麥當勞 (MCD) 2010 Q2 法說會逐字稿

Hello, and welcome to the McDonald's July 23, 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.

Thanks.

Hello, everyone, and thank you for joining us.

With me on the call today are Chief Operating Officer, Don Thompson 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 Don, 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 our corresponding GAAP measures.

Now I'll turn it over to Don.

Thanks, Mary Kay, and good morning, everyone.

I'm very pleased to share the latest business results from McDonald's, which continue to be strong.

For the second quarter, global comparable sales were up 4.8%.

Operating income increased 10% and EPS reached $1.13, a 15% increase.

Now, these results marked our 29th consecutive quarter of global comparable sales growth, confirming the ongoing strength of McDonald's Plan to Win and our ability to continue to meet and exceed our customers' needs.

Our momentum is continuing into July with global comparable sales trending in line with or better than second quarter sales.

Our strength is broad-based as each area of the world is contributing to our growth.

And, we're growing share nearly everywhere in an informal eating out market that varies from declining to slightly up.

As we move through the mid-year point, we remain confident in our strategies and we intend to work even harder to keep delivering for our customers.

Since becoming Chief Operating Officer about six months ago, I've made it a point to visit all of our major markets around the world, from Europe to Asia to Latin America and right here in the USA.

And across the system, I am so impressed with our people, with their energy and with their commitment to becoming the favorite place and way to eat and drink for even more customers.

Together, we're focused on taking our business to that next level.

And we're aligned to run our top priorities for getting us there.

First, it's optimizing our menu, and continuing to grow the business with the right combination of food and beverage choices.

Next, it's modernizing the experience, and elevating everything from how our restaurants look, feel and operate to how customers engage with our brand.

Third, broadening our accessibility, to drive growth through greater convenience, value and service initiatives.

And you know all of these things will be brought to light by well trained, highly motivated crew and managers.

We're working to seize the biggest opportunities in all of these areas, executing in the most relevant and meaningful ways.

So let's begin with the US.

Where comparable sales for the quarter increased 3.7% and operating income grew 7%.

These are strong results in today's environment, where we still see nearly double digit unemployment and low consumer confidence, and I'm very pleased with this momentum as we were continue to take market share and increased guest counts and owner operator cash flow.

This is especially meaningful at a time when overall restaurant traffic is still down.

We're connecting with consumers and delivering an experience that they're finding more compelling than ever.

The key sales drivers in the US continue to be everyday value, relevant menu choice and greater convenience.

Now, we'll continue to see strong results from the Dollar Menu at breakfast, which was launched in January.

It's generating both solid growth in sales and guest counts during this all-important day part.

This summer we've also brought back our $1 drink offerings on both fountain and tea beverages.

This was a highly popular value proposition last year that provided a strong lift in beverage sales, and we're seeing positive results very early on.

On the menu front, we're achieving success through leveraging our popular core products while also delivering relevant new offerings.

The McDonald's Shrek Forever After Promotion drove strong sales of McNuggets, while the launch of frappes in May has been a huge hit with consumers, contributing to higher sales across our entire coffee line.

This month, we rolled out wild berry and strawberry banana real fruit smoothies, which are already exceeding expectations and creating a tremendous buzz in the marketplace.

This is a product that our customers truly love.

Now looking ahead, we'll round out the summer with the introduction of the Angus Snack Wrap, elevating our snack wrap line and giving consumers another premium on-the-go offering.

And on top of all of this, we're broadening our accessibility and becoming even more convenient.

More than a third of our US restaurants are open 24 hours a day, seven days a week.

And we're devoting more staffing and resources to the 5 AM hour, adding to overall sales and guest count growth.

So let's switch over to Europe.

Comparable sales for the quarter increased 5.2% and operating income grew 14% in constant currency.

And while the overall IEO market in Europe continued its decline, we continued to increase our market share.

Europe's overall strategy of upgrading the customer and employee experience, building brand transparency, and enhancing local relevance remains a winning approach.

Through these strategies, we're pulling the right levers to manage Europe's uncertain economic situation, and remain a compelling destination for customers.

The UK market again led the way with a strong comp sales increase for the quarter, driven by impactful marketing and a strong combination of menu variety and value offerings.

Customers responded well to the UK's world cup promotion of Big Mac, fries and other popular core items, and we also saw success with a Great Taste of America sandwich promotion, featuring American-themed burgers with special breads and sauces.

In addition, the Little Tasters line continues to deliver results and elevate our position as a leader in the area of first rate, mid-tier, value offerings.

Our French business also remains strong.

We're continuing to upgrade our entire experience in France with compelling relevant restaurant designs, and we're succeeding with a strong line of premium chicken and beef products, as well as our smaller Petit Plaisir offerings.

Meanwhile the reintroduction of the double cheeseburger in France also drove strong sales.

In Germany, we achieved solid results for the quarter and continued to grow market share, further distancing ourselves from the competition.

Our new McWraps and recent line of Snack Deluxe offerings, including chicken and beef barbecue, are performing well and give us a strong platform of choice and premium offerings.

In addition, Germany's Easy Morning breakfast campaign continued to perform well, driving sales during this day part, which represents 5.5% of total sales.

Now, let's turn now to Asia Pacific, Middle East and Africa, or, as we call it, APMEA.

Comparable sales for the quarter grew 4.6%, and operating income increased 9% in constant currency.

Across this region, value, operations and menu are key drivers of growth.

Taking a closer look at our main markets, Australia is maintaining strong momentum by leveraging its fully reimaged restaurants and premium entree and snack items to delight customers.

In addition, our recently launched Family Dinner Box is performing extremely well in Australia.

It provides a combination of sandwiches, sides and drinks at a strong value proposition and is giving consumers a great option at dinner.

It's exceeding our expectations, and it's elevating our dinner and our late night day parts.

Also, we're seeing growth at breakfast in Australia, with the help of strong promotional items such as the Mighty McMuffin and a new breakfast wrap, both of which deliver a full meat and egg meal on the go.

Now, meanwhile, Australia continues to sharpen operations, lowering drive-thru and front counter times, which help the market achieve its best customer satisfaction scores in more than five years.

Turning to Japan.

The environment remains challenging in Japan, and the recovery is particularly slow and it's uneven.

But despite this, we're following a strong plan of action with great innovative food news such as our popular Chicken Tatsuta and Teritama Burger.

These products help us to differentiate our brand and we further differentiate it through reimaging and service initiatives, and we're also strategically closing some restaurants to maximize our efforts.

Meanwhile, China achieved nearly a 6% increase in comparable sales for the quarter, as signs of recovery in the marketplace continue to emerge.

Outstanding value and operations are keys to our growth in China, and China's customer satisfaction scores are regularly among McDonald's best globally.

And the highly popular value lunch program is continuing to build sales and build traffic.

Now, China remains a tremendous opportunity for McDonald's, and we're committed to growing there.

We have opened 48 restaurants this year and on track to open between 150 and 175 for all of 2010.

This is nearly a 15% increase over our base.

We plan to continue differentiating our brand through even stronger service and food news, branded value and maximizing our convenience, from drive-thrus to dessert kiosks to extended hours.

Just one last note on APMEA, though.

APMEA was the host region for McDonald's sponsorship of the World Cup in South Africa, and I am very proud of our entire system for helping our brand shine brightly during this global event.

Our popular player escort children's program was once again a huge success and we connected with all of our customers through a host of digital initiatives, menu promotions, and charitable programs.

It was really a great job done by everyone in showcasing the fun, the relevance and the modern spirit of our brand, not only in South Africa, but all around the world.

In closing, we all look forward to better economic times, but we're just not seeing it yet.

The global economy remains fragile, sustained levels of high unemployment and wavering consumer confidence continue to make this a tough operating environment, but I want to reiterate something, and that is the ongoing strength of our global business.

We remain committed to the Plan to Win and it is working, all around the world.

We're delivering high quality food at a great value with an increasingly modern experience, and it continues to resonate with consumers, making us a destination for more than 60 million customers each and every day.

We're committed to leveraging our position of strength to grow our business today, and to grow our business into the future.

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

Thanks, Don, and hello, everyone.

The alignment and focus of the McDonald's system around the Plan to Win continues to yield positive results.

Every area of the world generated increases in comparable sales and guest counts for the second quarter and the first six months of 2010.

This growth, along with effective management of expenses, resulted in second quarter operating income increasing 10% to over $1.8 billion.

And combined operating margin, our primary measure of overall profitability, increased 180 basis points to 30.5% year to date June.

Second quarter results benefited from expansion of both Company-operated and franchise margins.

In the US, Company-operated margins rose 260 basis points to 22.2%, primarily due to lower food and paper costs and to a lesser extent the impact of refranchising.

Our second quarter basket of goods in the US decreased about 6%, which compared quite favorably to the 4% increase in second quarter of last year.

Looking to the second half of 2010, we expect a sequential benefit of lower commodity costs to moderate.

For the full year 2010, our outlook in the US remains favorable with our basket of goods expected to be down 3% to 4%.

In Europe, Company-operated margins increased 220 basis points in the second quarter to 20.3%.

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

The strengthening of the Russian ruble and other Eastern European currencies benefited margins by about 40 basis points.

As we have previously discussed, for the 12 months ended June 30, comparable sales in France have benefited from a lower VAT on dine-in sales.

We begin lapping this benefit in July.

Our European business may also face some headwinds from the austerity measures being implemented or discussed in many countries.

As the last couple of years have shown, our Plan to Win provides the framework for us to operate successfully in any economic environment, and we remain confident in the underlying strength of our European business.

Europe's grocery bill declined 4% in the second quarter, and for the full year, we expect commodity costs to be down about 1% to 2%, which implies that we will experience slightly higher commodity costs in the second half, primarily in the fourth quarter.

In Asia Pacific, Middle East and Africa, Company-operated margins increased 90 basis points to 17.1%.

Positive comparable sales, particularly in Australia, and lower commodity costs were partly offset by higher labor and other costs around the region.

Turning to franchise margins.

Second quarter franchise margin dollars rose to $1.6 billion, an increase of 9% in constant currencies.

The consolidated franchise margin percent increased 40 basis points to 82.7%, driven by positive global comparable sales, partly offset by higher occupancy expenses.

G&A control also continues to be an area of focus.

As expected, second quarter comparisons were affected by April's biennial worldwide owner-operator convention which accounted for about half of the $33 million increase from the prior year.

Full year G&A continues to be in line with our plan and is projected to be up slightly on a constant currency basis.

Optimizing the ownership of our restaurant portfolio remains an important part of our strategy.

With most of the major refranchising efforts completed over the past few years, the contribution from gains on store sales has decreased.

In 2008 and 2009, at the height of our refranchising efforts, we recognized over $110 million of other operating income per year from gains on sales of restaurants.

This year, the gains decreased to $11 million in the second quarter and $39 million year to date, reflecting the slower pace that will likely continue.

On the expense side, as a result of our decision to voluntarily recall eight million Shrek glasses in the US and Canada, we recognized a $12 million charge in other operating expense.

With half the year complete, I wanted to provide an update on our reimaging efforts.

We view reimaging as a game-changing differentiator that delivers long-term, sustainable benefits to our business.

Reimaging allows our facilities to stand out in the marketplace and elevates our brand, allowing it to stretch in ways that can produce significant growth in sales, market share, profitability and overall returns.

In the US, we expect to complete about 400 reimage sites over the next nine months.

We are encouraged by the participation thus far from our owner-operators.

To date, we have received nearly 500 commitment letters across the country.

These sites are at various stages of the process, which averages about five months from start to finish, but can take as long as a year, depending upon the permitting time.

The scope of these remodels is holistic, touching the exterior, interior and operational elements of the restaurants, thereby enhancing the overall customer experience.

Many of the projects will increase the capacity of the restaurants as well.

The Company expects to contribute capital of $150,000 to $200,000 per franchise restaurant, depending on the scope of the project and the previous levels of reinvestment.

As the reimaged restaurants are completed, the depreciation related to these capital expenditures will impact franchise margins.

In Europe, we expect to reimage more than 1,000 restaurants this year and have completed about 400 restaurants through June.

The Company's contribution to reimaging in Europe primarily takes the form of rent relief.

One exception is in the UK, where rent relief is provided until an owner operator has at least 50% of his or her restaurants reimaged, at which point the Company contributes capital for subsequent reimaging.

In APMEA, we are leveraging the learnings from Australia's highly successful reimaging program and are making steady progress throughout the region, especially in Japan and China.

Around the world, franchisees continue to have ready access to bank financing at competitive rates and terms to fund their reimaging efforts.

After investing in our business through reimaging and new restaurant openings, we expect to return all of our free cash flow to investors over the long term.

Through June we have returned approximately $2.6 billion to shareholders through dividends and share repurchases.

Finally, an earnings call would not be complete without some comments about currency.

It bears repeating that wherever possible, we seek to minimize the economic or cash flow impact of fluctuating exchange rates by sourcing in local currencies, utilizing foreign-denominated debt, hedging a portion of our foreign royalties and reinvesting profits back into local markets.

Our global diversification also provides a natural hedge.

For example, the Australian and Canadian dollar do not always move in tandem with the European currencies.

The Aussie dollar has strengthened 25%, and the Canadian dollar is up 16% against the US dollar through June.

The Euro, on the other hand, is relatively flat year to date, but declined nearly 7% in second quarter.

The Euro is our single largest foreign currency exposure, accounting for approximately 25% of consolidated operating income.

All of our currency exposures and our currency risk management practices should be considered when projecting the translation impact on our results.

To provide you with some perspective, based on current exchange rates, we project currency translation to negatively impact third quarter earnings per share by approximately $0.03 and the full year by about $0.04.

As you know, though, these estimates become outdated within days given the current volatility in the foreign exchange markets.

In closing, our results through the first six months of 2010 highlight the ongoing strength of our Plan to Win, particularly in light of persistent and continuing global economic headwinds.

We remain committed to executing the plan to deliver long-term, sustainable growth for our system and our shareholders.

Thank you.

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

Thank you, Pete.

I will now open the call for analysts and investor questions.

(Operator Instructions).

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

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

The first question is from Matt DiFrisco at Oppenheimer.

Thank you.

I wondered if you could talk a little bit about or give us an update between the two regions what you're expecting as far as the sales lift or capacity gains, the 1,000 in Europe, what you're seeing or what you expect to see there.

And then also in the US, as far as sales lifts that you would expect in those 400 stores to be remodeled?

Hi, Matt, this is Don.

And historically what we've told you guys before is that 6% to 7% above market as an incremental growth was the target that we've had out there.

I will tell you as I travel around the markets, based upon the level of reimaging that we do, that really dictates the level of the sales increase, and you can look in terms of Europe as we've done internal and external, you'll see a little bit more, based upon the amount of things that need to be reimaged.

If it's strictly external, that's one part, if it's only internal, that will give us another yield.

But what we've said is the 6% to 7% incrementally above the broader marketplace.

And then are there efficiency gains as well, such as margin efficiency in the US with this?

Because it seems like for $200,000, you would probably get more than 7% lift.

I will tell you that, Matt, that clearly we're looking for stronger than even our targeted ranges, but we've done a couple of different things in the US.

So if you look at the combined beverage business initiative with the beverage sale, clearly that got us some capacity.

So we've already done that part in the US relative to the combined beverage business, and that business sale.

So we've gotten some capacity there.

The other area of getting additional capacity is when we change the external Drive-Thru lanes, external Drive-Thru appearance spacing, when we're able to do that, we get more capacity in the Drive-Thru as well.

Some of the technology aspects also help us with capacity relative to some of the things we do with the point of sale system.

Thank you.

The next question is from David Tarantino at Robert Baird.

Hi, good morning.

I have a question on Europe related to the trends that you're seeing there recently, given all the macroeconomic issues.

It looked like June comps were solid, but a little softer than what you saw in May, and I'm wondering if your sense is that the consumer is starting to slow down there or if there was something else going on in that June number?

Any perspective you have would be helpful.

Thanks.

Thanks for the question.

I think if we look back, clearly Europe's been under some economic pressures, just like the US has, just like the global economy has, and we've been doing very well throughout.

I think our branded affordability proposition helps us tremendously across Europe.

We've also got some great premium products that we've implemented.

We're doing some other things in Europe, the reimaging strategy has helped us, continues to help us.

We've still got great breakfast upside and potential relative to the consumers there.

This is going to be one that we're paying close attention to, clearly with the austerity measures that are coming into play now.

Will there be any impact on disposable income?

It depends on the severity of those measures.

What we're confident in is that we've been doing well even when the economy has been tough.

We've done this not only in Europe, but around the world.

Regardless of what those austerity measures are or VAT increases, we've got some value propositions across the menu board.

Matter of fact, in fact, in many cases like this, we look at this as an opportunity for us to appeal to even more customers if disposable income does tighten up.

But make no mistake, we would love the economy to be doing better.

We do better when it does better, but we do have some offerings that appeal to customers regardless of their disposable income levels.

David, the other thing a little unique to Europe was they did see some depressed sales from the World Cup, so we've talked about this in years past, the Europeans love to stay home and watch the soccer matches, and a lot of those matches were timed such that they were on during the dinner hour in Europe, and so we estimate it maybe was up to a point of a hit in June on the sales and obviously that tournament continued on into July.

Thank you.

The next question is from Steve West at Stifel Nicolaus.

You talked about the smoothies launch you rolled out the last month or so doing extremely well, exceeding expectations.

Hearing stories out there about supply chain issues, could you maybe discuss how you've planned for the supply chain and maybe what you've done to address getting that back on track to support the increased demand there?

Yes, Steven, first of all, this is a really great problem to have.

But the smoothies have been received very, very well.

As you know, we go through -- there's quite a bit of rigor around our supply chain planning.

As we planned for smoothies, we planned in terms of blueberries, blackberries, strawberries, raspberries.

We tried to plan out everything that we could and it took us quite a while, in terms of making sure the supply chain was right.

Interestingly enough, the challenge that we've had was not one of the products, it was actually a plastic nozzle on one of the produce bags.

So what we're doing is really ramping that up to make sure that we have ample -- I have been assured that we have ample product to be able to move forward, but I will tell you, this has been received by customers in a way that even with our high end projections, it's blowing away the high end projections.

So we're really excited about the opportunity that we have before us in terms of smoothies.

Thanks.

The next question is from John Glass at Morgan Stanley.

Thanks.

If I could just, one, ask just a clarification on the VAT in France and how much of a benefit that's been giving you in sales you believe, and therefore what you'd lose as you lap it?

And my question, separate question is can you talk a little more broadly, maybe, Don, about the McCafe business in the US, what your -- if there's an update on the run rate of the dollar volume you're now getting now that the full suite of products is out there?

And you didn't credit McCafe for the margin improvement in the US, but it's been assumed, at least by some of us, that that would be a margin driver.

So are you early days not getting the margin because there's added labor, or is there just other things that were more pronounced in the margin, so you didn't call it out specifically?

John, it's Pete.

The VAT increase in France, that only related to a portion of our sales, just the dine-in sales there.

It was probably giving a benefit in the -- let's say mid-single digit range for France, but obviously much less than that on total Europe.

And relative to the overall McCafe -- beverage business of which, we call it the McCafe strategy, it's actually been performing very well.

When we first came out, we talked about $125,000 of incremental sales per restaurant as a result of the beverage strategy.

I mentioned before we definitely are exceeding those numbers, and particularly with the launch of frappes and smoothies, which are not the last installments, even.

We talked about proprietary beverages down the road as well.

But right now we are exceeding the expectations that we had.

From a margin perspective, beverages are more accretive to our broader margins.

Now, having said that, if you look in totality, though, you've got balances.

So this year we've got breakfast value, and it's aggressive breakfast value that is bringing in a tremendous amount of guest count growth at breakfast and that would be -- that does not support margins from a percentage perspective, but it brings in quite a bit more business.

On the other hand, you've got the sale of the smoothies, frappes and the McCafe beverages, which do support a stronger margin.

Thank you.

The next question is from Joe Buckley, Banc of America, Merrill Lynch.

Thank you.

A couple of questions on the US business.

You gave us the full year of food cost expectations.

Does that imply lower year-over-year food costs in both the third and fourth quarter?

And then maybe just broadly on the US, the reacceleration 3% to 4% run rate, pretty impressive.

Could you talk a little bit about day parts, geography, is that being achieved with a lower check year-over-year or is there some check contribution to it?

Just talk a bit about the US business which reaccelerated over the past few months.

Joe, it's Pete.

I'll talk a little bit about the commodities and then Don can give you some additional perspective on some of the top line.

Your assumption was correct.

I think this was your assumption, that costs will continue to be down in the US for the second half of the year, but at a rate less than they were down in the first half of the year.

But we're still expecting to see the costs down third and fourth quarter.

And then regarding the top line --

Yes.

From a day part perspective, all day parts are positive, we're seeing really strong movement clearly with breakfast guest counts, as I mentioned relative to the breakfast value program.

And as a result of that, we do see a slight depression in terms of average check at breakfast, but overall, very supportive of the overall business.

Okay.

The next question is from Jeff Bernstein, Barclays.

Great.

Thank you.

Just, I guess, a two-part question as it relates to the Company operated margin.

First in the US, where now we're running above 20% for the past three quarters, it looks like it's the first time we've been at that level in at least a decade.

Just wondering if you can give some color in terms of where the breakdown of the benefit between what you think is coming between comp leverage versus favorable commodities and what you think is perhaps the potential upside to that margin when you look at the stronger courses or stronger quartile in your system.

And separately, transferring that over to Europe company operating margin, I'm wondering if you think the European region can achieve those US levels or whether there are impediments to different regions or whatnot to get to those type of levels we're seeing in the US.

Thanks.

Jeff, it's Pete.

In the US for the quarter, almost all of that increase was driven by our commodity costs.

This environment we've been talking about for a while is an environment where we're really focused on driving guest counts into our restaurants and the environment is not really conducive to increasing prices significantly.

So the reality is we achieved these margins with basically zero price increases in the US system.

And so almost all of that benefit was coming from the back door costs and slight benefits still from the carryover from the refranchising efforts, but mostly from the back door costs.

In Europe, we've talked before -- structurally, there are some higher cost elements to our business in Europe from a labor and occupancy side.

So we never necessarily compare the US to Europe and think that they can get there.

What we constantly look at is do they have the right strategies and tactics in place to continue to growing their margins?

And in Europe, they actually were able to take a little bit of price this quarter, so their margin growth was a combination of price and the commodity benefits.

Very healthy, very balanced and something that -- traffic was a part of that as well and so we feel pretty good about where the margins are around the world.

Thank you.

The next question is from Mitch Speiser at Buckingham Research.

Thanks very much.

Can you discuss some of your key markets globally, and as it relates to the informal eating out category, if you've seen any change in trend in some of those key markets perhaps in Europe or Asia Pac?

And if I could just slip in a separate question on margins, you said it was all pricing, and just to get it right, that the beverage mix is probably enhancing margins, but that's offset by some of the value and breakfast initiatives, so it really just comes down to the commodity costs that are driving margins in the US?

Thanks.

Yes.

Mitch, I'll clarify that second part and Don can talk about the areas of the world, the markets and the IEO market share.

Yes, you hit it right.

We've -- obviously with these premium beverages, we were able to bring in more customers and drive guest count growth, and that growth that we with got from that was offset by the average check that shrunk a little bit in -- at breakfast time as a result of the Dollar Menu.

And also, value drinks brought in people, so the dollar beverage initiative that Don mentioned brought in more traffic, but didn't necessarily increase the check.

So it really came down to all commodity costs.

And, Mitch, relative to your question about IEO and what we're seeing in the IEO markets.

I'll give a general statement.

Generally -- I mentioned depressed to flat, and by that I mean we're not seeing this major upswing relative to the IEO.

Now, there are areas where we may see -- where we're starting to see hopefully a slight positive tick possibly in QSR, US may be seeing a very, very slow uptick on QSR.

By the same token, IEO is still suffering.

We've got other markets where we're seeing IEO again is still down, and most of the areas around the world IEO is down.

Thank you.

John Ivankoe from JPMorgan.

Great, thanks.

Just to follow up on some previous comments regarding the McCafe investment from last year in terms of how much capacity that you think you got from that $90,000 plus store investment that still might get released when underlying IEO traffic improves is the first point.

And then secondly, if you can talk about what kind of capacity increases you may get from the new point of sale system, and if there's any margin benefit that you might get from the new point of sale system as well?

Okay.

Hi, John.

Relative to the investments that we made last year in terms of McCafe, which you know were primarily -- the physical asset part of that was to expand the Drive-Thru booth and I think that's what you're probably asking about.

There's a couple of things that we have seen.

We have seen some capacity improvements.

However, I would tell you that I think we've got a lot of room still to go there.

What we focus on at McDonald's we improve even stronger.

And so we've seen some -- particularly during the peak hours is where our focus is now, to be able to grow the business during peak.

So we've seen some benefits there.

We've definitely seen a benefit relative to our ability to handle peaks at breakfast, which is helping us support the additional guest count growth that we're seeing at breakfast right now.

Relative to the POS, we will have some -- it does help us with some capacity improvements based upon speed of service, it's easier to navigate for our crew.

The other thing that it does give us is the ability to do some things from a flexibility perspective, with products and offerings.

And so some of those things will be seen down the road in terms of how we're able to offer different condiment mixes, et cetera, in some much our menu products.

Next question is from Jason West at Deutsche Bank.

Yes, thanks.

Just wondering if you had the numbers year to date for your market share changes in the US?

I think you had given the number for 2009.

Just wondering -- has that continued to accelerate in terms of your market share gains this year and if you don't have specific numbers, if you just have a sense for it, that would be great.

Thanks.

We do know that market share in the US from an IEO perspective was up 30 basis points and that has been -- if you look historically from a US perspective, IEO is up 30 points, but also if you looked in our QS share, it would be up the same thing, about 30 basis points, and that has been a pretty consistent growth over the last several years, even through this economy.

A lot of our growth has been coming from taking additional market share.

Okay.

Next question is David Palmer at UBS.

Hi.

Thanks.

You haven't had the benefit of check or price in same store sales as you mentioned, and my question has to do with how you're thinking about price and check opportunities in the future.

Obviously inflation is coming back for restaurants, even though it's not back for McDonald's, and it's now coming back for at home food as well.

I mention that because I know you've priced slightly below broader inflation in the past, but perhaps you're thinking about pricing differently today, not just because of the consumer, but also because some things like combo meals may have gotten close to kind of a barrier where things would get more steep in terms of a traffic offset.

Any thoughts would be helpful.

Dave, I think you gave some of it right there yourself.

Interestingly enough, I do believe -- I think you're right.

What we've done a really, really great job of, and I have to really credit our franchisees across -- really this is around the globe as well, but since we're talking about US now, they have really held the line on pricing based upon the fact that we've been in a lower inflationary period.

Now, as we move forward, do we see opportunities to take price?

As inflation rises, the two things that we have to consider -- actually three.

One is what we see in terms of the employment levels and the potential for additional disposable income, and then the two things we talk about historically being food away from home and food at home, and you mentioned both of these.

Historically we price the food away from home, but over the last couple of years we've also been taking special note of food at home and we've got to make sure we don't get too far out of whack with food at home.

As we've seen increases there, and we've seen increases at food away from home, we'll set up our prices accordingly.

Thank you.

The next question is from Nicole Miller at Piper Jaffray.

Good morning.

If you could just look at your US comp or overall traffic or overall comp, could you please speak to your gap between all of QSR, so is all of QSR getting better or is that gap widening?

Year to date, that gap is about 5%, five points, and it has accelerated in the last couple of months.

Thank you.

Next question from Larry Miller, RBC.

Yes.

First had a clarification, then I had one question on product -- really two parts on the product.

But just to clarify, you are running some lower price in the US.

Can you kind of give us a sense of what that was in the second quarter, even though the check is negative?

And then secondly, on the products, you talked, Don, about smoothies exceeding expectations.

Can you tell us how incremental those smoothies and frappes are?

And what I mean by that is how many people, by your estimate, would have bought either a shake or another beverage?

And then on the Angus Snack wrap, can you talk to how well that tested?

Because what I've been hearing is that that McSnack Wrap has been a really slow seller.

And it seems that that snack wrap product, I'll say that a couple of times, appeals to a more healthy consumer or it's a more healthy offering, maybe lower calorie, smaller offering.

So are you convinced that a burger product in the snack wrap does well?

Thanks.

Wow.

Larry, let me take a stab at the first part of your question in this thing about check.

So there were a couple of things that were going on year to date.

One is Don mentioned that with the introduction of the Dollar Menu at breakfast time, we knew average check would go down and traffic would go up significantly and that -- we're seeing that dynamic.

So we're trading some check for guest count increases during that day part.

The other dynamic is with these premium beverages, so the frappes and the smoothies most significantly, is we're seeing an increase in the number of one and two transaction -- one and two items per transaction in our guest counts.

Our average items per transaction is closer to 4% -- I'm sorry, four in the US.

And so when we see an increase in one and two items per visit, that will pull down the check.

But definitely, as we mentioned, these are high margin items, and getting the incremental traffic in a QSR environment that is still negative, is a huge win for us.

And, Larry, in terms of a specific on the incremental, it's too early to be able to determine what that might look like.

What we do know is that it really has appealed to quite a few people and that's based upon our volume.

On the McSnack Wrap, McSnack Wrap was very successful and has been successful.

When we began, actually, it elevated the line of snack wraps.

It almost doubled the line of snack wraps.

Just like with any new product as we move forward, that impact will lessen, and so it is less now than it was initially.

It's not 50% of the overall snack wrap movement.

And I think the thing that the US team is doing right now is really good, and that is to look at this as a flavor of McSnack wrap, what it has done for the line, and they've talked a little bit about -- they've got some new flavors that are coming up later in the year and they'll be looking at what happens at that point.

Do we keep McSnack wrap in at that point or do we pull it out and put another flavor in?

I think this rotation of variety will be very, very good for our US consumers.

Thank you.

The next question is from Tom Forte at Telsey Advisory Group.

Great.

I was hoping you could provide a little bit of additional details on your commodity cost basket.

For example, what kind of a year-over-year inflation or deflation on a percentage basis are you seeing on individual items such as beef, chicken?

Tom, a couple of years ago we moved to our basket of goods approach in looking at our commodities.

So we're not going to get into details on individual line items, but know that our supply chain has had a goal and continues to have a goal of providing predictability and stability in our prices, they generally aren't out in the spot market.

Now we use more chicken than beef, so that generally impacts the basket more, but we're not going to get into individual line items.

Thank you.

The next question is from Keith Siegner at Credit Suisse.

Thank you.

One quick question on China.

Strong comps, high returns, business sounds like it's doing very well, local relevance and other initiatives are working, growth in the first half was kind of slow, about a third of your target for the year, so accelerating into the back half.

Is the back half more of a representative run rate?

In other words, can China growth accelerate a lit bit from here given the comps and returns?

If not, is there something limiting that growth?

Anything along those lines would be helpful.

Thanks.

We absolutely believe China can accelerate relative to our growth, and I would tell you it's not as much just a fourth quarter type phenomenon as it is a couple of things that were our decisions.

One, the returns are stronger now.

The economy in China has picked up.

When the economy was a little weaker, particularly in some of the areas outside the major cities, then returns suffered, and so we slowed down in some of those, focused back on some of the core cities and now we have an opportunity as the economy picks back up to accelerate again, so that's what we're doing in China.

And, Keith, this is Pete.

I actually just got back from a week visit into China, a week-long visit to China, specifically to look at their development plans and what they're doing.

And they have brought in not only resources from other countries that have a tremendous amount of development experience, but have brought in the world-class tools that we use in other markets around the world to map out the marketplace, map out the trade areas, look at the opportunities.

And compared to a year ago this time, they have a significantly greater number of sites and inventory than they've had in the past.

So we're definitely bullish on our opportunities to accelerate our growth there.

Thank you.

The next question is from Sara Senatore at Sanford Bernstein.

Hi, thank you.

I wanted to follow up on the margin question and ask about APMEA because that is where the margins are lowest.

You mentioned something about a difference, Europe being higher cost, so maybe not getting those margins to the US level.

Is there something about APMEA?

And in particular, I would think with the unit volumes being relatively lower there, that the healthier comps should have more of a margin benefit than -- than the other regions and yet the expansion in this quarter was a bit smaller.

So is there something -- are you seeing a lot more inflation there or something that's maybe more of an offset, particularly let's say in China?

Sara, no, there's nothing really dramatically different.

In general, our volumes are lower in APMEA, so we're starting from a lower base, which, by definition -- even though some of the operating costs are lower, you do get lower cost fixed coverage from those lower volumes.

But some of our McOpCos in APMEA are in urban centers like Hong Kong and Singapore where occupancy costs in those major cities are a little higher.

So there's nothing -- no one thing I can point to that says why they're significantly different.

It's primarily a function of volume if I had to come up with one thing.

Next question, Howard Penney, Hedge Risk Management.

Thanks very much.

My question is again dancing around the question of sales in the US.

I guess there's a lot of pieces to the puzzle, but if I was just to look at the math behind what you said today in terms of, every day part up, traffic is up, exceeding expectations through the McCafe suite of products, it actually almost seems [the math says] like your sales should be up more than they were and maybe your questions will be up in July when you talk about July sales trends.

But it almost seems like the 3.7 number was actually a little disappointing.

I'm just wondering if what we can't see, not knowing all the answers to that question, but is the check -- the decline of check at breakfast actually a little bit more severe than what you -- not that you commented on it, but it just -- and again, not to take anything away from the sales trends in the US, because they're absolutely fantastic, but it just seems like they should be a little better than they are.

Howard, thanks for the question.

A couple of different things.

One is keep in mind that the US Company is still running a sizable gap, as I mentioned earlier, 5% year to date over the broader marketplace in the competition.

And so it is a broader one.

There's one other piece to this, too, and that is of all the markets around the world right now, the US is a market where guest counts are outpacing comp sales.

And this was a very deliberate approach based upon the economy.

And so as you look at the US, what you're going to see is more than 100% of a comp sales growth is driven by guest counts.

Now, combine that with the fact that the breakfast value program in the US is something that really reached out to ensure the customers who had lower disposable income due to unemployment still could come in to McDonald's, that was part of the reason for the decision to appeal to those consumers.

So you've got strong guest count growth, gapping to the marketplace, incorporation of value and beverages that are still driving the business to a great extent, so the US business is in a good state and that's all, to Pete's point, without any substantial price increase at all.

So I think that there's still tremendous upside.

As we see a little more inflation, there may be a little bit more price that can be taken, but at this point in the time game, I think they're doing a great job of capturing more market.

Thank you.

The next question is from Rachael Rothman at Susquehanna.

Hi, good afternoon.

Sorry if I missed this a little earlier in the call, but would you mind reiterating for me or reminding me how we should be thinking about the potential for a dividend increase?

I think traditionally you do it about once a year, sometimes late in September.

Would you guys be framing that with respect to what your free cash flow yield is or a percentage of net income or some other metric that we should be looking for as we come into that decision later this year?

Thanks.

Hi, Rachael.

You're right, generally in the fall is when we take up the whole dividend discussion with the Board.

The one thing I can say is that our philosophy is unchanged related to this.

So with the significant amount of cash that we generate, we first invest in the business, so you know our CapEx is going to be about $2.4 billion this year.

And then our next priority for that is dividends, and the dividend has grown each year for the past 33 years.

Generally we think of it growing in line with earnings, but at the end of the day the Board has the ultimate call on what the dividends should be.

But I think framing it that way and then using the balance of our cash flow in a disciplined way to buy back shares has been successful for us over the last few years and continues to be how we think about it.

Thank you.

Next question from Joe Buckley, Banc of America, Merrill Lynch.

Hi, just wanted to ask a question about the China business as well, the up almost 6% comp.

Just talk about what you're seeing going on over there and if you think wage rates across the broad economy are going up, if that's a good opportunity for sales.

And maybe frame that 6%, if you can, with what it was against the second quarter a year ago.

Hi, Joe.

A couple of things.

Relative -- I'll take the latter one first.

On the wage rate piece, as wage rates do go up, we think it is going to be an opportunity to continue to help stimulate the economy there.

The great thing for us as well, and I know you all have heard a lot of information relative to how this is impacting margins for some of our competitors.

We are 10% higher than the minimum wage already in China.

And this is something that we did several years ago as we addressed what we thought at that time was a gap.

That's about 8% higher than our strongest competitor that's there.

And so we feel as if we're in a great point relative to being able to continue to move margins forward and to benefit from the increased disposable income as a result of them doing this across the country.

Here's the other thing that we're seeing.

If you look at -- you ask were there any other things that we were doing.

We have increased some of our marketing spend, also, in China.

Which does have some impact on margin, but I tell you, it is helping us to drive also the sales results that we're getting in China.

And this was a decision that was made by the Chinese team as well.

And, Joe, the last part of your question, last year's second quarter, the comp was negative 5.7 for China.

Thank you.

Next question Matt DiFrisco, Oppenheimer.

Thanks.

I just have a follow-up question with respect to China.

Can you talk about how the landscape looks right now with your stores versus -- and then Sinopec, and how much of your store growth ahead over the next couple of years do you think will be percentage?

Can you give us a rough estimate Sinopec and potential Drive-Thru?

When we started this out, Matt, as you know we had a big announcement related to the Sinopec relationship and you know, it's been a good relationship.

The question being whether or not it would -- we had enough space to yield the kind of sites that we wanted to be able to develop.

We have been able to develop some sites, however it's not been at a level that I think we'd look at and say this is it going to be largely impactful as we move forward.

So we're continuing to look for opportunity there.

But Pete mentioned something really important.

That is I think right now our development strategy in China around transportation hubs moving out from there, more traditional sites, more Drive-Thrus, tapping into the rural areas a little stronger, those things are helping us a little more in China right now than the Sinopic relationship.

Next question, Tom Forte.

Great.

Follow-up on McCafe/coffee, where do you stand today on percent of sales from coffee and then where could you stand in the future given the tremendous success of the frappes and smoothies, et cetera?

So we kind of put these in a couple of different buckets.

So if we looked at coffee-based products, we've gone from 2% just about five years ago, four years ago, to 6%.

And so in the US, that's a really, really strong number and strong performance.

That number, though, is not inclusive of things like -- it's not smoothies.

So smoothies are in a whole separate -- a whole separate category.

That also is not inclusive of sweet tea.

So that kind of gives you a perspective.

Okay.

Next question Larry Miller, RBC.

Yes, just a housekeeping question on how much stock you bought back year to date.

Thanks.

We've bought about $1 billion, little over $1 billion in the second quarter and about $400 million in the first quarter.

So close to $1.5 billion for the year to date.

Okay.

Looks like we are out of questions.

So with that, I'll turn it over to Don for a couple of closing remarks.

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

We appreciate it.

In closing, our global business as McDonald's is strong and we're committed to making it even stronger.

I think you can hear that through the Q&A sessions and our comments.

We continue to build the fund and elevate the Plan to Win strategies, ensuring that we remain relevant and meet the needs of consumers today and into the future.

We're in a really, really strong position, and we're determined to differentiate McDonald's brand even further as we move forward.

With our entire system aligned and energized, I'm confident that we will continue to drive long-term growth for the system and our shareholders.

So thanks to all of you for joining us today and have a great day and a great weekend.

Thank you.