麥當勞 (MCD) 2010 Q4 法說會逐字稿

Hello and welcome to McDonald's January 24, 2011 investor conference call.

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

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

(Operator Instructions).

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

Kathy Martin, Vice President of Investor Relations for McDonald's Corporation.

Thank you, and good morning everyone.

With me on the call are Chief Executive Officer Jim Skinner and Chief Financial Officer Pete Bensen, and Chief Operating Officer Don Thompson is also here for Q&A.

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

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

Both of these documents are available on our website at www.investor.mcdonalds.com, as are any reconciliations of non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.

So now I would like to turn it over to Jim.

Thank you, Kathy, and good morning.

I am pleased to report that our business growth continued in the fourth quarter and that 2010 was another strong year for McDonald's.

We continue to build our business, grow marketshare and strengthen our connection with the customer.

2010 marked our seventh consecutive year of positive comp sales in every area of the world, a feat that underscores the ongoing strength and relevancy of our Plan to Win business strategy.

Global comparable sales were up 5% for the quarter and for the year.

And while we don't like to single out weather, in December we experienced a severe impact.

It is always difficult to quantify, but our best estimates are that the December comp was negatively impacted by 5% in Europe and slightly more than 2% in the United States.

But it all indicates that our underlying trends remain strong.

Despite these conditions December global comparable sales were up 3.7%.

In January global comparable sales are expected to increase 4% to 5%.

In constant currencies, excluding impairment and other, and last year's Redbox gain, operating income grew 6% for the quarter and 10% for the year, while EPS increased 13% for the quarter and 16% for the year.

Overall the global economy is recovering slowly, but it remains challenging and consumers are still cautious.

We continue to succeed by understanding our customers and aggressively executing the right strategies, of optimizing our menu with a range of consumer-driven offerings, modernizing the experience for our customers and crew through service upgrades and reimaged restaurants, and broadening our accessibility with more restaurants, convenient hours and outstanding value.

This is our systemwide focus under the Plan to Win, and it is what helped drive our success around the world in 2010.

It is this proven strategy and our unrelenting focus on the customer that will drive the business in 2011 and the years to come.

Looking at the US, comp sales increased 4.4% for the quarter and 3.8% for the year, with operating income up 1% and 7%, respectively.

These results were achieved despite a tough economy and slow growth in the informal eating out market.

We continue to grow share, outpacing the competition on comparable sales, and we continue to achieve all-time highs for comparable guest count growth during the period when the overall industry traffic was contracting.

We drove results with a strong focus on value, menu relevance and convenience.

We benefited from our Dollar Menu at breakfast, which has been in place for over a year now, and has increased morning traffic.

This addition to our traditional Dollar Menu offering has boosted our position as a value leader across all dayparts.

Our expanded beverage program continues to bring in customers throughout the day.

And sales of our new Fruit Smoothies and Frappes during the quarter continue to do well.

This, coupled with the strong lift in the hot McCafe offerings, including the addition of Caramel Mocha, drove December McCafe units up 20% over last year.

The US also delivered results by featuring our popular core products as well as our unique favorite, our famous McRib, which we offered for a limited time on a national level.

Throughout the year we featured our flagship products which offer great taste and value every day.

December's focus on Big Mac, Quarter Pounder with Cheese and the Angus burger also added to increased unit movement.

And for the first time ever we partnered with Wal-Mart for our annual Monopoly promotion, resulting in a larger and more relevant price pool.

Monopoly lifted sales of featured core products like Big Mac and McNuggets, as well as high-margin Smoothies and Frappes, and it drove extra value meal units by more than 15%.

Now as we begin 2011 we are excited about our latest new menu offering, oatmeal, which we launched nationally this month.

This great tasting product is an example of how we are continuing to grow our nutrition profile and meet our customers' evolving taste.

Also, this year the US will continue rolling out our new point-of-sale system, which simplifies the ordertaking process, improves accuracy, and allows the crew to provide better service to our customers.

It is currently in about one-third of our stores, and we plan to have it rolled out throughout the US by the end of the year.

Now turning to Europe.

Comparable sales were up 3.4% for the quarter and 4.4% for the year.

In constant currencies operating income grew 9% for the quarter and 12% for the year.

In 2010 Europe reached an all-time high in informal eating out marketshare at 9.5% and served 200 million more customers than the year before.

We continue to take share with the overall market declining.

The segment drove results with a compelling menu signature -- of signature offerings and new products across all price tiers, as well as through breakfast and by modernizing the restaurant experience.

Europe is leveraging learnings from across the system and growing its breakfast business.

The UK finished the year with breakfast sales up more than 12%, largely driven by a sustained quality campaign around coffee.

In Germany the continued promotion of breakfast under the tagline, Easy Morning, helped build sales and drive traffic during that daypart.

McCafe is now in almost 1,300 restaurants in Europe and is helping to boost our breakfast business in a locally relevant way.

In markets like Italy, where we now have more than 100 McCafes, our espresso-based coffee and pastry offerings are delivering exactly what the Italians are looking for at breakfast.

In 2011 Europe will continue to expand McCafe in many markets.

On the menu front, France is a great example of meeting our European customers' expectations for value and variety.

During the quarter France drove sales with a Double Cheeseburger promotion, and the introduction of its Tour du Monde premium burgers with a variety of ethnic flavors.

New food news and premium offerings also contributed to the results in the UK and Germany.

In the UK food events highlighting the Big Tasty and Chicken Legend Sandwiches each performed well.

In Germany the recently launched Chicken and Beef McWraps continued their strong sales.

And sales results were above expectations for the new 1955 Sandwich, a premium burger with a homemade look and gourmet bun.

Meanwhile, our service scores improve across Europe due largely to our new customer order displays, which improve accuracy and speed of the drive-thru.

Europe also remains a leader in our reimaging efforts, with nearly 70% of interiors and about 40% of exteriors remodeled, making our brand more contemporary and relevant.

As I look to 2011, I am confident that our strategies around service, value and optimizing our menu will continue to connect with consumers and drive our momentum from well into the future.

Shifting to Asia-Pacific, Middle East and Africa, or APMEA, for the quarter in APMEA comp sales were up 5.5% and 6%, respectively.

Operating income also continued to grow, up 10% for the quarter and 11% for the year in constant currencies.

We are driving growth across the region through convenience, value and breakfast, along with core offerings and compelling new menu news.

Building on our leadership position in value, many of our key markets are offering a value lunch program that fits the needs of today's consumers.

And the entire segment remains the system leader in customer satisfaction scores, helping us differentiate McDonald's in the areas of food quality and customer experience.

Australia continued to build on last year's strong comp sales as it achieved success with new items, including the November rollout of Chicken McBites, which are a great tasting sandwich for snacking and customers on the go.

Early sales have exceeded expectations and are largely incremental to our popular McNuggets.

In addition, Australia continued to grow sales and traffic at breakfast with the help of their Mighty McMuffin, and new breakfast wrap, both of which delivered great tasting ways to start the day.

In Japan, while the economic environment and the formal eating out market remains challenging our strategies are delivering positive results, as evidenced by Japan's 4.5% comp sales increase in 2010.

Value breakfast launched midyear, featuring Sausage McMuffin and McGriddle maintained its momentum into the fourth quarter and continued to grow sales and guest counts.

And December's re-hit of the popular Texas Burger helped Japan deliver a strong finish to the year.

Turning to China, we remain committed and confident in our long-term success in this market.

In 2010 we opened 166 restaurants, bringing the total to nearly 1,300.

In 2011 we will grow the base of restaurants by about 15% or 16% toward our goal of 2,000 restaurants in China by the end of 2013.

China's comparable sales growth in the quarter was primarily driven by value and the ongoing success of our value lunch program.

Additional drivers included breakfast and greater convenience through initiatives such as delivery, desert kiosks and extended hours.

Our efforts are resonating with Chinese consumers.

During a time when the informal eating out market remains soft, we continued to increase our share of visits in our five major markets.

As we invest in China we intend to stay focused on gaining even greater relevance in the marketplace from building drive-thrus, reimaging our restaurants and continuing to deliver a compelling menu of core and local offerings.

So those are a few highlights of our continued business momentum around the world.

As we begin this year I want to reiterate our financial targets and capital management philosophy.

We are confident that we will continue to deliver on our long-term average annual targets of 3% to 5% growth, 6% to 7% operating income growth, and return on incremental invested capital in the high teens.

We believe these targets are right for a company of our size and maturity, and keep us focused on making the best decisions for the long-term benefit of our shareholders.

Achieving these targets delivers significant cash flow, and our philosophy for the use of this cash remains unchanged.

Our first priority is to reinvest in our business.

After that we remain committed to returning all of our free cash flow over the long term to investors.

For 2010 we returned $5.1 billion to shareholders through a combination of dividends and share repurchases.

Let me just say that overall I am proud to say that 2010 was another strong year.

Our owner operators', suppliers' and employees' strengthened alignment and have proven again to be a key competitive advantage.

At a time of lingering economic uncertainty and slow growth we continue to gain market share, attract more customers to our brand, and fortify our financial strength.

Our Plan to Win and its unrelenting focus on the customer has been a proven strategy in every kind of environment, and it will continue to serve us well in 2011 and beyond.

Thank you, and now I will turn it over to our CFO, Pete Bensen.

Thanks, Jim, and hello everyone.

As our fourth-quarter and full-year performance demonstrates, our system's collective focus on the Plan to Win continues to deliver strong results, despite challenging economic conditions.

It is a battle for marketshare, and McDonald's is clearly winning.

Over the past year we again exceeded our long-term financial targets.

Systemwide sales grew 6% in constant currencies.

Operating income grew 10% in constant currencies, excluding the impact of impairment and other charges.

And our one- and three-year returns on incremental invested capital, while not yet finalized, should be well above our high-teens target.

Exceeding these targets have positive implications for our investors, who enjoyed an overall return on investment of nearly 27% in 2010, ranking us third among the Dow companies.

Positive comparable sales for the year in nearly all of our 117 markets, combined with expense control and favorable commodity costs, drove a 90 basis point improvement in combined operating margin.

At 31% our operating margin compares quite favorably to other large global consumer companies.

Looking at restaurant margins, our consolidated franchise margin dollars increased 8% for the full year to $6.5 billion.

The consolidated franchise margin percent rose 30 basis points to 82.4% for both the fourth quarter and the full year, driven by solid comparable sales growth in each area of the world.

Consolidated Company operating margins rose 20 basis points to 19% for the quarter, as positive comparable sales more than offset higher labor and other costs.

For the year, Company operating margins increased 140 basis points to 19.6%, driven by comparable sales increases and lower commodity costs, primarily in the US and Europe.

Turning now to segment performance, in the US we delivered comparable sales growth and even higher comparable guest count growth in both fourth quarter and the full year by staying focused on the customer.

On a trailing 12 month basis through November our IEO marketshare rose 50 basis points to 11.8%, the largest increase in five years and our highest marketshare ever.

This translated into over 550 million additional customer visits during this period.

We drove this growth in a declining IEO market through a multifaceted approach that included relevant new product introductions like the Frappes and Smoothies, effective national promotions of iconic products like Big Mac and Chicken McNuggets.

We expanded our value offerings to include Dollar Menu at breakfast and broadened our accessibility through extended hours and more dual lane drive-thrus.

The increase in comparable sales generated significant top and bottom line gains at a restaurant level.

On a beginning average annual store volume of nearly $2.4 million, it translated into over $90,000 of incremental sales in 2010.

This was primarily accomplished through guest count increases as we essentially took no price increases during the year.

These strong sales helped drive our average owner operator cash flow per restaurant up nearly $50,000, or 16%, to a record high of $364,000 on a trailing 12-month basis through November.

US Company-operated margins grew 30 basis points in the fourth quarter and 190 basis points for the year.

Positive comparable sales, and relatively flat commodity costs in the fourth quarter, and 4% lower commodity costs for the year, more than offset higher labor costs.

As we look to 2011 we project commodity cost increases of 2% to 2.5% in the US, which still puts our costs below 2009 levels.

From a pricing standpoint, as commodity and other cost pressures become more pronounced as we move throughout the year, we will likely increase prices to offset some, but not necessarily all, of these cost increases.

Drawing traffic and marketshare has been a key to our success these last few years.

Accordingly, we will continue to maintain the balance of strong traffic momentum with any strategic pricing moves.

Turning to Europe, in the fourth quarter France and Germany continued to effectively promote the core menu, along with rotation of four-tier menu options.

The UK also focused on menu variety and value, along with growing the breakfast daypart and specialty coffee business.

We now have the leading marketshare of hot brewed coffee in the UK.

Increased sales, partly offset by higher labor and slightly higher commodity costs, contributed to Company-operated margins increasing 30 basis points for the quarter to 19.5%.

For the year positive comparable sales, along with a 2.5% decline in commodities, partly offset by higher labor costs, resulted in Company-operated margins increasing 140 basis points to 19.8%.

As we head into 2011 we face some headwinds that could impact both sales and margins.

VAT increases and austerity measures could potentially pressure overall retail sales growth, although to date we have seen no change in customer behavior.

In the UK we already increased our prices to cover the 2.5% VAT increase implemented January 1.

We did this strategically restaurant by restaurant, not simply across-the-board.

We will be closely monitoring the UK and the rest of Europe to understand consumer reactions to these measures.

We also expect other austerity measures and tax increases to pressure Europe's margin.

Increased social charges, especially in Russia, could negatively impact Europe's Company-operated margins by more than $20 million or about 30 basis points.

In addition, we are projecting commodity cost increases of 3.5% to 4.5% in 2011.

Despite some of these near-term challenges, all of which are manageable, our business in Europe remains very strong, as does our fundamental operating model.

We will continue to evaluate our pricing strategies and make adjustments when prudent, while also balancing the need to grow guest counts.

I am confident that we have the right people and plans in place to continue to grow European sales, traffic and profitability in 2011 and beyond.

In Asia-Pacific, Middle East and Africa virtually every country posted positive comparable sales for the quarter and the full year.

Key convenience initiatives, including delivery and drive-thru, are increasing accessibility across all dayparts.

Convenience also means being open beyond the traditional workday.

Nearly two/thirds of our restaurants in APMEA offers some form of extended hours, and over half are open 24 hours.

In addition, breakfast continues to be a growth platform and is offered in about 75% of our 8,400 restaurants.

Relative to profitability, APMEA's Company-operated margin was flat for the quarter at 17.1%, as positive comparable sales were offset by increased labor, occupancy and restaurant opening costs.

For the year Company-operated margins increased 100 basis points to 17.8%.

Similar to the US and Europe, APMEA enjoyed lower commodity costs, along with strong comparable sales, which more than offset higher labor and other costs.

For a perspective, APMEA's year-end McOpCo margin is 690 basis points higher than five years ago.

We are pleased with our progress in this key growth region and remain optimistic about our long-term potential.

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

In constant currency G&A increased for the quarter and the year, in line with our expectations.

Remember that the year included costs associated with the Vancouver Winter Olympics and our bi-annual worldwide owner operator convention.

Importantly, G&A declined both as a percent of sales and revenue for the fifth consecutive year, a trend we expect to continue in 2011.

I would like to comment briefly on our tax rate, which we expect to be slightly higher in 2011.

In the past couple of years our effective tax rate benefited by approximately 2 percentage points from our ability to claim certain foreign tax credits.

With a recent change in tax law these credits are no longer available to us.

Our economic engine, coupled with prudent financial management, continues to generate significant amounts of cash from operations.

Our first use of that cash is to reinvest in our business to continue growing and generating strong returns.

In 2011 we expect to invest about $2.5 billion, half of which will be used to open approximately 1,100 new restaurants.

The breakdown for openings in our largest geographic segments is as follows -- 150 openings in the US, 225 in Europe, and 625 in APMEA, including 175 to 200 new openings in China.

The other half of our CapEx will be devoted to investing in our existing locations.

The US completed about 200 reimages in 2010.

With our knowledge and experience growing, we expect to complete an additional 600 this year.

Europe is planning to complete over 850 reimages, while APMEA is projecting about 500.

We manage our business for the long term.

Reimaging is critical because it significantly enhances customer perceptions of our brand and helps drive sales over time.

To remain relevant, I believe the decision to reimage is not a question of if, but rather of when.

Our system is strong, our owner operators have both the financial capacity and willingness to reinvest, and we are taking share from the competition, all of which combine to make it an ideal time for McDonald's to seize this opportunity.

Lastly, let me touch on foreign currency translation, which negatively impacted fourth-quarter results by $0.02, while benefiting full-year EPS by $0.01.

At current exchange rates, we expect first-quarter 2011 EPS to be positively impacted by about $0.01, with a greater benefit for the full year.

As always, take this as directional guidance only, because I know rates will change as we move throughout 2011.

As we enter the new year the environment continues to change, posing both new opportunities and challenges.

Our performance over the last couple of years gives me great confidence in the ability of the McDonald's system, our owner operators, suppliers and Company employees, to successfully navigate these conditions.

We are operating from a position of strength.

Our system is aligned with over 32,000 restaurants serving more than 62 million customers a day with high-quality food at a great value at the speed and convenience only McDonald's can offer.

We are poised for future growth and well-positioned to participate fully as the economy begins to recover.

2011 will be another great year for the McDonald's system.

Thank you.

Now I will turn it over to Kathy to begin our Q&A.

Thanks, Pete.

I am going to now open up the call for analysts and investor questions.

Please press star 1 if you have a question, and star 2 to remove yourself from the queue.

We want to make sure as many people as possible have the opportunity to ask questions, so if you can limit yourself to one, we will get back to you for follow-up as time allows.

So we are ready to begin.

Our first question comes from Mike Kelter, Goldman Sachs.

I wanted to ask you first and foremost about food inflation.

You gave some initial guidance for the year, what assumptions did you bake into that guidance as it relates to costs around the world?

What did you already lock-in versus what is floating?

And more broadly, what did you learn in let's say '07, '08, during the last inflationary commodity environment that maybe you will do some things a little different this time around?

This is Jim Skinner.

First of all, we learn a lot every year about how to manage our way through these commodity cost increases.

But we have been doing it a long time, not just 2007 and 2008, and certainly '09 and now '10 and now going into 2011, it has really been business as usual in the way we approach this relative to the supply chain and the treasury working together on some of the hedging and the out contracts relative to those things that impact the commodity costs, as you know, to lock-in prices so that we have a reasonable expectation on the P&L for our franchisees.

But, with that, I will let Pete talk specifically to what that process looks like or what our assumptions were.

As Jim mentioned, our goal there really in our commodity hedging with our suppliers is to provide predictability and stability in the pricing.

So we look at our basket of goods as a -- if we look region by region, the US we have more opportunity to lock-in costs because of broader markets and more instruments available to our suppliers to do that hedging.

So while we are not going to give specific percentages by each category, we are about as locked-in today as we were a year ago at this time, and have a fair degree of confidence in that 2% to 2.5% increase.

Probably the biggest variable in that will be beef.

We built a substantial increase in our beef costs into that guidance, but that is the one market that looks like it could be the most volatile for us.

The same with Europe, beef is probably the biggest driver of our volatility there, where typically less opportunity to lock-in and hedge broadly across the Continent, although each year, both in Europe and APMEA, we get more and more opportunity to get that done.

So the US at 2%, 2.5%, we feel pretty good about that in terms of our ability to raise prices where it makes sense to deal with that.

But as we look at price as we have experienced these last couple of years growing traffic is very important.

So, as I said in my remarks, we are going to look to balance traffic growth with recovering input costs, and the same basically in the other two areas.

David Palmer, UBS.

I just want to follow up on that a little bit.

With regard to how you think about pricing, and I have asked this in previous quarters, but it is relevant going forward, you talked about your basket prices being up 3-ish depending on the Continent, you know they're going to be up a few percent on a grocery basket.

You are seeing CTI these days a little less than 2% for restaurant and at home, so that is creeping up.

You still haven't taken pricing yet.

How will you think about your pricing?

Is it still the outside world and doing a little bit below that, so if you see 2% in the outside world you are thinking 1%, and as that creeps up, you were shadowing that, or is it your own input costs?

Thanks.

Jim Skinner, and I may have Don Thompson talk about the specific segments, if he will.

I wish it were that scientific.

But we measure everything, and as you know, we have a very comprehensive pricing tool that we use in every segment.

We are pretty good at taking a look at all of those factors that are going to have an impact.

But the most important factor is really what about the elasticity that we have for pricing relative to the value orientation for our customers, which is the most important thing.

When we factor all of those things together, and including inflation, we do have the opportunity to pass some of those costs along in price increases, but as Pete said in his comments, not all of those in every market.

So with that, I will let Don talk a little bit about the segments.

To Jim's point and Pete's point, one of the things that we look at quite intently is the consumer base side of this.

So food away from home is a huge component, which is related to CPI.

But we look a little deeper than the CPI piece alone.

So we will look at the Producer Price Index as a result of that, and then we look at food at home.

So one of the things we found in the US quite a few years ago was that pricing to food away from home and below food away from home maintained a good value rating for us, and to the point, again, made a good sensitivity from consumers in terms of their ongoing purchase intent.

So that was a big point.

The other thing though that we learned was that food at home does matter.

So grocery store prices do matter.

If you look at the US this last year you saw about a 1.3 in terms of food away from home, but interestingly enough you only saw 0.2 increase in food at home.

So our pricing, we have to be able to flex around those points, and make sure we have solid value.

It is not based upon our competitors' pricing alone.

As a matter of fact, that is a very small portion of our consideration, but we do look at the others.

When you look around the rest of the world it varies, to Pete's point, by market.

You've got markets that have higher inflation, such as sometimes markets like Russia.

You've got other markets that have very low inflation, such as markets like the UK.

So even as we look at all of our pricing strategies we have to take into account market by market those individual circumstances.

So we look at food away from home, food at home, and then we try to make sure that we continue to maintain our value proposition which, to Pete's point, is really around price stability, especially around the value menus.

David Tarantino, Robert W.

Baird.

It is Baird.

Just a quick question for Pete, following up on all the pricing and cost discussion.

Pete, given what you know about the level of pricing you might take, and the level of cost inflation you might see in the various markets, what type of comps do you think you'll need to hold onto your Company restaurant margin in 2011?

Maybe if you could talk about both the US and Europe that would be helpful.

Thanks.

Traditionally as we have looked at our model, we have said that in the US a 2% to 3% comp in a normal year is what we need to maintain margins.

So from an input side -- cost input side this year this looks like a normal year for the US.

Europe, our cost structure is a little higher, and typically we need a 3% plus to maintain margins there.

And a couple of things -- one, commodity costs are going to be a little bit higher than average this year in Europe.

And that increase in the social taxes in Russia is a 30 basis point drag on the segment's margin is adding some additional challenge.

They have a social charge on wages there that is going from 26% to 34% of wages.

And about 20% of our McOpCo's sales come out of Russia.

So that is more of an unusual one-time item that is impacting Europe, but it is a consideration when we look at the margins there for the year.

Matt DiFrisco, Oppenheimer.

Just to clarify on that -- or to follow-up quickly before I get into my question, that 30 basis points on the segment, is that also then -- was that already visible in this quarter and in the other occupancy leverage, or deleverage, when I look at the overall margins or are we expecting that to come?

And then I wonder if you could give us any sort of greater clarity on what you see as same-store sales drivers, especially in the US as you lap the beverage introduction and launches, things that we could look for?

Are we correct to presume that incrementally from beverages there is not going to be as much on the calendar this year and we are done with that, and we're going to be more so lapping an introduction rather than bringing out some new things alongside the beverage lineup?

It is Pete.

I will clarify.

That increase in taxes in Russia is effective January 1, so we did not experience any of that in December.

And I will let Don talk about the opportunity that we still have ahead of us in beverage.

To the point, we have some big benefits still available, we think, in beverages.

Keeping this in mind, remember, it was only a few years ago beverages represented 2% of sales, or I should say coffee -- and the whole coffee base represented about 2% of sales in the US, to date it is over 6%.

And we still have some opportunities there.

In 2011 you're still going to see some benefit from Frappes and Smoothies.

You're going to see benefit, I think, continuing relative to the way the marketing calendars are structured to continue to -- on an ongoing fashion talk about our McCafe lineup.

So we are not running away from those.

We want to make sure we continue to market those effectively.

But I wouldn't be as shortsighted as looking only at the beverage side.

We continue to have great consumer reaction to our core products.

So this past year Big Macs and the Nuggets, that Pete talked about and Jim talked about, the breakfast value, keeping in mind that last year or 2010 was the first year we implemented breakfast value at a national level.

All the markets had had something before, but with a concerted voice.

So we continue to have that as it moves forward.

We hope to see some economic benefit, as recovery, but we don't count too much on that as of this point.

But you've got great core, and we've got the value that we will continue to talk about.

You still got beverages.

The US will begin -- in a more aggressive way they're reimaging programs this year, which always give us a lift to the brand as we move that forward as well.

Extending hours -- the US grew another couple of points last year, so they still got some opportunity.

It is in the high 30s versus being in the 50s when you look at 24/7 over in APMEA, so still room there.

More room to grow in terms of drive-thrus as we look at drive-thru optimization, and the third phase of that was side-by-sides and dual lanes and all the investments that we and the franchisees continue to make.

So those are some of the things, and that is without talking about the rest of the pipeline, which right now we have many of the markets around the world tapping into the global pipelines that we have established, everything from wraps to wings to Angus burgers and Angus Snack Wraps.

So we feel pretty good about the menu pipeline and about our ability to continue to drive the business.

Jeff Omohundro, Wells Fargo.

I wonder if you could elaborate a bit on the opportunity that you see in the US efforts in reimaging that Don just mentioned.

But also in terms of the focus areas in the program, and also perhaps comparing it with the European effort and comparing it in areas such as cost and the expected returns.

Thanks.

I will chat a little bit about this, and if Pete or Jim want to chime in they definitely can on this one.

Relative to reimaging, what we think will happen in the US is very similar to what we have seen.

And I am glad you brought up some of the markets in Europe.

I will pick a couple of them we've talked about before.

France and Australia, if you look at Australia it has been now about seven years since they actually began some of their reimaging.

The market is now complete.

We have continued to see great business movement in Australia, and we continue to see great discount movement really driving that.

So demand is driving it.

As we move into -- if you look at France and you look at the different decors, what we try to do in markets outside of France and Australia is learned from what they did.

So in the US one of the things that we held back on in 2010 was to get the design portfolio right so consumers would react to that portfolio in a positive way.

And as result of that we have begun to do in interiors and exteriors at the same time in the US.

So we think that there is -- we're going to see some really good benefit to both the designs themselves.

The designs in Manhattan will be a little bit different than the designs in Kearney, Missouri, but the exteriors of the building will fit the neighborhoods and the consumers that we see there.

So we are pretty positive relative to reimaging.

Incrementally we are still saying that 6% to 7% in terms of incremental sales.

The returns are strong, but keeping in mind the returns are based not only on the investment and the cost there, but also on the broader base of where sales go in those marketplaces.

So we have seen when we get to a certain point 30, 40 percentile in the markets that we see an additional lift -- brand lift in those market places as well.

Just to comment also that maybe had been overlooked is we have improved our customer satisfaction scores throughout 2010 in most every segment, including the United States.

So these reimagings, along the new POS and those other tools that the management and crew have for delivering a greater experience for the customer and drive-thru optimization that Don talked about, gives us a lift not only reimaged stores, but in stores that are enhancing drive-thru experience at the front counter.

And we've got to be sure we don't forget about operating excellence as a driver of sales growth.

Andy Barish, Jefferies.

Can you clarify a little bit, you cite higher labor costs in the US and Europe in particular in fourth-quarter margins, yet payroll and benefits were down.

Is that something else going on there or is it bonus expense?

Can you just clarify a little bit on the labor line?

It is just that some of that labor is a fixed cost, so as we drive comps as a percentage of sales it goes down as a percent, but our hourly wages and some of the variable costs in there were increasing.

John Glass, Morgan Stanley.

I just wanted to come at this margin question maybe one more time.

What is your internal level of tolerance for letting -- say in the McOpCo margins on a consolidated basis slip below flat?

In other words, are you willing to let it go down to preserve traffic or do you have a baseline that says, we will utilized pricing to a level to at least maintain flat margins.

Beyond that obviously it is going to be driven by traffic.

If you could answer that.

And then also, is there a sequencing of how commodity inflation impacts 2011?

Is it worse in the first half or second half or is it pretty even?

Thanks.

We have no internal tolerance, to use your word, for McOpCo margin.

As we talked this morning, we don't manage solely by McOpCo margin.

You heard a lot from Don and Jim about our pricing philosophy.

Now the flip side to that, worldwide we are 80% franchise.

So obviously it is important that the franchisee's profitability, so it is not like our store operating margin is irrelevant.

But it is in the mix.

It is in that art that Jim talked about in our pricing decisions.

And it is something we look at, but we have no internal guidelines, if you will, that if it is looking like it is going a certain direction that we suddenly jump on price.

I think we also, as we have over the last three years, as you know continue to look at combined operating margin, which has increased every year.

So that is the mix really when you're taking a look at the margin expectation.

But just as a headline, and Pete answered it properly, we have no tolerance for decrease in margin overall, but we don't manage our business to that.

As we move throughout the year, you asked a question about progression, in the US the second and third quarters will be the highest in terms of the increase.

Europe seems pretty stable in terms of that increase throughout the four quarters.

Jeff Bernstein, Barclays.

Pete, just one clarification and then a separate question.

On the clarification site you mentioned in Europe -- I think you mentioned you have already taken enough pricing in the UK to offset the 2.5% VAT increase.

I know last quarter you had mentioned that you were expecting some margin pressures beyond that just due to the normal course of inflation.

So I am just wondering if you could talk about the thoughts around when to take price there, like how you measure what potential negative impact there is from austerity before you consider price or whether we should still expect a near-term hit to margin?

Then just separately, on China, I know your prepared remarks talked about the informal eating out market remains soft.

I am just wondering whether you can touch on whether you view that as still -- at what point do you take that from a short-term concern to maybe a longer-term concern, and perhaps how the cost pressures play out there.

It seems like labor and food inflation are a pretty big issue there.

We don't get as much color there as we do in the US and Europe.

Thank you.

All right, I will talk about the UK a little bit, and ask Don or Jim to talk about China.

With the VAT increase, I think as you know, VAT is netting in our sales number there.

So we took the 2.5% increase, which basically is neutral to comps, because the underlying tax increase, 2.5%, so we needed that just to stay even.

Consumers in the UK have been conditioned.

We took prices down when VAT went down a couple of years ago, and we raise them when they go up.

That happens across all the retail, so we are on the same footing as everyone else.

Then now that we are on the same footing and we have recovered the VAT, we are going to look at the price increases to our back door in the UK, just like we do all around the world.

We are going to try to balance providing -- continuing to provide great value.

We will look at it store by store, and we won't be looking at any one particular measure to determine when and how much to raise prices.

Regarding China -- this is Jim -- we only point out the softening IEO because it is a fact and something that you would expect us to comment on.

But it does not concern us in the short term or the long term, nor does it necessarily dictate our strategy in China.

Our strategy has been strong.

We are opening more and more restaurants.

We are opening more and more drive-thrus.

We are in meeting the consumer's needs on menu.

And certainly we price in that marketplace, just like we do every place else, based on the movement up and down the scale relative to the economy and the informal eating out and in the quick service sector.

So it is in there because it is softened some, but when you look at the population and the penetration in the marketplace, it is not a significant factor in our strategies.

To Jim's point, our strategies remain sound.

A few things we do see, one is in the South, we are seeing -- we saw some pretty good recovery in 2010.

You all know that in 2009 the South was a point of concern, just relative to where the economy was going.

The South recovered pretty well.

North and the Central we still see a little bit of softness there.

I think the thing we continue to watch is what we have talked about already when we look at food at home across China.

That is where we are seeing the greatest escalation.

It was over 10% in terms of basically their version of the Producer Price Index.

So we continue to look at that, but it really helps us relative to our execution strategy, which is around our value programs, our value lunch programs.

We continue to build breakfast in China.

Breakfast -- our breakfast percentage increase is now roughly 7 percentile, and still a lot of room to grow based on the Asians' and the Chinese habit relative to breakfast.

So we feel pretty strong about the actual plan that we have, along with the development plan, as we continue to grow the marketplace.

Mitch Speiser, Buckingham Research.

Thanks very much.

Can you comment on this quarter, I believe, the franchising mix globally went down about 20 bips or so.

That is the first time we have seen that in quite a few years.

As you go forward do you expect the franchising mix to continue its long-term trend of going up?

And I apologize if I can just slip one other question in there.

On the other operating income line, Pete, can you just refresh us as to how you look at that line in 2011, given less refranchising activity and potential for more asset write-offs from the reimaging campaign?

Thank you.

This is Jim Skinner.

I will start with the franchising.

We made a commitment a few years ago to get to 1,500 -- transition 1500 restaurants into the hands of franchisees.

We are at about 1,400 now.

We are putting pretty much through with that.

And there hasn't been any significant shift relative to the overall franchising as a percentage.

And there is no intention to move off of that strategy.

We will look at our ownership structure in various markets around the world where it is -- have the opportunity to continue to put the restaurants in the hands of more franchisees.

But that number will be pretty much where it is today, I think, over the long term.

I think the one blip you may have seen there, we did a -- we purchased about 40 restaurants in Canada at the end of year, but that was just part of our plans to look at that market and redistribute necessarily where the McOpCos are at.

So looking at the other operating income line, I think you have it right in terms of thinking that the income from that line in 2011 will likely be lower than it is in 2010, primarily for a couple of reasons.

We will probably have fewer gains on store sales.

And as we do more reimaging, we tend to have more asset write-offs associated with the restaurants that we touch.

But it will be down from the approximate $200 million of income that we recorded this year.

Keith Siegner, Credit Suisse.

I just wanted to ask a question about the SG&A guidance, obviously, down or for a decline in constant currencies of 2% to 3%.

It is a little different than what I was expecting.

I know you quantified the two major events from last year, or discussed them.

Could you talk a little bit more about how much they mean to this, and maybe what other pieces are playing into the G&A guidance, that would be great.

Thanks.

The two events that are mentioned on an as-reported basis account for essentially all of the decline next year.

So what that means is our underlying G&A continues to be flat.

So we work really hard as an organization to continually reallocate our G&A.

And what we mean by that is looking at getting resources closer to the customer that we are going to impact decisions at the restaurant and minimizing back of the house administrative type costs.

That is just a part of our culture.

It is an ongoing focus.

And so allowing our ongoing normal recurring G&A to be relatively flat is pretty good.

Joe Buckley, Banc of America - Merrill Lynch.

Thank you.

First, a follow-up on China.

The last couple of quarters you have actually shared the same-store sales numbers in China, would you be willing to do that again?

Sure, they were -- the comp for China for the fourth quarter was 5.2 and the guest count growth was a little more than 6.

Thank you.

That's it, Joe?

Nicole Miller, Piper Jaffray.

Just back on pricing, could you please walk us through how much price you had in each of the three segments you disclosed for the fourth quarter, and how that compares what you had entering the first quarter?

And historically has all the price increases you have taken historically, do they traditionally -- are they pass-through or is there any resistance?

Thank you.

I will quantify what we estimate our pricing increases were for the full-year in 2010, and I will let Don talk a little bit about the relationship between a change in the menu board price than what flows through to the P&L.

But as I said in my remarks, the US was essentially flat, so we basically took zero.

Europe was closer to 3%, with markets like Russia being a little bit higher, and Germany and the UK being a little bit lower than that.

And APMEA was about 1%, which was pretty average amongst the major markets there.

So that is what we experienced in 2010.

But I will let Don talk a little bit about flow-through and customer resistance.

Typically, and it depends on the area of the world a little bit, but typically when there is a menu price increase you'll get about a 50% or 60% flow-through.

Now that again depends upon the pricing structure and the area of the world.

Relative to resistance, we try really hard as I mentioned earlier, to make sure that we are priced below, in terms of these increases, food away from home, and that we are mindful of food at home.

What happens is if you get outside of those kind of guidelines, we have seen that you can have some resistance.

But if you look at our guest count growth, we have been able to manage this exceptionally well.

If you look at the US last year they were very mindful of price increase, so they didn't take much at all.

As a result, we had the highest guest count growth that we have seen historically on an annual basis for comp in recent history.

So when you look at Europe, Europe managed it very, very well.

They were able to take a little bit more price increase as a result of what has happened in areas like Russia, as Pete mentioned earlier, but nonetheless great guest count growth.

This was a really strong year for us in terms of guest count growth.

You just heard the numbers on China.

And knowing what the economy is in China to see the results that we have seen there relative to guest count increases really bodes well, especially as we move into the future.

So those two points, food away from home, mindful of food at home, mindful of the competitive set all help us in terms of our pricing strategies.

This tool we use, one more point on the resistance -- we take a historical look at restaurant by restaurant what price increases we have taken and what has happened to guest count movement, etc.

So through that we are actually able to isolate which products tend to have the lower amounts of resistance to price increases and typically will focus on them as well.

Steven West, Stifel Nicolaus.

Actually Matt Sheerin for Steve today.

I just had a follow-up question to the comments about Chinese inflation and the geographic recovery there.

Has that changed your growth outlook or the strategy, whether it be short-term, opening new units in the South more than maybe the North and Central, as you said, or any kind of long-term shifts taking inflation into account and what kind of returns you can get from certain units and whether those kind of hurdle rates are high enough, given the labor and some of the other inflation that we have seen?

Thanks.

No, it has not changed our strategy.

Our strategy has been around the core cities initially and then growing out from the core cities.

A matter of fact, to see the recovery in the South is very, very positive for us.

We've got a lot of our initial sites have been in that southern area.

So we feel really strong there.

We feel good about our growth strategies in terms of -- many of you may have been over in China earlier this year and heard Kenneth talk a little bit about our strategy, which is a ring strategy of focusing on the core cities.

Then one of the things we have done is as we move out to the outer ring we are focused on drive-thru development more so now.

We know that the drive-thrus give us additional sales and returns.

Even though it is a slightly higher cost structure because of the amount of land required to put a drive-thru in we get stronger returns there.

So our strategy has not changed -- focus on the core, move out from the core, incorporate drive-thrus, and also at the same time be able to have full menu across the market.

So it still remains the same.

We have about four minutes left, so we are going to take a few more calls.

Next is Greg Badishkanian, Citi.

Could you just provide a little bit of color on the competitive landscape in the US breakfast market, and would you expect to gain or maybe pick up some share here in 2011 with initiatives like oatmeal and others?

Yes, this is Jim Skinner, let me just comment on that, because oatmeal is near and dear to my heart; I eat a lot of it.

But I would have to say that if you look at McDonald's history, we grow the breakfast daypart every year, and we have really since the inception of breakfast 30 some years ago.

The Dollar Menu last year helped us with that, certainly in terms of guest count growth around breakfast timeframe, and really gave us a boost on value across the menu.

The expectation would be, again, in 2011 that breakfast would continue to grow as a daypart.

John Ivankoe, JPMorgan.

It is certainly impressive that you grew share and grew your business in a declining informal eating out market in 2010.

But everything that you are seeing right now, such as employment in the US, which is now turning positive, and maybe some gives and takes in Europe, some economies doing very well, when other economies entering austerity, could you give us your broad, macro outlook of those two markets, informal eating out in US and Europe?

Do you think we have another down, stable, or perhaps even increasing environment for 2011?

Well, not much has changed going into 2011 from the way we looked at it last year.

So if you look at the economy, we pay close attention to the consumer confidence in the United States -- that has ticked down from November again.

You know the unemployment levels as well as I do.

So when you look at the job markets I don't see a lot changing there in the near term.

There has been some slight growth and a little bit of change in the economy over the last six months, but when we go into 2011 I think we are sort of seeing this the same way.

Whether or not we expect the informal eating out market to grow is, you know, maybe slightly in 2011, but quite frankly, we don't see a substantial change there.

When you look at Europe, Europe continues to have fits and starts.

But as Pete mentioned in his comments, we are really not seeing an impact from some of these austerity measures yet.

And as I have said many times before, our business model operates fairly well in these environments.

And Europe has had fits and starts before and we have managed through those over the years.

We don't expect to see substantial impact from that relative to, certainly, the overall growth of McDonald's share against the informal eating out.

The overall economies around the world though, I should say, are sort of where they were coming out of 2010 going into 2011, and don't see a whole lot of change there.

But I do believe that GDP will be better in 2011 in the US, and I think countries in Europe remain to be seen.

But we always have to remember that when we look at Europe, it is a number -- it is 50 countries, all operating at different levels of economic performance.

So we manage through that one country at a time.

Yes, the big three, UK, Germany and France, are big drivers of our business here, and we certainly manage very well through those ups and downs in those countries as well.

Larry Miller, RBC.

You guys are at the end of the call, so I'll just keep it brief.

I just wanted to clarify something, when you guys were -- and you don't do this very often -- when you were quantifying the weather and you said that Europe was about 5% negative impact, that would mean that you think the run rate was something like 4.5%.

Is that consistent than with what you're seeing as the weather has gotten better in January then?

Yes.

That is why we said there are some people who said, well, we mentioned whether, but was it really a concern over austerity and the issues in Europe?

And the answer to that is no.

We feel like there was at least a 5% impact on sales in Europe and more than 2% here in the United States.

Airports were closed in Europe.

You will all remember people skiing on the steps of the administration buildings in France.

People trapped in London, Berlin airports.

So we have a tendency to forget that.

Even here when there is no traffic it is a little difficult for us to operate.

Howard Penney, Hedgeye.

Thanks very much.

You constantly cite compelling value as one of the traffic drivers, which I think led to a decline in your average check this year, which I guess you could argue with the real driver behind traffic.

So I know you talked about why you're going to raise prices, but given those dynamics, how do you feel, or why do you feel you can raise prices?

Then you also gave a statistic for McCafe, about 20%.

Does that include both hot and cold product movement?

And if it does, is there any chance you could break out the hot versus cold?

Thank you.

Don, did we have a problem with average check this year?

No.

Hi Howard.

A couple of things on average check.

One, to your point, if you implement a value menu of sorts there are times when we will see some slight erosion relative to the average check.

We pick that up in terms of the total transactions and overall profitability is also higher.

Having said that, there is more than the value components of average check.

We also have implemented the beverage strategy.

As a result, our items per transaction on a beverage purchase will be lower than items per transaction when you are buying an overall meal that includes sandwich, fries or side and then the drink.

So what we do see is because of those individual purchases, and also because of the benefit we get with those purchases later in the day, snack periods, etc., we have seen that the average check component that we have seen.

Our average check is very, very healthy.

The new products have performed very, very well, so we are good there.

You asked a question about McCafe relative to the hot and the cold.

We are seeing good growth across beverages based upon the numbers we came out initially with McCafe.

And we talked about $125,000 based upon all of the McCafe beverages, Frappes and the Smoothies.

Those numbers that we gave earlier we have exceeded the expectations that we had for the numbers.

So we are solid both on the hot end and on the cold end relative to beverages..

We are going to take one final question, and it is Jason West, Deutsche Bank.

Just one quick one, you talked about price in the US, I am assuming that is just for Company stores.

If you have any sense if your franchisees are starting to take some price already, and maybe what else you're seeing from competitors on that front as well would be helpful, thanks.

All right.

Well, franchisees, as you know, are free to choose their pricing strategies.

We do offer support relative to an outside, a third-party service that gives guidance and strategic thoughts around pricing.

So the franchisees avail themselves of that service, and they pay for a portion of that service themselves.

But relative to how that impacts the overall business and how that impacts our overall pricing strategy, we feel like, and the franchisees feel like, they have been a pretty good shape relative to the price increases.

They don't peg their prices solely based upon our Company-operated restaurants.

They look at individual restaurants, as Pete mentioned earlier, and individual marketplaces, and that is the case around the world relative to franchisee pricing.

So have they taken any?

Some of them have taken some price increase.

That is just an ongoing approach -- ongoing way of doing business as they look at their prices.

Okay, I am going to turn it over to Jim, who has got a few closing remarks.

Well, thanks everybody for joining us.

In closing, I want to reiterate the ongoing strength of our global business and the optimism we have in the continued success of the McDonald's brand.

Our Plan to Win remains a strong and relevant strategy, and one that continues to resonate with our customers around the world.

With our entire system online and focused, I am confident that we will continue to deliver for our more than 62 million customers a day.

Thanks and have a great day.