麥當勞 (MCD) 2009 Q3 法說會逐字稿

Hello, and welcome to McDonald's October 22, 2009 investor conference call.

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

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

(Operator Instructions) I would now like to turn the conference other to Ms.

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

Ms.

Shaw, you may begin.

Hello, everyone, and thank you for joining us.

With me on the call today are Chief Executive Officer, Jim Skinner, Chief Financial Officer, Pete Bensen, and Chief Operating Officer, Ralph Alvarez will join us for Q&A.

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 8K filing also apply to our comments.

Both documents are available on www.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 Jim.

Thanks, Mary Kay.

Good morning, everybody.

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

Global comparable sales were up 3.8%, operating income increased 11% in constant currency, and EPS reached $1.15, a 14% increase in constant currency.

Our success has once again been a systemwide effort, with all areas of the world contributing to these results.

The headline from all of this is that our business remains strong, and we're taking the right steps to succeed in today's environment.

Today, growth in our industry is about gaining market share, and on this front, McDonald's is winning.

We're taking share in most of our major markets around the world.

Across the globe, McDonald's is delivering an overall experience that is making us the preferred choice for a growing number of consumers.

Our success began long before now, and it is no coincidence that our growth continues.

In these current conditions, consumers are more than ever embracing the key strengths of our business, everyday, predictable low prices, outstanding menu choices, better restaurant operations, and convenience, all in modern and inviting restaurants.

These are the hallmarks of our long-standing business strategy known as the Plan to Win.

The plan provides the framework and focus for driving our business.

We continue to follow the plan as we work to improve on our strengths and target new growth opportunities to stay relevant for our customers.

As evidenced by the most recent results from around the world, our plan is working.

Let's begin with the US, where comparable sales for the quarter increased 2.5%, and operating income grew 6%.

In our share of US informal eating out market, the informal eating out market has reached an all-time high.

These results have been driven by the continued strength of our core menu and value, and by our solid execution and new growth platforms.

At a time when consumers are looking for familiarity and a taste that they know, McDonald's stands out.

Our core menu including iconic favorites, like our Big Mac and Quarter Pounder, continue to see strong results.

The US has also maintained its commitment to value, a top priority for consumers.

Our Dollar Menu continues to resonate in the market place and this summer, the US enhanced its value offerings locally with $1.00 beverages on fountain and tea drinks.

Promotion generated widespread customer appeal and drove additional guest traffic for us this summer.

Meanwhile, two of our latest menu additions, Angus Burger and McCafe have helped to drive the business throughout the last couple of months.

We launched our Angus line in July, and it continues to outperform our projections.

With this new entree, we're [admitting] a strong consumer need for premium quality offerings at a compelling value.

Regarding McCafe, our Premium Coffee line continues to deliver strong results and establish our brand as a beverage destination.

Since the launch of McCafe, we've seen our coffee share increase by two percentage points.

We're excited about our potential to keep growing in this area, where we once again are delivering high quality premium products for superior value.

Turning now to Europe, sales and guest count increases were strong, with comp sales up 5.8% driven by the UK, France, and Russia, resulting in an operating income increase of 10% in constant currencies.

Europe continues to achieve success through its overall strategy of upgrading the customer and employee experience, building brand transparency and enhancing local relevance.

It is around this framework the UK continues to drive growth and deliver some of the best results in our system.

The investment in restaurant reimaging, operations excellence, and trust building initiatives is continuing to pay off, with increased guest counts in sales.

And they're keeping the momentum going with relevant menu items, like from an expanding line of smaller offerings like Little Tasters and Snack Wraps to the Premium Burger known as the M.

France, where we're celebrating our 30th anniversary this year, also contributes and continues drive strong results.

I just returned from visiting the market where we have some of the most modern and appealing restaurants in our system, and they help to strengthen an overall dining experience marked by premium and iconic products, as well as popular snack items all at a good value.

Germany also delivered a solid quarter with both comparable sales and guest counts up amid a highly price sensitive environment.

Germany extended its line of fourth tier items to enhance its quality and value proposition, and they drove [day part] expansion through a stronger focus on breakfast and extended hours.

Now let's turn to Asia Pacific, Middle East, and Africa, or APMEA, where comparable sales increased 2.2% and operating income grew 21% in constant currencies.

Across this region, convenience initiatives, value, core menu, and breakfast continue to drive results.

Australia, one of our most established and successful markets, continues to deliver strong results.

The market has already completed a full reimaging program, including adding McCafes, which are now in most free-standing restaurants.

They also continue to upgrade their menu with the line-up of chicken products, Cafe Bakery goods, Deli Wraps, and most recently, the Angus Burger, which has proven extremely popular with their customers.

When it comes to China, we all know how much the economy has slowed.

And while there are some indications the market is beginning to recover, we expect some softness to remain near term as the consumer regains confidence and begins to spend.

McDonald's China is doing what's right for today as well as the future.

In fact, third quarter operating income in China was up 25%.

The China team continues to run great restaurants to provide consistent value and offer convenience including drive-throughs, extended hours, McDelivery and dessert kiosks to drive the business.

We remain bullish on the long-term opportunity and continue to increase our annual restaurant openings there by about 15%.

Japan is another market where the economy is facing challenging headwinds.

However, McDonald's continues to take share in a declining informal eating out marketplace.

Japan's results this quarter reflected stronger operations, a successful Premium Coffee, roast coffee launch, and a new chicken offering that was met with terrific consumer response.

So, that's a snapshot of how we're continuing to deliver for our customers around the world.

The on-going strength of the business contributes to the stability and growth of our operating cash flow, which has averaged nearly $5 billion over the past five years.

Our philosophy around the allocation of capital has not changed.

Our first priority is to reinvest to grow the business and enhance shareholder value.

Despite these challenging times, we're continuing to invest in our restaurants.

There are few other restaurant companies today that are in this position.

It is a true competitive advantage for us, and we intend to leverage it.

For us, it is the key to getting even better and further differentiating ourselves in the future.

After these investment opportunities, our plans are to return all of the free cash flow to shareholders over the long-term through dividends and share repurchase.

Year-to-date, we have returned $4 billion to dividends and share repurchases, and we expect to end the year near the high end of the $15 billion to $17 billion, three-year target.

And while we're not setting a new target or time specific target, our philosophy of growing free cash flow and returning it to shareholders remains unchanged.

In fact, we recently announced we were raising our quarterly cash dividend by 10% to $0.55 per share or the equivalent of $2.20 annually.

To sum up, I want to reiterate that the fundamental strength of our global business continues.

We're gaining share, as our plan to win strategies are clearly working.

As we move through October, consolidated comparable sales remain positive, with Europe and APMEA contributing strong results.

In the US, despite continued gains and market share and advancement in our industry leading position, we're expecting flat to slightly negative October comps.

This is due in part to the current economic environment and strong results a year ago.

We do not believe, however, that this is a change in the overall trend in performance in the US.

Looking ahead, we plan to build on our strengths and continue seizing new growth opportunities.

Our goal is to further differentiate ourselves in the marketplace, and I'm confident that we have the right plans, the right people, and the right investment strategies to achieve that goal.

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

Thanks, Jim, and good morning everyone.

Grinding it out, every day in every restaurant.

It is the part of McDonald's DNA.

It is taking care of the details and the disciplines of running a restaurant business that creates great customer experiences in our 32,000 restaurants around the world.

Most importantly, this focus delivers results.

And In my opinion, nobody is doing it better than McDonald's.

In a challenging global economy, we once again delivered solid comparable sales growth through market share and improved our profitability, with combined operating margin increasing to nearly 30%.

This increase reflects our on-going success driving margin dollar growth and controlling G&A.

In the third quarter, Company operated margins rose 70 basis points, due to solid global sales growth and refranchising while commodity cost pressures eased.

In the US, our ongoing focus on driving customer traffic and offering great value across all tiers of our menu delivered industry-leading comparable sales growth.

This performance, along with the impact of refranchising, contributed to Company operated margins rising 110 basis points to 19.3%.

This strong Company operated margin growth is a key indicator of the health of our business, as well as our owner operators, and during the past 12 months, US owner operators have seen meaningful growth in their store level cash flow.

Part of the reason for the increase in US Company operated margins is the fact that we're not facing the same type of commodity cost headwinds as in prior quarters.

In the third quarter, our US basket of goods increased only 1.7%.

Our full-year 2009 outlook is for the US to be up about 2%, which includes a projected decrease of about 3% in the fourth quarter.

We're seeing similar trends in Europe, with our third quarter grocery bill rising just 1.5%.

We expect the full year increase in our European basket of goods to be about 3%, which also includes a projected decline of about 3% in the fourth quarter.

As for 2010 commodity costs, our preliminary outlook is favorable.

We're currently working through our detailed projections and we'll provide an update at our analyst meeting in November.

Moving to Europe, strong comparable sales growth, along with more moderate commodity cost increases and the benefit from refranchising, helped drive Company operated margin up 40 basis points in the quarter.

The UK, France, and Germany all improved as our tiered menu approach and limited time offerings continue to resonate with customers.

In addition, VAT reduction in France and refranchising in Germany contributed to the increases.

These increases were partly offset by declines in some central and eastern European markets that continue to feel the effect of weak local currencies on commodity imports.

This impact has been relatively consistent in each of the first three quarters, but at today's exchange rates, we expect it will be reduced in the fourth quarter.

In Asia Pacific, Middle East and Africa, Company operated margins rose 100 basis points, due in part to China, where lower commodity costs and a focus on operating efficiencies drove significant margin improvement.

In addition, the recent launch of the Angus Burger in Australia accelerated our momentum and contributed to that country posting some of the highest Company operated margins in our system.

Turning to franchise margins, franchise margin dollars grew in the third quarter, as we continued to drive sales growth.

However, as a percent of revenues, franchise margins declined slightly to 82.7%, as comp sales increases were more than offset by the impact of refranchising and higher costs, partly related to the US Beverage Initiative depreciation.

The final component of our combined operating margin improvement is G&A control.

G&A declined in the third quarter, partly due to last year's expenses related to the Beijing Olympics.

We continue to exercise discipline around our G&A spending and expect G&A to be down about 3% in constant currencies for the year.

Our fiscal discipline also guides our restaurant opening decisions.

Our goal is to open profitable restaurants that earn good returns from day one.

To achieve that, we look for locations with key retail, business, and residential traffic generators in place.

Reflecting this discipline, we have delayed the opening of about 100 sites this year, primarily because the expected traffic generators did not materialize, specifically, as a result of the current economic environment.

Although we will have fewer openings than previously projected, our outlook is for 2009 capital expenditures to still be about $2.1 billion.

This is because we're allocating more capital than originally planned to reimage and rebuild existing restaurants and to purchase sites that we previously had to lease.

Similar to commodity costs, the foreign exchange rate environment is also becoming more favorable.

If exchange rates continue to approximate current levels, we project that currency translation will benefit fourth quarter earnings per share by about $0.06, a welcome change from the $0.22 negative impact we saw in the first nine months of the year.

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

This means currency translation will always be a factor for us.

We mitigate this impact by purchasing goods and borrowing in local currencies to the extent possible, reinvesting a significant portion of local earnings back into our International markets through capital expenditures, hedging cross border purchases of goods where practical and economical, and hedging a portion of the royalties we receive from our International markets.

As always, whether currency rates are helping us or hurting us, constant currency results provide a more complete picture of the underlying strength of our business.

Our results in the third quarter and over the last year have proven the strength of our customers centered plan to win, the resilience of our business model, and the importance of our disciplined operations and financial management practices.

I'm extremely confident that these strengths will endure and continue to drive value for our system and shareholders over the long term.

Thank you.

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

Thanks, Pete, I'll now open the call for analyst and investor questions.

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

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

First question is from David Palmer at UBS.

Hi, guys.

Could you discuss a little bit on pricing and the role of inflation, and how you think about pricing in the US, you had about a third of your comp had been coming from pricing before.

As we come into a period of deflation, I'm curious to know what you're thinking about with that pricing.

Will you let that perhaps roll off in a world where food costs are not going up?

Thanks very much.

David, Jim Skinner.

We're holding the line on pricing.

Our pricing power is not what it was, and of course, we have not necessarily the same need for price increases, and certainly can't pass on those price increases to our consumers at this point in time, where value is so very important.

As you know, we did take a price increase a year ago in October, at the beginning of that month, because commodity costs were on the rise, and looking at what we faced going into 2009.

But right now, we're holding the line on pricing and have held the line throughout most of the year.

Thank you.

The next question is from Jeff Farmer at Jefferies and Company.

Great, thank you.

I just wanted to follow up on that question.

I heard you bought the October price increase a year ago, but what's the current pricing traffic and mix component in the September same store sales number, and sort of looking forward into October, based on what you said about current trends, how would that apply to the same three metrics, pricing, traffic, and mix?

I think Ralph has that number here in front of him.

If you look at September, about 50/50, about 40% to 50% was traffic, and the rest was price.

And then obviously some of that price starts rolling off, but that gives you an idea for September.

The next question is from David Tarantino from Robert Baird.

Hi.

Good morning.

Just a quick follow-up on that one.

On the price component, could you give us an idea of how much fell off in October, and then secondly, could you comment on the competitive environment?

It seems like it is getting a lot more promotional, and do you think that's impacting your business, and if so, how are you responding to that?

Thanks.

David, it is Pete.

We're not going to specifically quantify the impact of one month's price increases, but as Jim mentioned, we were increasing.

We had a price increase in October, and if you'll recall, in December last year, we had the change of the Double Cheeseburger came off the Dollar Menu.

And so, fourth quarter, if you think about the price increases, we had those helping us.

Those are rolling off as we enter the fourth quarter this year.

But as Jim mentioned, also, from a profitability standpoint, with a decline in our basket of goods, we don't have the need to increase prices, and in this environment where it is really a battle for market share, our ability to hold the line on pricing, we think is one of the reasons we're continuing to outperform the marketplace.

And David, from a competition point of view, we've been out there with our Dollar Menu for seven years.

We don't jump in and out like other folks are, and so we will advertise it.

We'll let the consumer know that that continues to be there.

They trust us on that situation, and we see it in the market share that we're taking.

So we will continue to stay aggressive that way during these times.

Thank you.

The next question is from Steve West at Stifel Nicolaus.

Just a question on McCafe.

You mentioned that it is driving strong results still.

I guess a couple of questions there.

Is it meeting the expectation that you guys had originally planned out, and then with the phase two, with the smoothies and Frappuccinos, can you give us a status on how many stores you have that across the US now?

First of all, it is meeting our expectations, Steven, and we are in the process of course of rolling out the rest of the combined beverage initiative, if you will, which we're moving right along on.

But we're not done yet.

Ralph, how many restaurants are we in now?

We're only in a couple of thousand restaurants.

On the rest of it, it is going to be a roll, again, this is because of equipment.

So, it is not our delay.

This is very specific equipment built for us that we will - - both for the Frappes and the smoothies.

The smoothies are real fruit, and so we also have to build inventory.

When we decide to get into something like real fruit, we end up taking a big chunk of the supply chain out there, and so those items will go market by market, obviously they're cold products.

So, you can expect that when the summer hits, we'll have pretty good penetration.

They've been very well received in the stores that we're in at this point in time.

So, we're pretty excited about the future.

These are really in our wheel house, cold, portable products that our customers want, that quite honestly, they can't get today, at the speed and price of McDonald's.

So, we're very excited about what these can do for us.

Thanks.

Next question is from Jeff Omohundro at Wells Fargo.

This is Jason Belcher on behalf of Jeff.

I was wondering if you could give us some more color on the Angus Burgers, particularly with respect to mix and how that offering has been impacting margins?

Jason, Angus has outperformed, I'm talking US, but really around the world, Angus has outperformed their expectation, our current rollouts for the US, Australia and New Zealand, these are average check [driving] items, and they have strong margins because they go out, and a high proportion go out in extra value meals.

So the actual sandwich may have a lower margin, just based on the fact of the ingredients that we have in there, and the size of the patty.

But they go out more than three quarters in a meal, and so they're accretive to margins and and to average check, and continue to outperform our expectations.

Thanks.

Joe Buckley, Banc of America.

Thank you.

Two questions.

Just could you elaborate a little bit more on the slower rate of expansion in 2009?

I think you took 100 units out of your target.

Maybe just say where you took them out of the target?

And then just a follow-up on the competitive environment.

So, is your game plan to perhaps re-emphasize the Dollar Menu and the existing product line, or do you think you need to do something in terms of changing the US product line to account for the higher level of discounting in the industry?

Joe, it is Jim.

First of all, we hold back a little bit on the openings in '09, specifically in Japan.

A few there, a few in the eastern block, a few in China.

China was the biggest pull back.

I think we pulled back about 45 or 50 stores there.

And the reason being that we're not going to go into a marketplace where, in fact, the marketplace is not growing and hasn't provided a customer base that otherwise we would expect to be there.

And so the inventory is strong.

We have the stores in inventory and the sites in inventory if we wanted to push the button on that.

But being prudent regarding the economy and where we find ourselves in some of the markets, it was appropriate for us to pull back on the openings.

Relative to the strategy of the communication with our customers and Dollar Menu and the menu at large, we don't expect to see a lot of changes.

We do have a few stores right now today in a few markets that are on Dollar Menu at breakfast, and we'll have to see where that goes down the road.

But otherwise, really not a big change in strategy, because we're winning the share battle and our strategies seem to be working well for us.

Pete, did you have a comment on the openings?

Oh, was just a little more texture on the nature of those, Joe.

That about half of them are actually half of the reduction are in either DL markets or joint venture markets where we aren't providing all of the capital for the openings, so it is another reason why our capital projection didn't change dramatically, even though we were reducing openings by 100.

Thank you.

The next question is from John Glass, Morgan Stanley.

You talked about the best use of your capital was first reinvesting in your business.

Can you talk about 2010 and where you plan to reinvest the most?

And I guess specifically, in the US, your remodels are only about maybe 35% complete, and you paused that as you went through the beverage program.

Do you have the idea now it is a good time to accelerate that remodeling program, and how much do you think that costs you, I guess over the next few years to do so?

Hey, John.

You know, we're going to use the analyst meeting in a couple of weeks to get into more details on our 2010 plans.

We're actually honestly in the midst of just finalizing those.

Ralph and I have been traveling around the world reviewing the plans, and in fact, we'll be in Europe next week.

But yes, you're right that we understand the importance of reimaging and what it does for our brand and making us relevant.

And in this marketplace, to be able to differentiate ourselves from the other players out there is an extreme competitive advantage we think.

So, we'll talk more about that in a couple of weeks.

I haven't seen the results of the planning process yet and signed off on it.

But we'll have done that by the time we get to the November meeting.

Thank you.

The next question is from Greg Badishkanian at Citigroup.

Great, thanks.

Just on the US same store sales, flat to slightly down US in October still implies some decent share gains.

But I'm just wondering is the slowdown due to tougher compares?

How much of it is due to tougher compares versus, say, increasing competitive environment?

It is a little bit - - Greg, this is Jim - - tougher compares as we said, I think we're up about 5.5% a year ago.

And the other thing that is going on is that the first half of the month started off fairly slow.

We're making some recovery as the month moves on.

Part of this is because of weather situation around the country that was pretty severe.

The only person that won in New England last Sunday was Brady and the New England Patriots if you look at retail.

We were down 10% or 11% up there on that one day, and if you look at the west coast and some of the issues, and of course, I've said for a long time, we don't like to give weather reports, but it was certainly a factor, particularly when you're in the middle of a promotion that's a traffic generator, like Monopoly, and the execution against that.

So really, that's why I say I think it's a [one often] in that in October, the impact of the flat to potentially slightly negative sales was really a result of those things.

Thank you.

The next question is from Matt DiFrisco at Oppenheimer.

Thank you.

In contacts with the press release last night with regard to Chipotle, can you comment on any tax implication that might be coming toward the McDonald's representation as those those two shares get merged?

Matt, there is no tax implications to us, and they satisfied the conditions of the separation agreement to move forward with this collapse.

And if you have any other questions, I would follow up directly with them.

Thank you.

The next question is Jeff Bernstein at Barclay.

Great, thank you.

Looking at the US company operated margin, up over 100 basis points, now over 19 again.

Seems like the largest increase in at least five years, and yet the comp being 2.5 for the quarter, interestingly the lowest comp over at least that same period.

I know you ran national promos of more premium products, all high margin this quarter.

Can you talk about perhaps the commodity benefit and the likely offsets from intensifying discounting?

Should we expect to see further US margin expansion if comps remain relatively flat here, and perhaps exceeding that 20% level?

And if you could just talk specifically about breakfast and late night on that front.

It seems like those are the day parts that are perhaps the laggers that might weigh down the margin.

Matt, this is Jim.

As you know, we don't project or communicate to projected margins, but I will say that when you look at the result of our efforts over the last number of years and the increase in average volume in the restaurants in the United States, and the share gain that we've had and the ability for us to overwhelm some of those fixed costs because of the average volume, it has been very important to us.

So if you look at the fourth quarter, which Pete talked about ,and you look at 2010 and you look at the fact that the commodity costs and the headwinds are abating, as a matter of fact, could be an advantage for us as we go into next year, you can see why that average volume per restaurant is so very, very important and reflects that growth that we've had over the number of years.

So, I would say yes, it is going to take a lesser comparable sales in this particular environment to accrete to the bottom line.

Now, I'll let Pete talk specifically about margins if he has something to add.

Well, other than specifically, Jeff, that we do highlight that the refranchising benefit has helped us, so that's been consistently in 40 to 50 basis points as we've moved throughout the year, and obviously we'll continue to have a benefit on that.

And Ralph will get into the day parts a little bit.

The day parts really aren't a big factor other than as we've said before, breakfast is the strong day part for us on a profit side, and we're staying aggressive on breakfast to make sure that we take share.

And there's been a lot of talk about the breakfast business being at risk.

We're running positive at breakfast.

Both the McCafe beverages and Angus are accretive to margins.

Our Dollar Menu has been in place, so it is in our margins already, and so when we're out advertising that, and that being our everyday compelling value, it is not a discount to our margin.

We price ourselves accordingly to be able to handle that.

So, biggest factor going forward is commodity costs and having some of that pressure eased.

We won't be taking as much price obviously, but definitely brighter from that point of view for the future.

Thank you.

The next question is from Steven Kron at Goldman Sachs.

Thanks, just sticking with margins for a second, but maybe flipping over to the franchise side.

I know for the first half of this year, in Europe you had certain costs of strategic brand building initiatives, and it seems to have been waning a bit in this quarter, I don't think you spent money on that.

Can you maybe just talk about whether we're kind of past that point, will you see potentially some franchise margin expansion in the near future, and I guess in the US, similar question, continued investment in beverage initiatives?

Can you maybe quantify what drag that is and where we are in that process.

Yes, Steven.

Certainly, you started with Europe.

The investment in the strategic initiative there takes a couple of forms, but primarily, it is through a lower percentage rent for a specific period of time.

So we'll continue to have that with us as we move throughout the next few years, actually.

But once it gets comped, so once you've got 12 months comparable against the prior period, the impact starts to lessen.

That's why we didn't necessarily call it out as impacting the quarter, but for the nine months it has.

But also, you've got to remember the refranchising is a negative, while it is a positive on our Company operating margins, it is a drag on our franchise margins, and in Europe, I think that hit was about 50 basis points to the franchise margins, a little bit less in the US.

But it still was a negative drag, maybe about 30 basis points in the US if I remember right.

So, when you look at the impact on those individual margin components, obviously it is having an impact.

But that's why we're looking at through all of this refranchising, focusing more on the combined operating margin because we're converting Company [operating] to franchise royalty flows which are more stable, and frankly more accretive to the bottom line as we drive more through the franchise model.

Thank you.

The next question is from Mitch Speiser at Buckingham.

Thanks very much.

A few questions.

First, I think, Jim, you mentioned that you're not going to make many changes to the Dollar Menu.

I was just wondering on your comments on the fact that a lot of your competitors are, I guess, naming names where they're touting their bigger sandwiches at the same price as McDonald's.

Of course, you've got the convenience advantage, the bigger advertising budget, but in particular, how do you combat that where they're specifically advertising same price points with more food?

Can you comment on that?

I can.

This is nothing new for us, by the way, just so you know.

But we've consistently been providing Dollar Menu to our customers over the last seven or eight years, it is a consistent approach.

We have value across our menu, and we're very pleased with the customer reaction to our Dollar Menu.

And the expectation for us is to be able to stay the course on this and continue to communicate every day affordability everywhere in the world really, not just here in the United States, where you've seen some of this ratcheting up.

But it is not unusual for our competitors to name names regarding McDonald's.

We've been through this in previous periods, and we will continue to take share and continue to grow, and our Dollar Menu will be a big piece of that.

Thank you.

The next question is from Keith Siegner at Credit Suisse.

Thanks, I just wanted to ask a follow-up question on the growth, particularly as it relates to Company-operated unit growth.

And I appreciate the commentary about the traffic trend impacting your outlook.

Overall, especially Internationally, comps remain pretty solid, margins are very strong, investment costs aren't increasing.

Are there any markets from a Company operated perspective where you're seeing opportunities or actually increasing unit growth, or might this be a time to maybe invest a little more capital given your access to it, to increase penetration and further say a first mover advantage in those markets.

Thanks.

Keith, this is Ralph.

For sure.

We've been out there actually land banking some properties in some places.

You'll see more growth in Australia, New Zealand, very strong markets for us, where the real estate market's softened up.

We've had some opportunities that weren't there before.

And those restaurants, there will be significantly more openings in 2010 and 2011 because of that.

Same thing in Russia, same thing in France.

These are strong markets for us, that to a certain extent have been very tight real estate markets, and expensive real estate markets that have made it difficult for us to develop.

And the other good piece there is a greater mix of being able to purchase land and control our rent forever type scenario, versus the market conditions that happen in some of the areas.

So, we're definitely being opportunistic in that area.

In some cases, we won't open right away, if the traffic generator is going to take a year or two to set up.

And Keith, we'll get into that greater detail at the analyst meeting as well.

Next question, John Ivankoe, JPMorgan.

Hi, thanks.

I know there has been a relatively new technology or just procedures, maybe I'll call it, at McDonald's in terms of ROI and your marketing spending, and just going into 2010, you've obviously maintained, not increased your dominance relative to your competition.

Could you comment on what you see about total advertising spend into the next year, as a percentage of your sales, and if there is any kind of significant reallocation you may be doing, given the fact that it is getting more competitive, maybe at a local level if not specifically, well, I guess as I say that, be it more competitive, but both at a local level and a national level?

How there might be different allocations in various programs?

Yes.

Well, John, we've taken a look at our ROI on advertising spend over the last couple of years, and as we have in the past, and as you know, the cost of communicating today has gone down, although that trend is starting to slow a little bit, and the pricing is starting to come back the other way.

In the midst of all of that, looking at our efficiency, we've been fairly efficient.

Most importantly, the spending rate, the spending trend for us is if anything, going up, not going down, and we're taking advantage of the share opportunity, [for sure] voice, to continue to spend at a rate that's beyond what we might have been spending.

In other words, we're not taking the advantage of the pricing to reduce media, but in fact, to increase share voice, and I think that trend continues, and that's kind of where we are around the world right now.

Even though as I said, I think the trends are changing a little bit.

In terms of the mix of media, as you know, most of it is still on television, but it remains to be seen as we lay out our plans, as we go into 2010 and what's going on in the various marketplaces relative to digital communication or other venues of communication.

Thank you.

The next question is from Jason West at Deutsche Bank.

Yes, thanks.

Just a little more color on China, if you guys could talk about what's going on in that market.

I think you said the comps are still running negative up through October.

I'm not sure if you commented on October.

The macro data out of China is looking better, but it doesn't seem like it is flowing through to the restaurant business.

If you could also talk about the cut you made in the unit growth.

Was that in addition to the cuts you had made earlier this year, or are you referring to the one I think you guys had slowed the unit growth there already?

Thanks.

Jason, the reduction in openings is the same that we had communicated earlier.

I think we were originally going to open 175 or so, and I think we're down to 125, 130, somewhere in that ballpark.

Closer to 140.

Closer to 140, and the marketplace there continues to be stagnant.

The economy is not necessarily improving that much, and consumer confidence and consumer spending there continues to lag that.

And we are optimistic about the future, of course in the marketplace, and I think most importantly, the Chinese team has done a terrific job of managing this environment, and as you heard me say, their profitability is up substantially in the quarter.

And we're very proud of their performance there, and of course, we're bullish long-term.

A 1.3 billion people, a tremendous market for us.

We have 1,200 stores there now, and we will ramp the growth up as appropriate as those market places come online.

Thank you.

The next question is from Tom Forte at Telsey.

Thanks, I had a couple of mix questions.

I wanted to know at the end of the quarter where you stood as far as percentage of sales from the Dollar Menu.

Also, where you stood as far as percentage of sales from coffee.

Then lastly, if you could comment, last quarter, I think you indicated at least in the US, all of the day parts were positive from a traffic standpoint.

Was that still the case for the September quarter?

So, on the Dollar Menu, Dollar Menu is very steady.

We have very loyal customer base on Dollar Menu.

It is below 10%, and that's obviously because of the switch we had made with the Double Cheeseburger no longer being on the Dollar Menu.

We kept a lot of those customers that are very loyal Double Cheeseburger customers, and so, that's been pretty constant.

It will move slightly, month to month, but no more than 30, 40 basis points.

The coffee, we picked up two points of share since we've rolled out McCafe coffees.

And on a percentage of sales, we're up north of 5% of our business is coffee, and if you go back a few years, that was more like a 2% number, and continuing to grow.

So, it is something that we believe in the long-term.

And Tom, traffic trends for day parts for the nine months, all the day parts are either relatively flat or up.

Ok.

Thank you.

The next question is from Rachael Rothman at Wedbush.

Hi.

Thanks.

I have a bigger picture question, if you guys could comment.

I know you had said that your share of the informal eating out category was the highest ever.

Can you talk about coming out of previous recessions?

Have you continued to take share in what has been kind of key to sustaining the market share gains, as the market normalizes coming out of past downturns, and how do you think you're positioned this time?

I think, Rachael, the answer to that is yes, we have, because we operate better in robust times than we do in recessionary times.

I've said it many times, we're recession resistant, not recession-proof.

Our business model operates well when all our customers are doing well, and so I think it has been consistent.

We're a different Company than we were in some of the past severe recessions.

We have much more business outside the United States today, and so on an overall basis or a global basis, if you will, we've got a different hedge there.

Now, the fact that the entire world economy today is struggling, and so most markets are being impacted by this, but I think the answer would be the same, that our strategies lend themselves well to robust times and we gain share during that time, and we certainly would expect to continue to be able to perform well as we come out of this recessionary environment.

And part of that, Rachael, is why we don't cut back on things like marketing, why we will reinvest in our restaurants, because there will be a lag from other people being able to start building restaurants or reinvesting.

They'll need to accumulate some room in their balance sheet before they can get down the road on that and the credit market has to ease up.

So, we actually think there is an opportunity here over the next few years while we have the strong balance sheet, the operators have the strong balance sheet.

We're going to be opportunistic on real estate and on reinvestment that provide good first year returns.

And there is actually one more piece, Rachel, that is, it gives us the confidence, is when you look at the marketplace, we think there is a greater number of people that have fallen out of the category because of the economic times than have actually traded down to McDonald's from casual dining.

So, if you kind of reverse that flow as the economy gets better, there is more people that will be coming back into the category who left us, versus potentially trading back up.

And even though some of the premium products that we're now offering will likely minimize the impact of people trading back up as well.

So all very positive as we look at coming out of the economic situation we're in.

Thank you.

The next question is from Unidentified Participant at Sanford Bernstein.

Hi, thanks very much.

I wanted to jump over to Europe, if I may, and ask you specifically about strength in the UK.

One of your competitors, I think, also implied some strength there.

So, it is surprising because the macro environment is not dissimilar to the US in the sense that it is quite weak.

So is that market itself just strong?

Are you gaining share there, too?

If you can maybe you give me some insight and also talk about the unit growth, because it wasn't mentioned as one of the places you're accelerating unit growth, but I don't know if that was just because you already are over indexed to unit growth there.

Yes, Sara, this is Ralph.

Our businesses there are continually strong.

We were double digit comps last quarter, we're double digit comps this quarter, great brand scores continue to increase.

So from our point of view, we're outperforming the category on a comp sales basis.

We're not growing many restaurants and that's been on purpose.

What we needed to do in the U.K.

was to get our house in order on a couple of different fronts.

One was we were 70% Company store base there, so, we've been converting that to our Best Success model, which is a mostly franchise model.

We're over 50% now.

We crossed the road on 50% franchise.

And so that's been using franchisee capital to buy the restaurants.

Then, we've been very aggressive doing over 200 reimages a year, and we'll have that in the next couple of years, the whole state there reimaged.

So the combination of those, local ownership, much better looking restaurants, improved operations, and our menu developments was driving the results.

We're picking up some slight share because there's still new development happening in the UK, and we're not building many new stores, and so we're not picking up the amount of share we're picking up elsewhere around the world, because of that.

But still growing some share.

Thank you.

The next question is from Jim Baker at Neuburger Berman.

Yes, good morning.

I wanted to ask a little bit about the other countries in corporate, where I noticed you had at least at the restaurant margin level, a very big improvement in the third quarter.

From what you had been doing in the first half, about a 1.6% decline versus 14% in the first half, with currency clearly not accounting for all of that.

You had very strong comp store sales growth of 8% in September and 6% for the quarter.

Could you give us some color as to what's happening in terms of operating profit, in Canada and Latin America, and what the prospects might be going forward with the improvement in currencies.

Yes, I'm going to separate those two between the Canada and Latin America.

Latin America is completely DL market for us, so we still have some properties that we own out there that we collect rent in, but the majority of it is a direct to licensee market place.

Still growing comp sales, and so our income is growing there as it grows based on sales growth.

You have improved currency there, and it's still an inflationary marketplace, which obviously, we're picking that up in the price increases that are occurring.

But we see that as, for us, a stable income.

Our franchisee is doing very well.

Jim and I just spent, we all spent doing a full annual business review here this week, and so that business is very healthy.

On the Canada side, Canada is having a terrific year, both in growing guest counts, taking significant share, even though we're not building many restaurants, and in margins have been slightly down because our goal has been, one because of commodity costs which have been very high, but that's coming down.

Second, we made a concerted effort to go after traffic in Canada that we know we can bend, convert, to a very loyal customer base.

So, Canada, like I say, has done an excellent job.

You'll see those margins become accretive starting next quarter.

And on the long-term basis, the economy there, while it does hinge a little bit on the US, didn't go down as hard, and will come back a little bit quicker, and so we're prepared for that.

Ok.

Next question from Larry Miller from RBC.

Yes, thanks.

I was wondering if you could talk about new product development, the platforms for growth, the big platforms that you've had for beverages and Angus, is there any longer term platform growth that you guys haven't yet tapped?

We're going to get into some of that again in two to three weeks at the analyst.

We'll give you a peek at some of the items that we're working out there.

We do our product development in the areas of the world, not here at home office.

We think that's important.

It is closer to the customer.

Actually, we have the talent in the major countries, and then we share those.

That's why you see Angus eventually going to different places.

You saw that with Snack Wraps, and so we'll show you some of those products around the world that then will be adapted and adopted in other countries and you'll get a good feel for that.

Thank you.

The next question is from Howard Penney, Research Edge.

Thanks very much.

I was curious, how many years have you done the Monopoly promotion now?

And might you be running into a sort of a Beanie Baby phenomenon from a few years back, in the sense that it is not the first time that there's been weather impacting your sales.

Coffee is working, breakfast is working, the Angus Burger is working, and I'm wondering if you can comment as to what might be slowing down in the US?

I know you're doing better relative than the industry.

Then lastly just on China, GDP grew nearly 9% last quarter in China, and I was just curious as to why you think you need to pull back and what the consumer might be doing differently there that causes you to pull back in your openings?

Howard, thanks for the questions.

I'll let Pete talk a little bit about China, or Ralph.

But in terms of Monopoly, we've done it several years as you well know, and I believe that weather was an impact on the traffic beginning of the month, and yet I think that our customers are very excited about Monopoly.

It is a great play for us.

It is a great play for them.

It provides them an opportunity to play a game and get involved, and I think the execution of that this year is a little bit different than it has been in past years, and that, in fact, we expect it will have good results from it.

But maybe not as good as we've had in past years.

On the China piece, GDP in China, very much driven by infrastructure investment, so you have to separate GDP from consumer spending, two different animals, and then where it is growing around the country.

The Chinese consumer is a big saver when they're worried about what's going on, and so we've seen that.

We're not going to chase the traffic there from a significant price point of view.

And so we see the consumer coming back there, so it is not any kind of long-term concern, but the GDP numbers that you hear are the level of infrastructure investment that's being put in along with incentives for things like car buying, et cetera, which do not affect the consumer every day in the retail side.

And so, we [moderna] the retail data and plan ourselves accordingly.

Thank you.

We have another question from David Palmer at UBS.

One moment, please.

David, are you there?

He has removed himself from the queue.

Okay.

Looks like we have another question from Joe Buckley.

Yes, I think you probably answered this indirectly.

I was curious in the APMEA pickup in same store sales in September, if China was in fact still negative.

It was.

Ok.

Thank you.

Ok.

I think we're out of time.

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

Thanks, everybody for joining us on the call this morning.

I want to just close by saying we're proud of our third quarter results in a challenging economic environment.

McDonald's is succeeding, thanks to a strong business model and a strategic plan that aligns our system to better serve our customers.

Looking ahead, we will continue to improve when it comes to execution and innovation, so stay tuned.

There is more to come.

See you all in November.

Thank you very much.