And-- on the transactions, as I said, we've got three things working there.

We've had some tradedown, mostly from promotional high priced products that we ourselves are not pushing as much around the world.

And moving into core menu is a part of the -- what's happened.

We are taking less price and will take less price over the next year.

And-- at the same time, we've had a slight uptick in guest counts which we believe in a market share battle that is the battle.

That's what needs to happen.

So, we had some quarters last year, it's -- if you looked at it where we may have had 70%, 65% of our sales came from average check.

We're definitely back at the 50% level, and maybe or will be below that level, as we go into 2010.

Next question from Larry Miller, RBC.

Yes, thank you very much.

I just wanted to go back to that comment you made, Ralph, about the IEO being negative in June.

Seems across the board in fast food something's changed with the US consumer.

You guys clearly see the consumer more than anybody else out there.

I was wondering if you could shed any light on what you think's happening out there.

Thanks.

We don't know.

And many of you wrote about it.

We saw it.

It was, an effect that we saw, kind of like when school let out.

All of a sudden, we don't know how much of that was last year.

We know we had a benefit of last year from the incentive checks that went out from the government.

And back then, people weren't in saving mode.

Those dollars got out there and got spent.

So we don't have good enough data yet to tell you, but we saw that slow down and then, un, we've seen a slight uptick in photographic since that initial hit.

And so, we like to think that we're gaining market share.

Obviously we don't want IEO to be down.

We want to gain market share when IEO is up.

And we think the customer reacted.

It was summer.

Gas prices were up.

You didn't have the same component of the investment checks out there that you had last year.

Customers saving 7%, unemployment is 10%, or the gross figure you read at 16%.

We think all those things had an impact with a customer, and, from our point of view, we just need to make sure we're getting our piece of the pie in the meantime.

And we got to be very careful on price, and we've got to deliver outstanding service at this time.

Thank you.

The next question is Steven Kron from Goldman Sachs.

Hey, thanks.

One followup on the margin question.

It seems like you guys are comfortable with the sustainability of what you're seeing in the US given the expectations for the commodity outlook in the back half.

In Europe I guess, certainly from the first quarter which was down 70 basis points at the company level back up to 10, my sense is a lot of that has to do with the easing of the transactional headwind.

Can you put context around what the sequential improvement in that transactional headwind was?

And then secondly, a followup to Larry's question on the US.

How were the consumers using your menu differently?

Are you seeing any change in mix that's concerning to you, or is the competitive environment adjusting, how you guys are thinking tactically, and is -- is your decision to not go national from an advertising perspective with Angus just because it's the wrong time right now to be promoting something premium like that, thanks.

Steven, it's Pete.

I'll talk about Europe margins a little bit.

And then Ralph will follow up on the US question.

Compared to first quarter, one of the big drivers was our comp was significantly better in the second quarter compared to the first.

So that helped our margin improvement along with the softening of the commodity cost a little bit.

The eastern European imports actually, was relatively similar in terms of its impact.

But we did -- we were able in some of those markets to get a little more aggressive in price to help offset some of that, but not significantly.

Really, it was the better comp and the weakening of the commodities that really were the two big drivers.

And thus we expect that to be helpful in the third and fourth quarter with what we know is happening with commodity costs in Europe.

As far the US, first on the -- let me clarify.

We are going to nationally advertise Angus.

We just haven't started that yet.

So I just want to make sure that was out there.

We're in what we call soft launch where we make sure that we're doing the right things operationally.

And we get supply to all the corners of the country.

But we will be in a national launch period coming up soon.

On the tradedown piece, we're not seeing anything sequentially, in a big way out there that changes.

We had gone to advertising more core.

We were, for example, Big Macer have us being in premium chicken sandwiches last year for items like that.

Obviously Angus goes against that.

Timing's not perfect on Angus, I will tell you.

But, customers love the product.

We've been sitting on the sidelines with it, something that we wanted to put out there.

And we know it will help average checks, and we know that customers that trade from our core menu to them, think -- really think highly of the products.

So we felt it was time for us to go out there.

It was a gap in our menu, and -- and so we'll do that.

But there is something on the tradeoff-type piece that would be concerning other than resistance to price increases, if -- that you can't cross that line.

Thanks.

The next question is from Jeff Bernstein at Barclays.

Great.

Thank you.

Actually this is a question on some cost-cutting efforts, which has been a theme across the industry lately.

Sound like your peers are perhaps slowing the unit growth and seeing significant cost benefits from I guess the removing of the cost of growth.

I know you guys have been focused on managing your G&A down.

I'm wondering whether there are any other major cost cutting opportunities or initiatives you see within your business to support the earnings growth during this stretch, whether there's quantifiable target.

Separately I know it's too early to look at 2010, but anything on the bigger picture of cash to return to shareholders?

I know the $15 billion to $17 billion is running out.

I didn't know whether we'd get a similar type promise in the coming quarter or whether you would stick to a one-year-type plan.

I didn't know if it would be higher or lower depending on the current trend that we're in.

Yes, Jeff.

On the G&A side, we try to stay away from the pendulum swings on the G&A piece.

And so we continue to work at it on a regular basis.

We're down, first half of the year, we're down 4% on a constant occurrence oh G&A.

Some of that is a benefit of not having an Olympic year and our convention.

But when you -- we're still giving increases to people, we're not cutting benefits, we're not doing any of that.

It is a headcount reduction both from the efficiencies of a more franchised organization, and just be more efficient with the people we have.

We have retirements or -- situations, similar to that, we -- we continue to get more efficient.

And that's the way we're going to go at it.

We're not going to go at one particular item.

The-- then I'll throw to Pete for the money question.

Yes, Jeff.

We're not ready to give a target or talk specifically about 2010 per se.

But you can expect there's not going to be a dramatic change in our business model.

And we're going to continue to generate a significant amount of cash.

And as I said in my remarks, we're going to continue to invest in the business because we're getting great returns.

And after that we like to fund the dividend and then buy some shares.

Thank you.

The next question is from Greg Badishkanian from Citigroup.

Thanks.

A followup on China.

You mentioned that there is a temporary impact from the macro that we've all kind of heard about.

And, just wondering maybe when you would expect a pickup there, and also I know there's not a lot of data, but maybe some color on market share changes in that market.

Okay.

Yes.

All of China has been impacted, but like I mentioned the south, that's our strong -- 40% of our business is down, basically centered around Guangzhou and that's the factory haven for the world.

That's where the impact is really happening, and we felt it there.

And we chased some of that business initially.

You guys remember about six months ago when that started happening and it hurt margin, and we made a decision to we are stronger in value.

We're giving up a little average check in that area.

But we're not giving the house away.

And that's an important piece because we do believe this is going to come back.

And you have to establish a brand, for the long term.

The rest of China is not faring that poorly, commodity costs have really swung around.

We've got a really strong management team, and so good restaurant controls.

The only other impact that it did to us on a temporary basis is, we pulled back on some of the openings that we had in the south because we want to understand where the factories reopen and -- and the population shift to occur again.

But we're very, we're confident on it.

But we -- we're getting excellent returns, our margins are -- for us at all-time highs in China.

So overall, we're strong on it.

On the market share side, I don't have any updated information, the data from there is not as robust as the monthly type stuff that we get in the US, and in Europe.

So we don't have any recent data, you can look at our comps.

You can look at the other couple of big players there.

They're similar where those numbers are right now.

So-- and the growth numbers, my gut says shares about the same.

Thank you.

The next question is from John Ivankoe from JPMorgan.

Thanks.

A followup and a question.

Ralph, it seemed like you were alluding to commodity cost staying relatively flat in fiscal 2010.

Did I hear that correctly?

And secondly, for I guess anybody, if you could update us where we are in the remodel cycle in the US, maybe what percentage of the system are you doing in 2009, 2010, and what kind of sales lift are you seeing from that project?

First, on the commodity cost, our early read on 2010 is stable.

So we're not giving any predictions on it yet.

But there's nothing out there, either on significant drops in -- in acreage or head of cattle or demand change or any of those items that we had seen in the past that you knew what was -- that something was coming through that was changing.

So right now it looks like a fairly stable first part of 2010.

The second piece and the remodels in the US, I'm sorry.

Yes.

The US, about 40% of the restaurants were touched with the reimaging program that we had that ended about a year and a half ago.

And so there's significant work to be done, we're further ahead in places like Australia.

We're almost done, Germany we're done.

France, we're far ahead.

So it's -- it's an opportunity for us in the US.

Obviously we needed to do some things in the kitchen in the US to deal with the huge growth in the drive-thru business over the last 10 years.

And so the combination of that which we tied in together with the beverage initiatives was a priority the last 18, 24 months.

At some point here we'll go back to getting on a regular cycle with the US to make sure that our brand is as contemporary as we want our product and our advertising to be.

Okay.

Thank you.

The next question is from Jason West at Deutsche Bank.

Yes.

Thanks.

Wondering if, Ralph, you could clarify a comment you made about doubling up advertising.

I think when you were talking about Big Mac and McCafe.

And then secondly, just if you could talk about the overall competitive environment in the US, does it feel like thing are still sort of decelerating to the downside there, and how does the current environment feel relative to back in 2002 when I believe we were in a similar environment.

If you could touch on the value of menu mix, if that's still a 10%, thanks.

Yes.

On the advertising piece, rates have come down, in a big way on the advertising side.

Many of those savings we translated into additional gross rating points, and outdoor billboards, so it's not just TV.

Using other mix of media, magazines, some of these are down more.

In order to be able to -- when I said double up, be able to have an adequate reach in frequency message for McCafe and the same thing for Big Mac, core menu advertising.

As a company, we threw some in some dollars, which were reflected in our margins, in our franchise margins to make sure that we had that as the operators have done on their side of the investment.

So it was a combination of better rates and some additional spending in order to both drive a new business and protect the core.

On the competitive situation, it hasn't changed much.

On the real estate side, nobody's building units.

Of the freestanding kind.

And so we're still out there, kind of with building 140, 150 a year on the freestanding side.

But with very little competition for those sites.

But as far as the rest of the category, the menus are about the same, our product mix is about 10%.

It hasn't move much on the dollar menu side.

And, I would say there's more couponing on the direct mail side, et cetera, going on.

But in general in our category that's so convenience driven, that doesn't have much of an effect.

Okay.

Thank you.

The next question is from Tom Forte at Telsey.

Thank you.

Wanted to get a little more detail on the consumer.

You just mentioned the percent of sales from the dollar menu.

Wondering if there's been any change in percent after sales from the core menu and how that's trended really since the recession has started.

Also wondering if you're seeing any difference on breakfast versus lunch and dinner.

And lastly, you made some comments before on Michigan, California, and Florida.

I think in Michigan, you rolled out McCafe early.

In California, I think you were benefiting from sweet tea and some other beverage initiatives.

Can't recall what you said on Florida.

But was wondering if you could give us some comments on those areas to give a feel for what sales were like or what the consumers were like in some of the more challenged markets.

Thank you.

Yes.

I'll start off with the last question geographically.

Our business is pretty steady across the country.

Our tactics are different.

So I can tell you we're up in Michigan on an overall basis.

Our business is up in Michigan, which is remarkable.

But we're much more aggressive on price in Michigan than we are in other parts of the country.

And need to be in order to have that level of traffic.

Florida and California stabilized last year.

And we saw pretty good sales last year, partly making up for going again some really soft numbers from the year before.

But we don't have a significance variance across the geographies right now.

On the menu side all five of our day parts that we measure were up for June.

So the latest month that we have.

And so the slowdown we saw quite honestly hit all day parts.

It wasn't concentrated one place or the other.

We have some benefit during the breakfast timeframe because we're advertising coffee, but if you take that out, the rest of breakfast may have slowed down some, but would still be positive just like the whole day part.

Thank you.

The next question is from Mitch Spieser at Buckingham.

Thank you very much.

Just a clarification and a question.

Just on the stable commodity food cost outlook for 2010, when you say stable, does that mean theoretically kind of flat year over year, or stable meaning that up 3% to 3.5% that you're expecting here in 2009?

And separately, just -- can you just clarify on the US comps, it sounds like you're saying that traffic has pretty much been steady.

But it's really been the check that has come in.

Maybe more specifically on the traffic trends from, say, first quarter to second quarter, and maybe from June to May, has it been steady and it's been the check that caused the deceleration in the comp?

Thank you.

First when we say stable meaning it -- the 3.5 this year, we don't consider stable because it was six or seven in the first half or one or flat depending on the second half depending on the US or Europe.

Stable mean it will go up whatever inflation is in general in the marketplace.

What we mean by stable.

We're back to a 1%, 2% inflation.

And that's what we expect.

If it's two to three, depending on where CPI goes to.

That's what we mean by stable.

In the US business, while the average check did slow down, the transactions are been positive but they did not grow -- have been positive but they did not grow.

They were fairly constant.

Okay.

The next question is from Rachel Rothman at Wedbush.

Hi.

Good morning.

I just wanted to follow up on your commercial real estate question.

I know you had some commentary on the US about people not building.

We've heard that of some of the other sectors that we covered.

The commercial real estate development globally has slowed materially.

And can you talk a little about whether or not you're seeing something similar internationally, maybe specifically in India or China on some of your developing markets.

And then whether or not that would have an impact on the pace of unit growth going forward.

And I know you guys are growing much slower than some of your peers, but it is still a large number of stores.

In the US, it did affect -- we had allocated more capital this year beginning at the end of last year to grow more in the US.

Quite honestly we'd grow more if we could get to sites that claim unit developments are way down.

So that's had some effect, we're still going to build 140, 150 freestanding units.

We would have done more, but, they're just not there.

So it's definitely an issue in the US.

That's not necessarily the same type of developments that we go in in Europe.

When it comes to Asia, and specifically in China, one of the reasons we didn't grow at the rate at the rate that we did is more than half our restaurants there are non-drive-thru, they're part of commercial center-type scenarios.

Some of those aren't being built, especially in the south.

And so that affected some of our growth.

But China's still the -- the real estate market in China is still growing.

Their GDP is still up, overall they're still pumping money into construction.

It was more of an isolated issue in the south.

India's not a big enough market for us.

We're building 30 some restaurants there this year.

And I don't know enough to give you more of that.

Thanks.

The next question is from Jeff Omohundro at Wells Fargo.

Thanks.

Wanted to follow up on the commentary coming out of Europe.

You mentioned the market share gains, for example, in Germany continuing.

I'm wondering, though, about the pace of gains in light of some increased promotional activity by competitors.

What your sense is in terms of the level of promotion, whether McDonald's might want to respond.

Thanks.

Yes.

We've been pretty aggressive in Germany, and so I don't know that we will respond beyond where we are right now.

We've got a very strong every day value menu there that's over 20% of our sales.

We strategically do mailers, freestanding-type inserts.

In Germany, they work there.

It drives people out versus what may happen in other places.

And so we've got -- we're pretty aggressive in the marketplace already that way.

At a rate that still provides really strong margins, our volumes and customer counts are pretty high in Germany.

We don't see -- and there really isn't competitors of enough size, of -- in the category to take us off of our program.

The consumer there is just -- they've cut back.

The German GDP) is highly dependent on manufacturing, it's 47 depend of GDP.

It's way down.

Depending on what you look at rates, it's down double digits.

And they go into saving mode, and so you have to be out there with value in order to have them.

And we will be as strong as we need to be to continue to take market share there because it's a very resilient customer.

They come back pretty fast when things turn around.

Thank you.

We have another question from Paul Westra at Cowen.

Yes.

Hi.

Just a couple of followup questions on the UK.

I was wondering if you can give us an idea roughly where you perceive your to be on this multi-year turnaround and how much maybe longer we, expect such stellar performances.

How far have you come to get personal profitability back to near peak levels?

We were seeing elsewhere around the globe and I guess more specifically on the refranchising, remodel program.

How many have you done and how many more have you got to go?

Yes, the UK as I said earlier is probably our best brand turnaround.

Strong management team, in the current environment, continuing to -- double digits on top of double digits.

I just spent a week there.

It's just impressive.

We still have 50% of the restaurants, and the majority of our drive-thru restaurant to be reimaged.

So we started first with the inline, high street locations because even though there are actually lower volume, lower profit locations, they are our highest exposure.

They get more eyeballs than your drive-thru ones.

And so we actually reversed what we normally do, and did those remodels first in order to make a brand impact.

And now we're coming around around the backside and hitting the window up 200, maybe 230 this year.

We need to do that for another two, 2.5 years to get the rest of the estate reimaged.

The refranchising, we're at 55% franchised.

At one point we were only 30%.

And, we're not going to rush into it, but our target probably is around 70% of the restaurants will be in franchisees' hands, and that -- it may take us another two to three years because they have to have the ability to handle the debt.

And do the reimaging at the same time.

So we're making sure that's a balanced approach so neither one of those suffer.

Okay.

Looks like we have one final question in the queue.

Larry Miller from RBC.

Yes, thanks.

On McCafe, final thing.

It's our understanding that sales are a lot stronger in the west than the rest of the country.

I was curious why that is.

And is that more of an opportunity to grow sales in other parts of the country, or is it just it is what it is?

Thanks.

I don't know -- it is what it is, but in general, we always sold more coffee out west than we did in the east.

We expected that.

And we expect that in the initial trial -- especially those that just convert from being your -- we do higher breakfast sales that way.

And the category's not as well developed.

We think over time those are things that will change, but it was in our numbers that we wouldn't be as strong out east or south as we would be out west, on the coffee business.

We think that's a longer term trend to change.

Okay.

Thanks, everyone.

I'll turn it over to Ralph for a closing comment.

Thanks again for joining us on the call this morning.

We are pleased with our strong performance for the second quarter.

As I mentioned earlier, the sequential improvement from our results in the first quarter, and we remain optimistic about our ability to continue to deliver for the remainder of 2009 and beyond.

Thanks, and have a great day.

Thank you.