麥當勞 (MCD) 2010 Q1 法說會逐字稿

Hello and welcome to the McDonald's April 21st 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'd now like to turn the conference over to Ms.

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

Ms.

Shaw, you may begin.

Thank you.

Hello, everyone and thank you for joining us.

With me on the call today are Chief Executive Officer, Jim Skinner, Chief Financial Officer, Pete Bensen, and joining us for Q&A, President and Chief Operating Officer, Don Thompson.

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.

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

And now, I'll turn it over to Jim.

Thanks, Mary Kay.

Good morning, everybody.

I'm joining you from our McDonald's Worldwide Owner Operator Convention in Orlando.

Every two years we bring together our franchisees from around the world, along with a number of our suppliers and Company employees, we celebrate our success.

But mostly, we calibrate about our future.

While we're in the middle of it now and it's been a tremendous week so far.

From the convention floor to our business meetings, we are focused on operations, menu, reinvestment and building this great brand.

We're sharing ideas and learning from each other, further strengthening our alignment which I know is critical to our future success.

We're energized and confident about what we're doing, regarding our business and taking our business to the next level.

So as we come together to look ahead, I'm proud of the results we achieved this quarter.

Global comparable sales were up 4.2%, operating income increased 13% in constant currency and earnings per share reached $1, a 9% increase in constant currency.

Our success continues to be a system-wide effort, driven by strong results in each area of the world.

In the US, comparable sales for the quarter increased 1.5% and operating income grew 12%.

Comparable sales in Europe rose 5.2%, and operating income grew 14% in constant currencies.

And in Asia-Pacific, Middle East and Africa or APMEA, comp sales grew 5.7% with operating income rising 9% in constant currencies.

Our momentum is continuing into April with comparable sales trending positive across all of our geographies.

We are now into our seventh year of positive comp sales growth in every part of the world, a feat that underscores the ongoing strength and relevance of our Plan to Win business strategy.

Guided by the plan, we continue to focus on differentiating our brand through common business drivers; menu variety and beverage choice,better restaurant operations, convenience and day part expansion, everyday predictable low prices and ongoing restaurant reinvestment.

On all of these fronts, we're improving and we're innovating.

As a result, we're growing our business and widening our market share lead around the world.

Together, we're aligned around thee drivers and delivering them in the most locally relevant ways.

Regarding menu, we made gains by promoting our iconic core products while delivering new food and beverage news.

In the US, a strong Olympic theme promotion helped ignite our Chicken McNugget sales and drove sustained sales growth across our entire chicken category.

Our new product news, included Mac Snack Wrap with all the great taste of Big Mac in a portable wrap which has helped lift the entire snack wrap line or category across the menu.

Looking ahead, the US is continuing the expansion of its McCafe line with the introduction of frappes and smoothies.

Frappes now are in about 90% of US restaurants and are already exceeding expectations and that's without any national advertising.

And later this summer, we will be launching wild berry and strawberry banana smoothies.

With these new additions, we're becoming even more of a beverage destination, serving familiar and popular drinks with the the quality, convenience and value that only McDonald's can provide.

Looking at Europe, we continue to delight customers and drive sales with our fourth tier menu offerings which deliver a popular option of smaller premium affordable sandwiches.

Little Tasters in the UK and Snack Deluxe in Germany have both delivered solid sales results.

And our latest line of Petit Plaisirs in France have exceeded expectations.

Europe is also driving momentum with its premium offerings, from the Big Tasty in France and the Chicken Bacon Onion sandwich in the UK to the launch of McItaly burgers which have performed strongly across our Italian market.

And APMEA, Japan has driven sales with its recent line of American themed burgers.

In addition, a number of markets are rolling out extensive campaigns to elevate our core products, including the upcoming launch of our Quarter Pounder in Singapore.

We also continue to offer strong value across our menu as consumers everywhere continue to count on McDonald's for branded affordability.

In China, we've maintained our popular Value Lunch which is driving guest counts and sales.

In the US, we launched our dollar menu at breakfast to provide the kind of everyday predictable value our customers expect from us.

As a result, we've reinvigorated this final day part and experienced stronger sales in guest count gross into the first quarter.

Meanwhile, everyday affordability and pricing from our value menus remains a strong traffic driver across Europe.

And year-to-date, our extra value meals throughout Europe have been extremely robust.

Italy saw 30% increases as they supported the Big Mac while France experienced strong extra value meal growth and the UK, Germany and Spain also achieved strong results.

We're continuing to drive traffic as we connect with consumers through core menu favorites, new food news and the most relevant value offerings.

And we're complimenting it with even better all-around restaurant experience, from how our restaurants look to how they are operated to the convenience they provide in our customers' daily lives.

As many of you know, we have a system wide effort to reimage and modernize our locations inside and out.

Australia and Europe have led the way, and our other geographies have seen the benefits and are leveraging these learnings.

In the US, over the past few years we've refreshed about one-third of our restaurants with an emphasis on the interior.

This year, the US will reimage 400 to 500 restaurants, concentrating on both the interior and exterior.

In China, where we're celebrating our 20th anniversary, we have an extensive plan to refresh our current restaurants and still plan to open between 150 to 175 new restaurants this year.

Wherever we have critical mass, at reimaged restaurants we're seeing improved perception of our brand and higher sales and returns, as in Australia, where many of our brand perception scores have increased over the last three years and we've delivered a three-year return on incremental invested capital of more than 60%.

We feel this initiative will set the stage to take the McDonald's brand well into the future.

The strength of the brand is also dependent on great service.

Through innovative technology and better training of our people, we will continue to enhance the experience of our customers.

APMEA continues to lead the way, generating our top customer satisfaction scores year-to-date.

In particular, China and Japan are truly differentiating our brand on service with Japan achieving its best satisfaction scores ever earlier this year.

The US and Europe have also continued to make great progress on improving their customer satisfaction scores.

This is a key measure that we pay very close attention to in order to ensure we are getting better at being better.

The key to Europe's results have been the nearly full implementation of our bridge operating platform which creates a better organized kitchen, increases capacity and puts less pressure on the crew through simplified operations.

It's now in nearly 90% of our European restaurants and it enables us to expand our menu variety at the same time improving our customer service.

Finally, we're leveraging greater convenience in day part expansion to continue to drive growth.

In the US, more than one-third of our restaurants are now open 24 hours and we know there are opportunities to do more.

In addition, nearly 80% of our stores are now open by 5AM, continuing to add to the comp for that particular day part.

In APMEA, convenience remains a key driver of our business.

Our McDonald's delivery service now operates in 19 countries throughout the region and contributed to measurable comp growth in China, Hong Kong and Korea.

Our continued expansion of 24 hour service drove sales in Japan and Australia.

Improvements in drive-through execution across all markets have led to greater capacity and cash flow.

Meanwhile, we've now made breakfast available in 75% of our restaurants in APMEA and we are excited about the tremendous opportunity that breakfast provides.

So those are a few highlights of how the momentum is continuing this year.

We are delivering the food and beverages our customers want, the value they expect and an overall dining experience that is modern, relevant and in step with our customers' lives.

We are committed to our business plans and our philosophy of financial discipline and enhanced shareholder value.

We have a healthy balance sheet and the highest credit rating in the industry, allowing us to access capital and help facilitate owner/operators to obtain they need to reinvest in their restaurants.

We remain committed to returning all of our free cash flow over the long term to investors through a combination of dividends and share repurchase.

And in the first quarter, we returned $1 billion to shareholders.

Overall, I'm very pleased by our first quarter performance and confident that we will continue to achieve strong results.

What I've experienced at this week's meeting is encouraging and motivating.

Our entire system is determined to get even better at all we deliver to keep McDonald's moving forward.

The optimism, confidence and alignment is truly inspiring and will continue.

Thank you.

And now I'll introduce Pete Bensen, our CFO.

Pete?

Thanks, Jim and hello, everyone.

As I walk our convention floor and visit with people this week, it's even more clear to me that the system alignment behind our Plan to Win is the fuel that continues to drive increased sales, guest counts, cash flow and market share around the world.

Owner operators, suppliers and Company employees are focused on satisfying the evolving needs of our customers by delivering unbeatable value, menu choice and convenience in a contemporary environment every day in our restaurants.

These collective efforts resulted in first quarter as reported operating income growth of 20% to nearly $1.7 billion.

Every area of the world contributed with top line sales growth, effective management of expenses and strong margin performance.

As a result, combined operating margin increased 220 basis points to nearly 30%.

US Company operated margins rose 210 basis points to 20.4%, primarily due to lower food and paper costs and to a lesser extent, the impact of refranchising.

For a perspective, the last time the quarterly US Company operated margin exceeded 20.4% was second quarter 1994, nearly 16 years ago.

We continued to experience lower commodity costs in the first quarter, as our basket of goods in the US decreased about 5%.

This compares to the 6.7% increase in first quarter 2009.

For the full year 2010, our commodity outlook in the US is favorable, with costs expected to be down 2% to 3%.

Lower food and paper costs have allowed us to continue to grow margins, while holding the line on price increases.

We remain focused on building traffic, which is critical to growing our market share over the long term.

Regarding Europe, Company operating margins increased 200 basis points in the first quarter to 17.3%.

Strong comparable sales in France, Russia, the UK and many other markets, as well as lower commodity costs, were partly offset by higher labor and occupancy costs.

Cross-currency pressures on imports in Russia and eastern Europe have eased since last year which also benefited margins.

Europe's grocery bill also declined 5% in the quarter, and for the full year we expect commodity costs to be down slightly.

In APMEA, Company operated margins increased 220 basis points, also driven by lower commodity costs, operating efficiencies and positive comparable sales.

Turning to franchise margins, we continued to benefit from a more heavily franchised structure as first quarter franchise margin dollars rose to nearly $1.5 billion, an increase of 8% in constant currency, driven in part by system-wide sales growth of 6%.

The consolidated franchise margin percent declined slightly, yet remained strong at 81.2%.

Our positive global comparable sales were offset by higher depreciation costs in the US and the impact of refranchising.

In addition, the significant strengthening of the Australian dollar in the first quarter of 2010 negatively impacted the mix of APMEA's franchise margin.

The final factor in our combined operating margin is G&A control.

First quarter G&A increased in total dollars, but improved slightly as a percentage of revenues.

This was in line with our internal expectations.

As I mentioned on January's call, the timing of the Vancouver Winter Olympics and our biannual Worldwide Owner Operator Convention will impact quarterly comparisons this year.

We still expect full-year 2010 G&A to be up slightly on an as reported basis and relatively flat in constant currencies.

As a system, we continue to concentrate on initiatives and assets that grow our business over the long term.

Where necessary, tough decisions are being made to close certain capacity constrained sites.

Japan, our 50% owned affiliate, decided the to close approximately 430 restaurants with lower volumes and returns by mid year 2011.

Accordingly, our first quarter results were negatively impacted by approximately $30 million after tax or $0.03 per share.

We expect minimal additional charges for the remainder of the year, so we are revising downward the total estimate for these costs in 2010, from $40 million to $50 million to less than $40 million.

Somewhat offsetting the impairment charges in Japan were about $30 million in gains in our US business from the dissolution of a few of our joint partnerships.

These gains were reflected in other operating income.

This is a continuation of our broader efforts to optimize our ownership mix, to leverage the entrepreneurial spirit of our proven owner operators and enhance our portfolio of Company operated restaurants.

While pruning underperforming assets in certain markets and continuing ownership optimization certainly makes us stronger, we are also focused on the opportunity to build future returns and enhance long-term shareholder value with new restaurant development and reimaging of our existing restaurants.

Reimaging has contributed to sustained momentum and outstanding returns in France, Australia and other markets that have a significant percentage of contemporary restaurants.

Fresh, new looking restaurants helped to retain existing customers while attracting new ones.

They also enhance our ability to introduce more premium offerings.

Australia's recent success with the Angus burger is a testament to that.

We believe the timing for expanding our reimaging efforts is ideal.

Put simply, together with our franchisees, we are investing on a scale that cannot be matched.

We plan to reimage over 2,000 locations this year; about half of those will be in Europe, another 600 in APMEA, with the remaining 400 to 500 locations in the US.

The opportunity to update our brand is significant.

Globally, only about 20% of our exteriors reflect our current contemporary look.

Approximately twice as many interiors or about 40% have been updated.

Therefore, the majority of our restaurants do not yet have a contemporary look on either the inside or the outside.

In general, Europe is farther along than either the US or APMEA, particularly with interior reimaging.

The combination of both an exterior and interior reimage produces the most significant sales lift so that will be our plan going forward.

In the US, the first 400 to 500 reimaged sites will tend to be older, higher volume locations where permitting time is reasonable and we either own the land or have significant lease term remaining.

Geographically, we expect them to be fairly disbursed around the country with about 20 restaurants in each of our 22 regions.

And in addition to our reimaging efforts, we will rebuild over 150 restaurants in the US this year.

We are co-investing with our owner operators on the reimaging effort in a similar manner as we have in the past.

We expect our investment per restaurant will be in the range of $150,000 to $200,000, depending on the scope of the remodel.

Our owner operators will contribute the remaining $250,000 to $500,000.

The total reimaging cost per restaurant will vary considerably, depending on the age of the building, whether any previously updating has occurred, maintenance and repair needs and compliance with local zoning requirements such as interior sprinklers, lighting, signage and accessibility.

We have seen an average sales lift above overall market performance of at least 6% to 7%, so we expect the returns from reimaging to be good for both the Company and our owner operators.

Lastly, I would like to update you on currency translation.

Our currency benefit came in at the low end of expectations that we provided on our call in January.

While the US dollar strengthened against the Euro and the British pound over the last two months, this was mostly offset by improved operating performance, particularly in markets like Australia and Russia where currencies remain more stable.

And having approximately 45% of our total debt denominated in foreign currency also provides a hedge against volatility.

Based on current exchange rates and business outlook, we expect the comparisons will begin to turn negative in the second half of the year, but for the full year, currency translation is expected to provide a slight benefit.

We recognize that that becomes outdated within days, but at least it gives you some perspective at today's rates.

McDonald's first quarter numbers are a testament to the the alignment of our system around growing both top and bottom line results in a challenging environment.

McDonald's continues to gain strenth.

And looking ahead, my experience this week with the franchisees here at our Owner Operator Convention gives me more confidence that we can do even better as the economy improves.

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.

(Q&A Instructions).

First question from David Palmer at UBS.

Thanks, Mary Kay.

Hi, everybody.

In the US and Europe, how does traffic and the check break down?

My gut is that check was under pressure in the first quarter, as it was for a lot of players out there and maybe even that your traffic was above the same store sales number you did, particularly in the US.

But also that included in this gut feeling is that you think that that check can improve through the year through playing the trade-up game against the trade-down game last year, and maybe even a little pricing as the year goes through.

How does that thinking sound to you?

And any color would be helpful.

Thanks.

Good morning, David.

This is Jim.

We have seen a little bit of a fall-off in the check because of the way we've been presenting the menu to our consumers, particularly around breakfast.

But we do see some potential upside down the road.

You're right, we're not going to get it through pricing.

We're still holding the line on pricing, but through some of our initiatives around the menu.

Maybe Don can talk a little bit about what that looks like.

One of the things that's really great this year is we're seeing an even larger percentage of our sales growth.

Sales growth is really attributed to guest count growth.

And particularly to Jim's point, when you -- in markets such as the US or Canada, when you implement some of the breakfast value pieces that have been implemented, then those things will hit the average check a little bit more.

However, the guest counts that we're driving are really tremendous and far exceed any breakeven.

When we look at it overall, we're really looking finally you would say at the guest count growth and that's what the focus is.

And David, specifically for Europe, guest counts accounted for about 50% of the comp growth there.

We saw the balance, as you heard in some of the remarks, we had a lot of success with premium products and more full margin products.

We had a nice balance of check and traffic growth there in Europe.

Thank you.

The next question is from David Tarantino at Robert Baird.

Hi.

Good morning and congratulations on a great start to the year.

My question is on the US business and in particular, the acceleration in the comps in March and the positive tone related to April.

Do you think that the core QSR consumer is starting to feel a little bit better or do you think that those results are being driven by some of your own sales drivers?

David, this is Jim.

I think that the consumer is starting to feel a little bit better.

We see consumer confidence scores getting better over the last couple of months.

We see a little more spending in the marketplace and yet the stubborn unemployment being at 9.7% still is a factor I think, relative to that overall spending and that confidence.

I don't believe that the spending levels are going to get back to prerecession until people have some confidence over the fact that they're going to have a place to go to work and put food on the table at home or away from home.

I think that's going to continue to be an issue.

And I believe that the results that we're achieving are a result of our strategies around the value orientation of our menu.

It is absolutely continuing to be the most important thing relative to our customers and that is, everyday affordability.

And yet, of course we continue to grow guest counts during this very difficult time and have opportunity for them to partake of value across the menu, even in our premium sandwiches.

I think it's as much our strategies as it is the confidence of the QSR consumer.

Thanks.

The next question is from Greg Badishkanian at Citi.

Great.

Thanks.

Maybe a little bit on food cost deflation, how that looks toward the back half of the year.

And does that give you a little bit more maybe ammunition to be a little bit more aggressive on value to drive the -- your guest counts?

Yes, Greg.

As we look at how commodities are going to shake out for us as we move throughout the year, specifically here in the US --

Yes.

It's a pretty favorable environment for us.

We've probably seen the best quarter of the year in terms of experience here in the first quarter, but we think we're going to continue to see a favorable environment as we move throughout the year.

As you mentioned, that's going to allow us to stay a little bit on the sidelines from a pricing perspective.

While others may not be as situated as we are with the strategies we have in place to mitigate some of those commodity costs and they may feel a little more pressure to have to go to the menu board, we feel pretty comfortable where we're at and our ability to focus on growing the guest counts and even deliver pretty good margins in that environment.

Greg, this is Don.

The other thing too, to Pete's point, we didn't wait until the commodities had continued to decline.

We implemented breakfast value in the US earlier, Mac Snack Wrap earlier to beef up the mid tiers.

We did those things also at the same time that we implemented the Angus burger for margin and profitability for last year, and now frappes and smoothies coming forth.

We've had a good mix, relative to bringing in the guest count and then trying to take advantage of that relative to some additional margin growth.

Thank you.

The next question is from Jeff Omohundro at Wells Fargo.

Thanks.

My question is about Asia-Pacific and maybe a little bit of an elaboration on the convenience initiatives being pursued there, such as delivery and an update on the drive-through utilization and outlook in China, and perhaps a little bit on the [sun of pack] relationship.

Yes, Jeff, Don just got back from Asia so he's our resident expert on what they're doing over there.

Hi, Jeff.

Actually, great, great visit to -- I was in China and Japan here recently, specific to drive-through and actually I'll talk a little broader about the development strategy in China first.

The one thing that they're really focused on to your point is beginning to expand drive-throughs.

I think we're learning how to do it even more effectively and being able to develop drive-throughs in the outer rings as we call it, where you have a little less density and you have a little bit more car traffic coming into the more urban areas.

The drive-through part of that focus is great -- big focus around the transportation hubs there, tremendous amount of density and the potential for us to continue to grow the business.

The combination of those two things really are a major part of our strategy, and also the building more free-standing restaurants.

And so in China, great strategy.

We beefed up our infrastructure.

We're driving stronger margins.

We're running better restaurants.

Some of the lowest customer satisfaction opportunities that we have within the system which means really great operations.

And so all of those things are helping us in China.

And the drive-through strategy is continuing to -- will be a big growth target for us in China.

Okay.

Thanks.

The next question is from Joe Buckley from BoA Merrill Lynch.

Thank you.

I wanted to ask one follow-up to the March question and then a related US question going forward.

The acceleration in March, can you break that down for us a bit?

Did you pick up a little bit of check in March or was check still down?

And how did the day parts look and how sustainable does that feel to you in the March pick-up?

And somewhat related going forward, just an update on the smoothies.

Sounds like the frappes are almost done.

Will the smoothies be up and running in time to do national advertising over the summer?

Hey, Joe.

It's Pete.

I'll talk about March a little bit and then Don will talk about the extension of the McCafe beverages.

March was a real good month for us.

We saw sales and guest count growth across all day parts.

That was for the entire month of March.

And there's -- as we mentioned in the remarks, momentum is continuing into April.

We feel pretty good about where we're at and it wasn't just one or two things.

It was broad-based across the items that Jim mentioned.

And specifically having frappes in 90% of the system by now is certainly a part of it and Don can probably elaborate on the frappes and smoothies.

Hey, Joe.

Right now, frappes, we've got them in about 9,000 restaurants.

The performance expectations at this point are greater than what we would have thought.

The reality of it is, we're at unit levels now that we thought we'd see once we actually started the marketing and we haven't started the marketing launch yet.

Frappes are performing well.

And to your point on smoothies, whether or not we would be ready for the advertising, yes we will.

We've already got smoothies in over 2,000 restaurants in the US and so those are performing exceptionally well.

This morning, as Jim mentioned, we're at the worldwide convention.

We had a chance to hear from some of our owner operators who are executing the smoothies and interestingly enough, in Michigan and really outperforming based upon their execution in the restaurants.

A lot of excitement in the operator community and we're moving forward very effectively in terms of getting those products into the restaurants.

Thank you.

The next question from Jason West at Deutsche Bank.

Thanks, guys.

Just wonder if you could talk a little bit more about the commodity side of things.

I'm really more focused on how do you guys manage the cost down so much, when we're seeing some inflation across a lot of the proteins?

You mentioned something you do differently from competitors, if you could talk a little bit about what that is and how that gives you a pricing advantage over time.

That would be great.

Thanks.

Yes, Jason.

We've got an outstanding group of folks that work in our supply chain at McDonald's.

They work with some of our risk management people and ultimately though, it's our independent suppliers that end up making these final decisions, but we do a combination of things.

We do some fixed contracts, fixed price contracts after looking at markets and trying to anticipate what's going to happen.

Do some forward buying, some options, and really through some of the long-term relationships are able to negotiate some pretty favorable pricing.

It's all about for us trying to provide some stability and predictability in the prices.

It's important to be able to go to owner operators and talk about what promotions we're going to be running six or nine months from now and have them feel confident that they have some idea of what the costs of those items are going to be.

In times like this, when you're starting to see maybe the commodity markets take off a little bit, these tactics allow us to mitigate the impact on our margins and our commodity costs.

And again, there's no one item in our basket of goods that's more than 15% of our cost of sales, so it's spread amongst a broad base of items where we have the opportunity to be as opportunistic as we can.

Jason, in our restaurant level too from an execution perspective, what we decide to promote plays a big role.

We've got great value in the restaurants, but the ability to, again, sell an Angus product helps us also in terms of minimizing overall food impact.

The product mix does help in Europe, whether it's the larger [Lay M] Burgers, wraps in Austria and Germany so we've got some higher margin products as well that support us, relative to overall food costs.

Thank you.

The next question is from John Glass at Morgan Stanley.

The remodel costs, Pete, you had thrown out a range, I think if I added correctly between $400,000 and $700,000, and I had previously heard $400,000.

It seems like it's a wider range, perhaps.

Does that mean the average is in the middle or you think it's more at the lower end, but you're just providing an upper end in special cases?

Can you talk about the sales lift compared to the prior remodels?

It would seem that if the sales lift was about the same in prior remodels, but the cost is higher so the return would be lower.

If you could just check me on that.

I can't leave the March comp question alone.

You said April was better than the first quarter.

Is April also better than March?

All right, John.

I'm feverishly writing down all your questions here.

Let me talk about the remodels a little bit.

This is the first time that we've officially given guidance on what those costs are going to be.

I know there's been some estimates out there and stuff, but the range -- we wanted to get across the point that there isn't going to be -- it's going to be hard to come up with an average remodel when you look across 6,000 restaurants in the US system.

Varying ages, varying sizes, and individual owner operator decisions that they make in terms of what they want to invest in.

There's going to be the specific items that we know are going to really enhance the brand, and there can be other items that an operator may take the opportunity to invest in at the time.

I was visiting with some owner operators about a month ago, and while they were doing the remodel of both the interior and the exterior, they chose to do replacement of their HVAC and to basically redo their whole parking lot instead of just reseal it, because they knew that was coming up in a couple years anyway and they take the opportunity to do it right now.

You are going to see a wide range of spending, but ideally I'd like to say the average would be in the middle, but that's really hard to say.

When you look at the sales lift from these, the fact that we do the combination of the interior and the exterior, we're getting a bigger sales lift than if we just did the interior.

And this is a lift, if you think about the environment we're in, John, sales are strong and we're getting a lift above the general market in addition to that.

As we look at it and pencil it out, even at some of the higher ends of our contributions and the lower end of the sales increases, we're seeing returns in the low double digits as a first year of cash-on-cash return that we know will grow from there.

We feel pretty confident about that and that the level of investment and the sales expectations will warrant the level of investment.

For April, what we said in the release was that we expect April to be at least as strong as the quarter on a global basis.

What we're setting there is a floor, saying that it won't be any lower than 4.2 is what our expectation is.

Thank you.

The next question is from Jeff Bernstein at Barclays.

Great.

Thank you.

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

I know you talked about breakfast during your prepared remarks and specifically the dollar menu.

Just wondering if you can give a little bit more -- whatever color you can give in terms of the mix of the dollar menu, whether it's as a percentage of total breakfast or otherwise, perhaps the impact from margins and what you're seeing from a competitive standpoint.

Then separately, just in terms of returning cash to shareholders, looks like $1 billion in the first quarter.

I'm just wondering whether you could talk about -- it seems like in the past the refranchising was a significant contributor to that cash flow.

Should we expect that mix to continue to move from the 80% to 90% or might we think about potential leverage for share repurchase and obviously the paydown existing near term debt.

Thanks.

Jeffrey, I'll just start with the return to shareholders and the franchising relationship.

We're at 80% now, relative to stores in the hands of the franchisees.

Our formal process around that 1500 we talked to about over three years is basically done.

And I really don't see, for example, us getting to the 90th percentile.

I do believe, though, that where we're at now is where you see it will settle out over time.

But what we are doing is we're optimizing the ownership portfolio in every market around the world to make sure that we have that rate relative to our system and how we perform best in our business model, and then the shareholder return issue is secondary to that.

And then, Don, perhaps you can talk a little bit about Jeff's other question.

Hey, Jeff.

Relative to breakfast and the mix in terms of what we're seeing, clearly we're selling more coffee.

If you look at the products that are part of that dollar menu, it's basically a sausage biscuit, a sausage muffin.

We've got a hash brown that's there and then you've got coffee.

And then you've got the other products that were already on dollar menu, such as the fruit and yogurt parfait.

When you look at it broadly, we're selling more coffee.

We're selling more hash browns.

We're selling clearly more sandwiches there.

You're talking about sandwiches that have a relatively low food and paper cost so the overall impact is not a large impact from a margin perspective as you can see from the margins that we were able to deliver.

All in all, we're really pleased with the -- the notion here was to really recapture guest counts and Jim mentioned this earlier.

With unemployment at the level it is, our goal was to reach out and pull people out of home.

When you've got food at home still down 2% and you've got food away from home elevated at about 3.5%, we know we can't take a lot, a lot of price.

As a result of that, this breakfast menu has been helping us quite a bit to pull people back into the restaurants and we're real happy with the guest count growth we're seeing at breakfast.

Thank you.

The next question is from Mitch Speiser at Buckingham Research.

Thanks very much.

Can you give us some metrics on the beverage mix?

In particular, you've given us how coffee has performed over time.

In general, can you tell us where the beverage mix maybe for all beverages was maybe three or four years ago, where it is today and maybe what you're thinking over the next couple of years.

And just separately, I'm sure someone will bring it up, but just with the whole healthcare reform moving its way through, can you give us some numbers perhaps on how it might affect the McDonald's system on a corporate level and perhaps on a franchisee level?

Thank you.

Yes, thanks, Mitch.

This is Jim.

I'll start with healthcare and then Don can fill you in on where we are with beverages.

First of all, as you all know, this is going to be implemented or mandated in 2014.

We've got a few years here to figure out what that direct impact might be to us.

We're a federation of small businesses, as franchisees, as you well know, as I just mentioned and the impact's going to vary across those franchisees.

There's so many moving parts now.

When you do the math, it's difficult to figure out exactly where it might settle because we're just into the implementation process now.

It will vary by the number of employees that are full-time for each franchisee.

And then the bill of course has some things in it that have been beneficial for us, whether it's a 90-day waiting period before employers are required to enroll employees which is very important for us because sometimes it takes 90 days for us to realize whether or not a person is going to be a full-time employee for us or whether they want to be a full-time employee for us.

That will be helpful in the overall implementation.

And yet we've taken a shot at the math, like a lot of other people.

We think in the US it might be $10,000 to $30,000 per store -- to be determined.

We really don't have it sorted out yet.

I don't think anybody really does.

Relative to the corporate level, there's really going to be minimal impact for us.

You've seen other companies come out who have had legacy costs because of retiree health benefits.

We don't have that problem.

We have 100 retirees that are in our program.

They pay full premium, including prescription rebates.

We don't have that legacy problem and therefore, you won't be seeing any negative impact relative to the overall corporate coffers if you will, relative to our overall situation which is a very good thing.

We really are structured in a way with our 401-Ks and our profit sharing and all those other kinds of things, we don't have any of the legacy issues that many companies have and we're very fortunate.

On the other question, just relative to coffee and how it's performing.

Just a few things, when we started this back awhile ago, our share in coffee was really low as you all know.

If you looked at an overall share of coffee, we were somewhere around two percentile overall.

That is more than tripled.

And if you just really broke it down, in terms of brewed coffee we now sell more brewed coffee than anyone.

That number has been a large growth opportunity for us.

If you look at espresso base, clearly we've more than doubled since the first part of just 2009.

We've doubled our espresso based coffees.

And then clearly in the iced coffee arena, we've had tremendous growth there as well.

All of the coffee strategies have been intended to really bring in more customers.

We talked earlier about the incremental nature of it and 40 odd percentile of the customers being incremental.

That still holds true, even as we move into frappes which is still a coffee based or an espresso based drink.

All of our measures and metrics in terms of coffee have moved in a positive direction substantially.

Mitch, the other nice thing about the beverage strategy and specifically with the frappes and the smoothies that are rolling out, only about 25% of the frappes are sold at breakfast time and about 15% of the smoothies.

It fits nicely with filling in other day parts when we're trying to drive some traffic into the restaurant.

Thanks.

The next question is from Keith Siegner, Credit Suisse.

Thanks.

Just had a question on Japan.

Was wondering if you could give us a little bit more details maybe on the profitability of the stores that are going to be closed over the next year and change.

Maybe, if there was any impact of the store closures on the equity income this quarter.

And any guidance or color you could give us on how we think about the contribution from Japan to equity income, assuming all these stores were closed.

Any details around figuring that out would be very helpful.

Thanks.

Yes, Keith.

It's Pete.

Within the equity pick-up line, there was no real impact from the closures.

I think about 30 restaurants really got closed this quarter, of the ones that were announced.

And while they were of a lower volume and lower return than the average in the market, just getting 30 of them closed this quarter really didn't have a significant impact.

And really, as we go forward, we don't think there's going to be a tremendous impact on the equity and earnings.

They weren't a significant drag.

We'll have some what we call sales transfer as we close these restaurants, so other restaurants in the market will pick up sales and those are the higher performing operations.

We'll see a slight benefit in our earnings from the ongoing operations there in Japan.

But the real benefit of doing that was we had these group of restaurants that were constrained for future growth.

They weren't really representative of were the Japanese team wanted to take the brand in the future and so it's really more positive going forward about the estate and the group of restaurants that we have which ultimately leads to better operating results and performance.

This is Don.

I was just over in Japan a couple weeks ago and if you looked at these restaurants, they're restaurants that were -- to Pete's point, really, really size and physical space wise constrained.

We couldn't even put full menus in there.

When we look at being able to -- last year we shot a Quarter Pounder across the marketplace.

It was really a challenge for us to get the operating platforms beefed up enough so-to-speak to be able to sell Quarter Pounders.

What we're trying to do is close down some of these that were opened up, a lot of these street front type retail -- high street type sites that were really not benefiting us at all from an income perspective.

And we just had a bunch of them that we opened over a short period of time back in the early 2000s.

And so that's really the goal here, close those down.

I will tell you this.

On April 25th, we're reopening around 13 restaurants in Tokyo.

We're going to open all of them on the exact same day.

They will be the reimaged restaurants that are going to be very iconic in Japan and it is the future of where we want to go there.

We're really excited about it.

The Japanese team is excited.

We will begin to see that market turn in an even more positive way as a result of what we're doing with development.

But we've got to get rid of some of these older constraints within our system.

Thank you.

The next question is from Larry Miller, RBC.

Thanks.

I just had a quick follow-up first on the reimaging.

I think you said you were going to invest $150,000 to $200,000 total.

Two things, is that similar structure like the prior investment, i.e., you get paid back either way?

Can you talk about that?

And then will there be -- as you co-invest, just remind me how it impacts franchise margin.

And then I had two quick questions.

As you're implementing a lot of these new programs, Don, can you talk about anything you're noticing in speed of service?

And then finally, maybe you guys could just discuss in general the discounting levels that you're seeing today and how they compare with maybe six, 12 months ago and what do you think or at least your best guest what that might look like going forward?

And then theoretically, why would you push your franchisees to let up or the whole system?

And maybe this is more generally to the industry, why would anybody push their franchisees to let up on discounting when you could argue it's driving traffic or defending traffic and really those guys bear the margin risk so if you could talk about that in turns.

Thanks.

All right, Larry.

I'll give it a shot.

We have people working feverishly over here to capture all of that.

On the first one, investment level, you talked about the older program versus the newest one.

Here's the difference.

Before, what we did was we had a fixed amount; $85,000 that we contributed toward a reimage when we did the old reimaging program.

What ended up happening was the franchisees actually invested -- we thought the investment would be somewhere around $170,000.

To the point that was made earlier, and Pete made it, the franchisees ended up spending $250,000 because they saw other things that they wanted to invest in.

This time, this is not a fixed dollar investment.

What we're looking at now is somewhere in the neighborhood of 40 percentile of lease hold improvements, so we're talking physical plant type improvements in the restaurant.

Now the reason we're able to do that this time is because we already did have a reimaging program for the interiors before.

If if a franchisee did not benefit from that, then this time they're going to have to put forth some dollars to be able to do the interior of the restaurant and we have a very small contribution there.

But the gist of this is the leasehold improvement and so that's the difference between the old program and the newer one.

The other thing is, and Pete mentioned it but we should reiterate it again, this time there's a broad range.

Some restaurants only need to do the exterior.

Others will want to do a full interior, exterior, the core package change, signage and M&R around equipment.

That's why you see such a broad range so very different investment profile on our end.

The next one, speed of service wise, we have not seen speed of service hindrances.

The reason we haven't is if you look at when we implemented the combined beverage solution, the biggest part of that, about 80% of our restaurants did what we called a full remodel of the beverage sale.

What that meant was that they actually put in a built-in additional capacity in the drive-through, we had additional equipment, we had better spacing in the drive-through.

We went from five foot three booths, way out over nine feet in many cases.

When you look at what we did in drive-through, we built in additional capacity.

For some of the products we have now, it's really flowing well in the restaurants.

We have not seen a decrease in service.

As a matter of fact, in the US they just posted their best quality service and cleanliness scores for the month of March, historically.

We're doing real well on that end.

Discounting levels, I tell you, we don't really look at this as a discounting level and the reason is because we have consistent value across the year.

It's the reason for breakfast value menu, dollar menu, consistent value across the year which allows us then, having set that up in the minds of our customers, they know it's consistent.

Now we can come in with our promotional activity and talk about frappes or smoothie or Angus, really important for us.

We're not jumping in and out of quote, unquote discounting.

We have a consistent value message across the year.

And Larry, the one other point is the impact of the reimaging, so our co-investing with our franchisees because, as Don mentioned those, are going to be leasehold improvements.

Where you see that show up will be in additional depreciation on the franchise margin line.

Thank you.

The next question is from Steve West, Stifel Nicholas.

Yes.

It's actually Matt on for Steve.

But I had a question on the status of the McCafe expansion in Europe and if you're still seeing the same pretty strong sales lifts at those units as that goes in?

Just any color on that would be great.

Pretty much, I think right now, Germany has tremendous amount of McCafes that are built down in Europe.

Our sales performance there is strong.

We are continuing the McCafe build-out.

France has quite a few McCafes built out.

Also, France, as you know, has a tremendous amount of our restaurants that have been reimaged from an interior perspective and now France is doing the exteriors in 2010.

The rest of Europe, as we continue to move forward with both interior and exterior reimages where appropriate, we will look at the McCafe expansion as well.

McCafe is a different occasion in Europe than it is in the US.

It is a sit-down based occasion.

Whereas in the US, we're able to execute this through drive-through and at the front counter.

We have even more drive-through traffic that are benefiting from espresso based drinks in the US than we do in Europe.

Okay.

The next question is from Howard Penney, [Hedge Eye Risk Management].

Thanks very much.

Sorry.

As I think back on the seven year run that you've had and Mr.

[Canapo's] decision to -- back when he first did the Plan to Win was to get back to the core McDonald's and focus on what you do well.

Over the years, we've heard about McGriddles, and snack packs and coffee, and now frappes, and all the beverages that you're doing.

How do you guard against some of the histories, some of the past mistakes that you made in the past where many proliferation has completely -- or not completely, has increased the complexity of the back of the house and the execution of the core business.

And we don't happen to run into what we saw in '07 and years ago.

Thanks for the question, Howard.

This is Jim.

We stay focused on the future is mostly how we manage that.

And our processes today around the food development protocols and the design studios for food and food news, and food relevance and our innovation labs is a very, very deliberate process with a larger test cell than we've ever had in the history of our Company.

We don't move forward with anything that is not fully deliberated and collaborated with our franchisees relative to the operating side of the business in the restaurants.

We continue to be aggressive around the development of menu and wouldn't expect that we'll see any failures along the way.

Howard, when Jim and Jim helped us, relative to giving us some focus relative to Plan to Win, one of the things that we first started doing was really reinvesting in the infrastructure.

And I think there's a big part of that that gets missed.

It's not just about the new products.

At one point, we were rolling new products without the reinvestment in the infrastructure.

Bridge operating platform in Europe, made for you in the US, made for you expanding around the globe throughout Japan now.

When you look at all of those things from an operating platform, they enable us to better execute when we have additional menu items.

The other thing that we're doing is clearly, we're much more focused on our ops execution scores and you inspect what you expect.

As we focus on execution of operations, we've gotten much, much better and our customers are telling us that.

All of these kind of things, and making sure that we're not getting ahead of ourselves in marketing and promoting, then we have the capability for in terms of operations, are the things that have helped us to execute.

That Plan to Win focus that Jim and Jim helped us to fortify back in the early 2000s is what's helping us today.

Okay.

Great.

Looks like we are out of questions.

Thanks.

I'll go ahead and turn it over to Jim for some closing comments.

Thanks, everybody for joining us this morning.

In closing, I want to emphasize the continued strength of our global business and reiterate my confidence in our system.

Our Plan to Win is delivering significant sustainable success.

These latest results mark our 27th consecutive quarter of comparable sales growth.

As I have experienced at this week's convention, our alignment and plans to deliver a great experience for our customers well into the future is strong and clear.

With our entire system aligned and focused, I'm confident that we'll continue to satisfy and delight our 60 million customers every day.

And I'm confident that our best is still yet to come for our system and our shareholders.

Thank you so much.

Thank you.