麥當勞 (MCD) 2009 Q4 法說會逐字稿

Hello.

Welcome to McDonald's's January 22, 2010 investor conference call.

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

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

(Operator Instructions).

I would now like to turn the conference over to Ms.

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

Ms.

Shaw you may begin.

Thank you.

Hello, everyone.

And thanks for joining us.

With me on the call this morning are Chief Executive Officer, Jim Skinner, and Chief Financial Officer, Pete Bensen.

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

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

Both documents are available on investor.mcdonalds.com as are reconciliations of non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.

Now I will turn it over to Jim.

Thanks, Mary Kay.

Good morning everyone.

I'm pleased to report that our business growth continued in the fourth quarter, contributing to another strong year for the McDonald's brand.

Global comparable sales were up 2.3% for the quarter and 3.8% for the year.

In constant currencies, operating income grew 14% for the quarter and 10% for the year.

2009 marked our sixth consecutive year of positive comp sales in every area of the world, a feat that underscores the ongoing strength and relevancy of our Plan to Win business strategy.

In January, we expect to post another month of positive global comparable sales, with both Europe and Asia Pacific, Middle East and Africa positive and the US relatively flat.

In this challenging economic environment, we feel very good about our trends, and we continue to grow by adapting to our customers needs and elevating the key drivers of our Plan to Win, those being, more menu variety and choice, better restaurant operations, greater convenience and day part expansion, everyday predictable low prices, and on-going restaurant investment.

In all of these areas, we are innovating and improving and pushing ourselves to stay in step with consumers in order to give them the most outstanding dining experience in every way.

This strategy and alignment helped us achieve strong achievements across the system in 2009.

In the US, comp sales increased slightly for the quarter and up 2.6 for the year, contributing to an operating income growth of 5% and 6% respectively.

We are proud of these results, especially given the high unemployment and its impact on consumer spending.

In the US, last year our comp sales GAAP against the industry was positive, every week of the year.

And despite an overall decline in the informal eating out category, we increased our market share and strengthened our leadership position.

We drove results by delivering exceptional value, menu choice, and convenience.

The US maintained a strong focus on value at every level from the dollar menu to mid tier and premium offerings.

This continues to make us a compelling choice for of customers in this uncertain time.

We continue to win through menu choice with the balance of familiar and popular core products as well as new items to keep us relevant.

Our McCafe specialty coffees and our line of premium Angus burgers were new offerings in 2009 and they helped us make McDonald's a more clear destination for outstanding quality at the best value.

We are pushing ahead with more choices, including the national launch this month of our Mac Snack Wrap and Breakfast Dollar Menu.

The Mac Snack Wrap is a snack version of our Big Mac; it is a fourth tier product with a good margin and fits into the growing snack day part or as an add on to a meal and certainly can be eaten on the go.

The Breakfast Dollar Menu introduced with our franchisees gives us a national voice on value at breakfast.

Both of these highlight our commitment to keep modernizing our menu and provide the products that our customers are looking for.

And this month, we are also launching free wireless internet access at nearly all of US restaurants.

This will make us the largest provider of free internet in the country and make our restaurant experience even more valuable.

Now turning to Europe, comparable sales were up 4.8% for the quarter and 5.2% for the year.

In constant currencies, operating income grew 10% for the quarter and 8% for the year.

Europe's guiding strategies of upgrading the customer and employee experience, building brand transparency, and enhancing local relevance continues to drive results.

In the fourth quarter, we grew our market share in the informal eating out category across Europe, including the UK, France, Germany, Italy, and Spain.

A key to this growth was to continue to focus on our three tier menu platform, everyday low price, core, and premium, delivering choice and value across the menu.

In addition, we continue to enhance our fourth tier menu platform by delivering a category of smaller premium affordable products.

We expanded our line of popular Petit Plaisir's in France and our Little Taster offerings in the UK and we have introduced fourth tier products to other markets such as Germany with the Snack Deluxe.

All of this is building greater relevancy for our brand and stronger results for our bottom line.

Europe also saw success from an increased emphasis on day part expansion, particularly breakfast.

In Germany, we expanded our breakfast line up with classic and new offerings as part of our Easy Morning Breakfast launch, and it's yielding solid results.

In the UK, our number one breakfast market in Europe strong media support helped generate some of our highest breakfast sales to date.

In addition, Europe's on-going coffee strategy, including the stand alone McCafe concept is resignating with European consumers, with McDonald's now being the number one seller of coffee in Germany.

Many of these opportunities are enhanced by Europe's leading role in re-imagining, whereby the end of 2011, 85% of Europe's 6,800 restaurants will be re-imagined.

Let's shift to Asia Pacific, Middle East, and Africa, or APMEA, which delivered $1 billion in operating income in 2009.

This is a long way from the $345 million they delivered in 2005.

For the quarter and year, comp sales were up 1.5% and 3.4%, respectively.

Operating income also continues to grow, up 28% for the quarter and 23% for the year in constant currencies.

Our growth across the region continues to come from strong execution of convenience, value, core menu, and breakfast.

Australia remains one of the top performing markets in our system.

They have re-imagined their entire asset base setting the stage to drive strong results with premium offerings like the popular Angus line and the M Burger selections.

They also launched the next version of their Value Picks Menu, as well as enhance the drive-through experience leading to better operations and service times.

Now, China, although their economy is improving and we delivered an increase in comp sales and guest counts in December, we expect it will still be some time before consumers regain confidence and are willing to spend more.

In the meantime, we are making the right moves to grow our business and strengthen our connection with our Chinese consumers.

We are improving operations, which is differentiating our brands on service and helping build capacity during peak hours.

We also launched a highly popular Value Lunch initiative that has helped drive guest counts and incremental sales.

And as we announced recently, we are adding to our footprint by planning to open up 150 to 175 restaurants in China in 2010.

We remain excited about our potential growth and expansion in this region.

McDonald's Japan made solid progress last year in the face of significant economic headwinds, delivering positive comp sales across the majority of months.

Our results were driven largely by the introduction of the Quarter Pounder, the launch of premium roast coffee and a strong focus on portability, highlighted by our popular Value Lunch.

Additionally, in the fourth quarter we made gains through a focus on drive-thru, the the re-launch of McChicken, and the continued success of our premium coffee products.

So those are are some of the recent highlights from around the world.

As we turn to the year ahead, I want to say a few words on our continued commitment to financial discipline and enhancing shareholder value.

In 2009, we returned $5.1 billion to shareholder through our share repurchase system dividends for three year total of $16.6 billion dollars in our $15 billion to $17 billion three year target.

Going forward, our philosophy regarding the use of our cash flow remains unchanged.

Our first priority is to reinvest in the business, after that, we expect to return all of our free cash flow over the long term to investors through accommodation of dividends and share repurchase.

Our reinvestment strategies, our financial discipline, and especially our Plan to Win are the main stays of our success and the blueprint we will continue to follow to drive future growth.

We are pleased with 2009's results, we remain confident in and committed to our Plan to Win and our customer focus strategies, and as always we feel we have the best leadership team in place to achieve our goals.

As you all know, Don Thompson recently became our new President and Chief Operating Officer.

Don as a deep knowledge of the business and has done outstanding job leading our US business, and Don will continue to drive value for the brand in his new role.

At McDonald's, we pride ourselves in our commitment to talent management, leadership development and always having a deep bench of strong capable leaders.

We have a great management team in place that is highly talented, well-aligned, and ready to deliver results.

Moving forward, we are all focused on the drivers to be more relevant for our customers everyday.

from the best tasting food and beverage offerings to the greatest value and convenience to an unparalleled restaurant experience.

With our franchisees, suppliers, and employers all working together, I am certain we will continue to succeed on all of these fronts and I am confident we will keep delivering positive results for our system and our shareholders.

Now, I will turn things over to Pete Benson, our CFO.

Thanks, Jim.

Good morning everyone.

Everyday, more than 60 million customers around the world come to McDonald's for convenience, variety, and value, while our investors count on us to drive growth, cash flow, and returns.

I am proud to say that we delivered for customers and investors alike in 2009, with sales, operations, profitability, and returns all improving, amid an historic economic downturn.

For the fourth quarter and the year, we delivered double digit constant currency earnings per share growth.

Even after adjusting 2008 results for the gain on sale of Pret A Manger, and 2009 results for the income related to the Redbox transactions, and the resolution of certain Latin America liabilities, earnings per share rose 10% in the quarter, and 13% for the year in constant currencies.

During the fourth quarter, primarily due to the resolution of certain Latin America retained liabilities, we recorded $65 million of pretax income, as well as a $22 million benefit in tax expense, mainly related to the release of a tax valuation allowance.

In total, this resulted in an $0.08 benefit to earnings per share and a 240 basis point benefit to the effective tax rate for the quarter.

Combined operating margin improved significantly in 2009.

At about 30%, our combined operating margin is significantly higher than that of many global consumer companies.

This combined operating margin performance reflects our ability to drive strong franchise and Company-operated margins, while controlling G&A spending.

Total margin dollars from McDonald's restaurants reached a record $8.8 billion in 2009, up about 6% in constant currencies.

Franchise margin dollars, which represents nearly $6 billion of the total, grew at a faster pace as we continue to execute our refranchising strategy.

As a percent of revenues, franchise margins were strong at 82.1% for both the quarter and the year.

Over the last two years we have refranchised more than 1,100 restaurants, in connection with our refranchising strategy.

And today, more than 80% of McDonald's restaurants worldwide are franchised.

We expect to refranchise a couple hundred more restaurants in 2010.

Company-operated margins were up 160 basis points in the fourth quarter, to 18.8% driven by positive comparable sales, lower commodity costs, and refranchising.

For the year, Company-operated margins increased 60 basis points to 18.2%, the highest level in a decade.

Throughout 2009, our US business out-performed the overall informal eating out industry and the fourth quarter was no exception.

Easing commodity costs benefited margins in the forth quarter as our grocery bill declined about 4%.

Refranchising also enhanced the margin increase; as a result our US business delivered Company-operated margins of 20.3% for the quarter and 19.4% for the year.

Strong Company-operated margins are a key indicator of our business health and restaurant level cash flow.

In 2009, the average restaurant cash flow growth for our owner operators was the strongest in 15 years.

We closed the year with average annual pre-debt cash flow approaching $320,000 per restaurant.

This strong owner operator cash flow helps enable future re-investments in the business, like support for Breakfast Dollar Menu or re-imagining.

In Europe, Company-operated margins increased 130 basis points in the fourth quarter, driven by strong comparable sales, partly offset by higher labor and utility costs.

The UK, France, and many other countries drove this improvement as our menu variety and value continued to appeal to customers.

While Europe's local currency grocery bill declined 3% in the quarter, currency rates continued to pressure commodity costs in Russia and other eastern European countries, making the net impact of food and paper costs slightly negative.

For the year, Company-operated margins rose 40 basis points in Europe reaching a 10 year high of 18.4%.

In Asia Pacific, the Middle East and Africa, Company-operated margins increased 260 basis points in the fourth quarter, and for the year, Company-operated margins rose 90 basis points to a very healthy 16.8%.

Our sustained strong performance in Australia, and operating efficiencies, and lower commodity costs throughout the segment drove the improvement for both periods.

We are confident we can deliver strong Company-operated margins going forward, as we continue to execute our strategies related to price, product mix, and promotion, while driving efficiencies and managing costs.

As it relates to food and paper costs, our initial outlook for 2010 is for our Basket of Goods to be relatively flat in the US and Europe, with easier comparisons in the first half of the year.

Turning to G&A, in constant currencies, G&A was up slightly for quarter and down for the year.

2009 marks the fifth consecutive year that G&A declined as a percent of both sales and revenues; and we expect G&A as a percent of sales and revenues will continue to decline in 2010.

While total G&A dollars will be up slightly on a reported basis at today's exchange rates, G&A should be relatively flat in constant currency.

The timing of the Vancouver Winter Olympics and our biennial, world-wide owner-operator convention will impact the quarterly comparisons.

Our proven ability to drive sales, deliver strong margins, and control spending, along with our franchise business model, all have positive implications for our cash flow.

As we continue to be disciplined in how we use this cash, our philosophy has not changed.

Our first priority is to reinvest in our business as Jim said.

We have the financial capacity and the local talent to invest capital back into our business, when many others cannot.

This is a competitive advantage that we intend to leverage to further differentiate the McDonald's experience.

In 2010, we will invest about $2.4 billion in capital expenditures.

Our goal is to elevate our brand to drive sustainable growth while continuing to earn strong returns.

Approximately half of our capital expenditures will be used to open about 1,000 new restaurants around the world, including roughly 500 in Asia Pacific, 250 in Europe, and 150 in the US.

The other half of our capital expenditures will be allocated toward re-imagining over 2,000 existing locations.

Nearly half of these remodels will be in Europe, 600 in Asia Pacific and 500 in the US.

Re-imagining has a direct positive impact on sales and market share, as our experience in the US, France and Australia demonstrates.

In 2010, our re-imagining efforts will be focused on both the interior and exterior of our restaurants.

As we have done in the past, we will co-invest with our owner-operators in these high impact re-imagining efforts.

It is important to remember as we make these investments we are upgrading our asset base.

This is because we own the land and buildings or hold long-term leases on the property underlying our restaurants.

In addition, by sharing in the investment, we can accelerate initiatives, reach scale faster, and positively impact our business sooner.

On a final note, as you know for most of 2009, currency translation was a significant headwind, negatively impacting full-year earnings per share by $0.15.

However, this headwind became a tailwind in the fourth quarter, a benefit we expect will continue for the next couple of quarters.

Based on current rates we estimate that currency translation will positively impact first quarter earnings, by about $0.05 or $0.06 per share, and the full year benefit is estimated to be approximately $0.06 to $0.08 per share.

We have a brand advantage in convenience, menu variety, and value, a strong balance sheet and cash flow, and owner-operators and suppliers who are aligned and focused.

As we move forward in 2010, we will continue to leverage our competitive strengths to extend our lead in the marketplace and drive value for our shareholders and global system.

Thank you.

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

Thanks, Pete.

I'll now open the call for 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 will come back to you for follow up questions as time allows.

The first question is from David Palmer at UBS.

Thanks.

Could you comment -- I guess this is a simple question -- could you comment on your traffic trends per restaurant and how your same store sales trends have trended versus the industry.

I remember during your Analyst Day, you showed a wider gap at the end of the year versus the competition and that's obviously US specific, but perhaps you can comment as to whether that gap remained as wide recently?

David, thanks for the question.

This is Jim.

Our trends have remained the same.

Fortunately we had traffic growth or guest count growth in every segment of the business last year, much of that was because we were capable of keeping the average check in place.

We didn't take as many price increases, we don't have the pricing elasticity and of course our consumer today around the world, deserve a break, if you will, relative to pricing around food away fro home and we have kept the line on that very well, and we have therefore been the recipients this guest count growth, if you will.

Thanks.

The next question is from Matt DiFrisco of Oppenheimer.

Can you just tell us where in the 2010 plans you expect to do the refranchising and then also if you could just give us some commentary or greater detail as far as looking at the contraction on the franchise margin, especially in the US?

What is behind that?

Or just so we can have better modeling purposes?

Matt, I will let Pete talk about the franchise numbers relative to the financials.

But, you're not going to see the same kind of wholesale activity we've had in the past relative to refranchising.

It is -- we have done the bulk of it already.

But it will be -- continue to be done in this same markets that we have done it in over the past.

You know, we had stated we were going to refranchise about 1,500.

We are well past the 1,100, almost 1,200 mark now.

And so it is across the markets and it is not significant really in the scheme of things.

So, the relationship is going to remain about the same.

And Matt regarding the franchise margins in the US, the comp was a little lower in the quarter and there's a lot of fixed costs in that margin, so we had a little less leverage on that.

But also, we've had with the investments in the beverage initiative, we've had a little higher depreciation and amortization.

But we also saw a little less impact from owner-operator incentives.

So, hopefully that helps.

Okay.

The next question is from Sara Senatore at Sanford Bernstein.

Just a question about comps because you gave us an update in January.

First, just generally speaking in the US, it got a little better in December then it looks like flattish in January.

Is that just, calendar shift and overall trends have been pretty stable, or are we seeing something different December to January because I know it is sort of a choppy environment out there and jumping over the other side of the world with China, you said traffic was up, and it looks to me like deflation is trending down?

So should we expect to see pricing get better there, too?

Thanks.

That was two questions.

First on the United States and then I will let Pete talk about the pricing and the relationship in China.

But, I think in the US, the trends are actually better in January, when you factor out weather.

Weather has been a -- had a tremendous impact on our trends here in January.

We don't normally like to talk about weather, but we can't avoid it when you look at the first 14 or 15 days of the month.

And the severity of the weather, I think it was impacting us around 3% a day in the sales because whenever we had the weather that was normalized, we saw much better results.

And so, if anything I would say that the trends are a little better than they were in December.

And Sarah, regarding China, a couple of things.

One, yes we did report positive sales and guest count movement in December.

You won't see that in January though because we have the shift of the Chinese New Year.

So, last year that was in January, and this year, it will be in February.

So, by comparison, that will be a little bit choppy, but we are optimistic in what we are seeing with the trends, and we have talked about China and the south and the central and the north.

So we saw the all three of those areas improving in December and are kind of cautiously optimistic as the consumer starts to spend a little more money there that we will then be able to get a little more out of price and get a little more traffic moving there.

So, that is a perspective for you.

Thanks.

The next question is from David Tarantino at Robert Baird.

Good morning.

Another follow up question on the US comp trend.

It looks like traffic might have picked up fairly considerably when you adjust for pricing rolling off in December and the weather comment you just made.

What do you think is driving that better trend?

Is it the industry trends are getting better, or do you think that it is some of your initiatives such as maybe more marketing allocation toward the Dollar Menu?

Well I think it is -- as you know we launched the -- David, we launched the Dollar Menu at breakfast, nationally.

With we have a very strong national voice against breakfast right now.

All of our franchisees are on board and we have a lot of messaging out there about the Dollar Menu, not only all day, but now at breakfast, and then the Mac Snack Wrap that we have talked about.

So I think it is more about our initiatives and the communication around the menu.

And because really when you look at trends in the industry, and you look at the spending of our consumers and the consumer confidence, even though it's edged up over the last couple of months, with the unemployment where it is, until we see job creation and people get comfortable with the fact they have a place to go to work and have a steady income, we are not going to see in my opinion, enormous pick ups or big change relative to the trends.

Thank you.

The next question is from Steve West at Stifel Nicolaus.

Can you give a little color on the McCafe, the Phase II, that you guys have been rolling out.

How many stores do you have that in now and when can we start expecting to see the TV advertising campaign pick up for that Phase II?

Our McCafe project has gone very, very well for us.

Certainly, on the coffee side.

We are now into smoothies and frappes, introducing those into the restaurants and we are well on the way with the frappes; the smoothies are a little bit behind that but we expect to be ready to go in the summertime.

I can't tell you when they'll be messaging around it, but it is pretty much ready to go in the summer.

Thank you.

The next question is from Steven Crown at Goldman Sachs.

Hi.

Thanks.

Just one quick follow up, on the breakfast menu, Value Menu.

Can you tell me what you expect that that will mix as far as contribution to revenues and the what the economics of that product are?

And then on the US margin side for the quarter, 20.3% Company-operated margin, I think that's the best quarterly margin you have put up at least as far back as my model goes.

I recognize commodity costs are a big driver of that, but in anticipation of maybe the environment getting worse, did you guys get more aggressive in other -- and pull other levers to control the margin side of things?

Thanks for questioning, Steve.

I will let Pete talk about the margin in a minute.

But, the mix on the Dollar Menu and the contribution of that and the Mac Snack Wrap, for example, now, it is too soon to tell.

We just started.

We really don't have a good feel for how it is going to shake out over time, but we are very pleased with the economics around it.

Otherwise we probably wouldn't have done it.

One.

Number two, with the support of our franchisees and everybody being all the way in on this, we think that it gives us the opportunity to deliver fairly well around that Dollar Menu, but it is too early to really tell you exactly what the details of that are because we don't have the data.

But Steven on that, before I get into the total margin question, it was a relatively low increase we need in transactions in the US from the Dollar Menu breakfast to be margin dollar neutral.

And so we feel pretty confident we will be able to hit that?

But in terms of the total margin in the US for the fourth quarter, the 20.3%, 75% of that was driven by commodities and the rest, basically, the refranchising.

You saw comps were relatively flat and we didn't get anything out of the sale line, so it was really the cost and the refranchising benefit.

There were no other special levers or anything like that which gives us confidence in the environment moving forward with the commodity costs remaining benign as we can move that top line a little bit more, then we will be in pretty good shape.

Thank you.

Next question is from John Glass at Morgan Stanley.

[Inaudible] growing share in a declining market in the US, but your system sales grew 3%, so you clearly actually were more than neutral there.

Can you talk about how much share you took in 2009 and how much you think the informal eating out market contracted this past year?

Well, it varies by market, John.

We grew our informal eating out market share really in every segment of the world.

So, if you look at the US, for example we were up about .2 or .3 of 1% to about 11.3% and when you look at -- that's a pretty big number, when you look at the size of the informal market.

It varies around the world, but we had increases in every market.

I can't tell you how much informal eating out declined in every market around the world because it varies, but it has either been stagnant or shrinking in most markets.

And most of our growth in 2009 came from share growth around the world.

Thanks.

The next question is from Mark Kalinowski at Janney Montgomery.

[Inaudible] further into sales trends dynamics in China.

The sense I am getting is that lower price food chains like McDonald's, KFC are generally struggling, but higher price chains might be struggling even worse, fair amount of discounting going on in the quick service environment, and if you can talk about some of those details, that it would be great.

Thank you.

I think overall basis, the pricing relationships in China in the quick service restaurant industry are an interesting dilemma because of who you are competing against which is a very low price menu on street from the non-chain -- restaurants and food available.

And we are not necessarily discounting, but what we are doing is getting our pricing right in the relationship for the economic time that we find ourselves in, which is an on going pricing relationship as compared to a discounting of our food.

And so -- and it moves up and down the scale, depending on where we find ourselves in the consumer spending.

As we have said, the environment in China, which basically fell off a cliff after the 2008 Beijing Olympics, we have adjusted accordingly along the way to be relevant with our consumers and it has worked well for us.

Thank you.

The next question is from Jeff Omohundro at Wells-Fargo.

Thank you.

Just wonder if you could talk to the strategies that you are pursuing to support check.

Just given the step up both in the breadth of value offerings and as well your marketing support this efforts.

Thanks.

So Jeff, specifically, I will talk a little bit about the US, but these kind of comments apply around the world.

As you know, it is a market share battle out there, so focusing on driving customer count is important, but we need some other elements to help keep the managed -- the average check from falling off a cliff.

So, things like in the US, the Mac Snack Wrap, which is both a transaction driver and also something that can either trade people up from the Dollar Menu or add on to an extra value meal is a margin enhancers.

You think about the next phase of the beverages rolling out in the US, the frappes and the smoothies.

Those are very nice margin and average check enhancers, if you will.

We are seeing and it is early in these tests, but we are seeing a nice trade between the espresso based coffees, which are over 50% in the morning, and these smoothies and frappes are a much smaller percent in the morning and a greater percent in the snack day part, which should help fill in there.

And in the US, also you think about the ANGUS burger.

That wasn't necessarily a traffic driver, but it was a trade up mechanism that delivered more in the margins.

So, taking that and summarize energy the rest of the world, that focus on premium some products, the focus on beverages, and the focus on fourth tier menus are some of the things that we are doing that are helping balance that check and traffic part of the equation.

And, Jeff, if I could -- I think a number of these frappe, smoothie and even McCafe have generated some new visits.

And those new visits have also generated food sales, and so that's been helpful, but at the same time, the Dollar Menu experience and the trading against that has remained about the same.

So, all of these other items that are on the menu have picked up our opportunity relative to average check.

Thanks.

The next question is from Jeff Farmer at Jefferies.

Just a follow up on the some of the commodity, looks like your consolidated food and paper costs fell by 180 BIPs in the fourth quarter.

How should we think about that number in 2010 given the outlook for relatively flat commodity costs this year?

We don't provide that kind of forward-looking guidance.

There's so many moving parts, how much are price is going to increase that are going to impact the base that we are measuring that food and paper change off of.

Product mix also impacts that, so we are not really forecasting that.

But we are optimistic, obviously, with the commodity costs at the level that we are seeing them.

Thanks.

The next question is from Joe Buckley at BofA Merrill Lynch.

Thank you.

I have a question on the European Company margins.

Pete you shared with us that because of the importing of food into Russia and some of the Eastern European markets that the food costs were slightly negative.

You mention labor and utilities being negative, yet you've got a big bump positive bump in the Company margin.

I am wondering what else was left there that you leveraged?

We did, Joe, while the food and paper costs had a slight negative impact for the quarter, compared to the previous quarter, if you look at it sequentially, they were over 100 basis points better, the food and paper impact.

So, a lot of the impact is coming from more benign food and paper costs and the strong comp we had during the quarter and refranchising.

So, that is really the items.

Thanks.

The next question is from Jason West at Deutsche bank.

A little more color on the outlook for food costs and pricing.

We have seen some of the commodities, you starting to lap more favorable trends from 2009, particularly cheese and ground beef.

Just wondering, how high your confidence level is in the flat number?

You guys have some of the big items locked in for the year, and just your thoughts on pricing, if you were to see some movement in some of these items against you, do you feel like you could take some price at this point?

Yes, Jason, as we look at at 2009, I would say that generally around the world, we probably had about 1% less in price, on average, between the US and all of the major markets.

And as we head into 2010, it is probably going to be even a little bit less compared to 2009, probably where we are or down a little bit.

You appropriately point out that we look for opportunities to lock in our costs when we can.

We are able to do a little bit more of that in the US versus Europe and APMEA, but we're becoming more active in those markets as well.

We are constantly looking at the marketplace to see, do we have opportunities to raise price without negatively impacting the traffic.

It is quite interesting when you look at the difference a year makes.

A year ago, we had all of our teams around the world doing scenario planning for what's going to happen if the environment gets a lot worse.

Well, today those scenario planning discussions are around making sure we are able to catch the upswing when it comes and how are we going to be able take advantage of that?

So, we are really focused on being able to maximize that top line when we do see the rebound.

Thank you.

The next question is from Mitch Speiser at Buckingham.

Thanks very much.

A couple of questions on beverages.

Pete, I believe in the third quarter in the US, the Company margins were up about 110 BIPs and then up 150 BIPs in the fourth quarter.

Is there any way to pull out what the increasing beverage mix contributed to that margin expansion, and with the smoothies and frappes coming out, is that, in fact, a margin enhancer a percent margin enhancer as well.

Mitch, no is the short answer to the first part.

But that sequential change, it was definitely an improvement in all commodity costs that helped the margin in the fourth quarter, offset by less sales in the fourth quarter.

As we look at the impact of the frappes and smoothies going forward, we are optimistic that on a per unit basis, that it is accretive to margins on a percentage basis, and in tests, while its early, we aren't going to give unit movements, but if you think about those two products, they are a lot closer in to the core McDonald's customer and the core McDonald's menu compared to the espresso based coffees.

We are starting to see some pretty nice movement in the test markets.

We are optimistic on the impact it can have later in the year.

Thank you.

The next question from John Ivankoe at JPMorgan.

Thanks.

Obviously, remodels are increasing in importance in fiscal '10, and it will be a multi-year process for you.

As you begin to finish Europe, I presume that the US will receive more of the attention longer term.

Is it possible for you to talk about what your remodel cash contribution is in the US with the franchisees and what kind of sales lift you are seeing from that expense?

Well, as John -- thanks for the question.

Let me just start and I will let Pete talk about the contribution mechanism that we have used over the years.

It varies by market, of course.

We are still wrestling with it here in the US, but he might be able to add some more texture to that.

But we are reinvesting more in re-imagining and remodeling across the board.

We don't wait for Europe to be finished and then get more allocation in the United States.

Everybody has their own plan.

We have accelerated the plan across the board, and so it is not about waiting for one segment to get done so we can start the other.

We have plenty of wherewithal to do it on a consistent basis of every segment.

Pete you want to talk about the contribution?

Sure.

We know that re-investing with our operators is the right thing to do to help accelerate these initiatives and give them the scale more quickly, and we know from our test markets that there's plenty of cash flow in return from both us and the owner-operators.

On this specific US initiative that is going move forward, we do not have a final decision on what that contribution is going to be.

So once we get that figured out, we will be able to communicate that.

I wouldn't expect it to be dramatically different from what we have done in the past or dramatically different from what we have done with something like the beverage initiative.

But until we get that worked out and finalized, we don't want to share that, but definitely it is focused on allocating returns that appropriate level for us and the owner-operators.

When we do the full re-image, we don't have a lot of them done in the US, but we do know from other markets that generally we see a 6% to 7% sales lift relative to the rest of the marketplace.

When we do the holistic reimage a really nice blow out on the dining room and the inside along with the exterior of the building and the landscaping and everything.

Thanks.

Next question is from Greg Badishkanian at Citigroup.

Thanks.

Just assuming no real change in the macro in terms of unemployment, how do you see your kind of message going forward over the next, next quarter or two, in terms of really focusing in on value?

Do you see that increasing or about the same?

Well, Greg, thanks for the question.

We expect to keep the pedal to the metal if you will relative to value everywhere in the world because I don't see much changing.

More importantly, we've had a fairly steady contribution relative to value messaging over the past few years in recessionary and non-recessionary times because it is extremely important for our customers to understand every day affordability at McDonald's exists in the good times and bad times.

which is why it was fairly easy for us to continue to support the Dollar Menu across the United States and, of course, our everyday affordability in other segments of the business because that's the way we have structured our menu and the understanding of the consumer expectation.

Thank you.

The next question is from Keith Siegner at Credit Suisse.

Thanks.

Just one follow up question on the approach to promotional activity and pricing.

We have talked about unemployment, we have talked a little bit about commodities.

When you think about what the determining factors will be that are going to influence your approach, are those the primary things a return to inflation in the at-home food markets, does that help?

How do you rank the determining factors that influence your approach to pricing and promotional activity.

Well, let me just say in some cases, we would like to say it is that scientific.

It is really as much as it is a science because we do take all of those things into consideration that factor, but on a wholesale basis, it is intuitive to understand our pricing relative to the consumer.

So when we talk about not having as much pricing elasticity that Pete had talked about earlier, because of commodities and other kinds of things in the past or the certainly the inflationary environment, and more importantly, the consumer confidence and the unemployment.

We don't have as much pricing power as we might have had, so we really don't even talk about how we are able to pass on any cost that we might have to absorb when we do our pricing models and how we communicate with our consumers around value.

We decide that it is important for us to continue to have everyday affordability, present to our consumers a value proposition that makes us a compelling choice relative to eating out when they choose to eat out.

And all those factors are considered.

We do that on a regular basis, not just during recessionary times, and of course, since we have been in this situation now some would argue for more than two years, it continues to be the consumer insight we use and make our decisions around and it doesn't necessarily leverage any movement back and forth turning the strength around our messaging except to say that it has been fairly consistent.

Thank you.

The next question is from Tom Forte at Telsey.

Thank you very much.

Breakfast, can you give us a sense of where it stands today as far as mix of sales in the US and if it is still at 25%, and then you talked about January, you are going to roll it out, the Dollar Menu, system wide across the US.

Can you give us a sense at the start of the fourth quarter and end of the fourth quarter, what percent of your system already had the Dollar Menu in place at breakfast?

It is a small percentage at the beginning of the end of the fourth quarter on the Dollar Menu at breakfast.

The breakfast percentage does remain the same as a big piece of our business, if you look at it that way, and the Dollar Menu, and the voice around Dollar Menu, will certainly help our growth.

And by the way, we grew breakfast in '09, not only in the fourth quarter, but year-to-date December, which was not an easy feat, considering the fact that we were faced with the unemployment we were; and second of all, we had a very strong '08 with McSkillet and the chicken biscuit introduction.

So we had some numbers to overcome.

We are proud of our results and our consumers have rewarded us because they know the great value there is for breakfast in our restaurants.

Thanks.

The next question is from Paul Westra at Cowen and Company .

Thank you.

My question, specifically, is if you can give us more color on the capital trends you are seeing in eastern Europe and Russia in particular and where the real world impacts you are seeing on those returns from these in the cross border transaction issues, and perhaps maybe some updates on the supply chain efforts you are doing to help mitigate these impacts?

Paul, it is Pete.

Listen, obviously, the what you are seeing on the impact on the commodities in our eastern and central European markets is having a little bit of a hit to the profitability there.

So, just by doing the math, our returns are down a little bit.

But the reality is that we are still getting good returns in those parts of the world and there's still, still great opportunity to grow there, so we are going to continue to invest capital there.

When we look at opportunities to mitigate the impact, we do estimate some of these cost benefit type trade-off decisions around can we hedge, can we hedge at an effective cost or are we comfortable just letting it ride.

We were a little surprised to see the ruble still down against the dollar in fourth quarter.

We have thought it might snap back a little bit by that.

But Russia in December was strong, we saw good sales for the year in Russia, and it continues to be a highly profitable and great long-term market for us.

So, there's really no concerns in the returns perspective there and we are going to continue to do our best to mitigate the impact of the currencies, but not overpay for any protection.

Thanks.

Another question from David Palmer at UBS.

Thanks.

As you went -- back in 2000 -- just this last year and going into the summer, it felt like the consumer environment was getting tougher.

Did you, in retrospect, reallocate marketing dollars and attention a little bit away from some of the things that might have been more incremental, premium stuff, the beverages, and toward value in a very meaningful way in terms of dollars, and conversely when things change, and if, indeed the consumer comes back and things become a little bit more receptive to those incremental sales, will that get a disproportionate amount of the dollars in the future?

We will make that call when the time comes.

I will be anxious to make that decision, and -- [ LAUGHTER ] The interesting thing to point out around media is that we are a 52 week communicator and media and every segment of the business, we did not pull back on communication with our consumers in the media spend, in any respect.

If anything, we got more efficiencies during this downturn because of the buys and yes, the answer is that the answer is yes that we did put a little more effort against breakfast and value in the US in terms of dollars spent against media.

Thank you.

The next question is from Howard Penney at Hedgeye Management.

Thanks very much.

Do you think the shift in the Dollar Menu at breakfast is permanent?

Meaning is this something that will help you get through 2010 and if the economy gets better, you will remove it, or --

Thanks for the question, Howard.

The answer to that right now is yes.

Yes, it is permanent.

We have no plans to remove it.

I thought that's what he asked.

Thank you.

The next question is from Joe Buckley at BofA Merrill Lynch.

Thank you.

I wanted to follow up my first question because you didn't understand the question or I didn't understand the answer and I had another question.

So the second question is to the McCafe sales mix build as the cold weather took place, is the product a little more seasonal than perhaps you expected, or is it -- discuss the seasonality of that product?

And then Pete, back to Europe for a moment.

European Company margin was up 130 basis points.

Right.

And if I understood your answer, or some o of your comments on the call, food costs sounded like they were up, labor costs were up and utilities up as a percent of sales, and I am just trying to understand how you get 130 basis points of improvement if you have the major cost items like that all negative?

Okay.

I will get into that in a little more detail.

[Inaudible] the coffee did spike up some, the McCafe product spiked up some during colder weather and that was a shift away from the iced tea and some of the other beverage initiatives as the weather cooled off, if you will.

Regarding the margin in Europe, if I look at the progression, 130 basis point improvement for the quarter, we got pricing and traffic gave us a lot of growth there, and relatively flat food and paper, so slightly negative, 30 basis points, and a similar benefit from refranchising as we had going forward.

Nothing else really unusual.

It was top line driven with modest cost increases and the benefit from refranchising.

Thank you.

Looks like we have a final question from Mitch Speiser at Buckingham.

Great.

Thanks very much.

And just in the US, more of a bigger picture question, labor has been somewhat of an on-going pressure.

I don't know if you mentioned it in fourth quarter there is no minimum wage increase, obviously the unemployment rate is up.

Do you think relative labor expense can work in your favor in 2010?

Thank you.

Mitch, in terms of labor rates, I think maybe we saw about a 3% increase in the average wage throughout the year, probably something very similar to that going forward, maybe a little bit less, but really on the labor side, we're focused more on driving more productivity, so more transactions per crew hour and that's where we are able to mitigate and have some benefits actually on the labor line as we focus on those efficiencies.

Thanks.

We did get one more question from Bob Coleman.

Go ahead, Bob.

Yes.

Thank you.

In regards to your future CapEx of $2.2 billion.

Should we expect that investment to generate a higher return on existing equity, or could it be capping out at these levels.

Bob, we continue to operate under our targets of getting returns on an incremental invested capital in the high teens, so our expectations on these increases are that we will continue to see, returns in that level or better as we move approximate forward.

So we are not lowering the standard in an effort to increase the CapEx.

Okay.

Thank you.

I think that's the end of our questions.

I will combo ahead and turn it over to Jim for closing comments.

Thanks, everybody for joining us today.

I want to reiterate that the McDonald's global business continues to be strong.

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

We have the right plans in place to grow our business for today and over the long term.

We will continue to follow our Plan to Win and execute our strategies at an even higher level to remain modern, relevant, and in step with our customers.

With our entire system aligned and focused, I am confident that we will continue to deliver for our 60 million customers every day.

Thank you.

Thank you.

This does conclude McDonald's's conference call.

At this time you may disconnect your lines.