麥當勞 (MCD) 2011 Q1 法說會逐字稿

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

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

Ms.

Martin, you may begin.

Thank you.

Good morning, everyone, and thanks for joining us.

With me on the call are our Chief Executive Officer, Jim Skinner; Chief Financial Officer, Pete Bensen; and Chief Operating Officer, Don Thompson.

Today's conference 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 students in our earnings release and 8-K filing also apply to our comments.

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

Now, I'll turn it over to Jim.

Thank you, Kathy.

Good morning, everyone.

I'm pleased to share McDonald's latest quarterly results, which reflect the continued strength of our business.

In the first quarter, worldwide comparable sales were up 4.2%.

Operating income increased 7% in constant currencies, and EPS reached $1.15, a 12% increase in constant currencies.

And, our success continues to be a system-wide effort.

In the United States, comparable sales for the quarter increased 2.9%, while operating income declined 2%, as it was negatively impacted by a four percentage point decline in our operating gains against 2010.

Comparable sales in Europe rose a healthy 5.7 %, and operating income grew 12% in constant currencies.

In Asia-Pacific, Middle East, Africa, or APMEA, comp sales grew 3.2% and operating income rose 18%, in constant currencies.

The 2010 charge for Japan's strategic restaurant closings benefited APMEA's 2011 growth rate by 12 percentage points, and the consolidated growth rate by two percentage points, and our momentum is continuing into April, with our global comparable sales trending in-line or better than the first quarter.

These results are a testament to the continued relevance of our plan to win, and its relentless focus on those five Ps.

People, products, place, price, and promotion.

The economic climate is still less than ideal, from a slow and uneven recovery to significantly rising commodity costs and fragile consumer confidence, but we continue to succeed by staying true to our proven plans and listening to consumers.

We're elevating our business to meet their needs in a holistic way, with attention paid to each one of the growth priorities under our plan to win.

Optimizing the menu, with right food and beverage offerings.

Modernizing the customer experience, by upgrading every aspect of our restaurants from service to design, and broadening our accessibility through continued convenience and value initiatives.

It's not just one initiative, but the combination of all of them that is driving our growth.

This approach isn't revolutionary, it's evolutionary.

We focus on improvements on top of an already strong and healthy base.

The alignment of the McDonald's system around our global growth drivers, and then scaling and executing against each of them, is what will continue to grow our business and increase our market share.

In the area of menu, we're delivering results by focusing our core offerings, which drives the majority of our business.

At the same time, we balance this with new food and beverage news around relevant products that our customers want.

We're tapping into opportunities to further build key categories from chicken and beef to beverages and breakfast.

And, we're already in a number of $1 billion brands, as you know, to leverage along the way.

And, with the benefit of shared learnings from markets around the world, we will continue to deliver a strong global pipeline for today and into the future.

In chicken, we've taken a well-known brand, McNuggets, and featured larger sharing portions with great success.

In January, the United States drove double-digit sales increases in the product with the promotion of 20-piece McNuggets, while in the UK launched a 20-piece share box, resulting in sales that were more than double the initial projections.

And, Australia continued to see success with its popular new chicken bites, a smaller bite-size chicken offering, and they are testing several oven-baked chicken offerings as part of our efforts to keep innovating in that category.

Beef continues to provide opportunities, with products like our iconic Big Mac and more recent additions, like the Angus Burger.

Several markets celebrated the 40th anniversary of the Big Mac, and, in France, the double cheeseburger continued to be a strong seller throughout the quarter.

Line extensions and locally relevant limited-time offers continue to drive gains across the system.

Europe has been doing this with great success, and our other areas of the world are taking the learnings and applying them to grow their business.

Japan hit the mark with its highly popular Big America Two burger campaign.

In February, the US entered a Chipotle and Bacon flavor to its line of Angus Burgers and snack wraps, which drove total Angus Burger sales to their highest rate in nearly a year, and increased total unit movement by more than 30%.

In this month, Canada is launching its new line of Angus Burgers.

The US is targeting additional opportunities for line extensions and limited time opportunities in both beef and chicken, as it explores the use of artisan breads and a variety of toppings, and they're really taking a page out of Europe's playbook.

Turning to beverages, we're in the earliest early stages of leveraging this platform around the world.

In the US, the winter months helped to boost our growing line of hot McCafe offerings, with sales of specialty coffees increasing 17% from a year ago.

The US will build on its momentum with the launch of a frozen strawberry lemonade in May, along with a new unique smoothie flavor this summer, in a re-hit of the popular value drinks.

Beverages in the US are a $146 billion business, and we have only scratched the surface on our opportunity there.

Beverages are also important outside the United States.

In China, we had more than 145 McCafes and, in Europe, more than 1,350.

And, in other markets such as Canada and Australia, they are testing various products from the US lineup of specialty coffees and blended iced drinks.

Now, let me wrap up the discussion on menu with breakfast.

In the United States, food news from the quarter was the launch of Fruit and Maple oatmeal, which you all heard about, which strengthened our overall nutritional profile and gave customers another great-tasting high-quality option, not only at breakfast but all day long.

And, China and Japan both made gains at breakfast through a combination of compelling value and focus on strong menu offerings.

Now, regarding Japan, our thoughts continue to be with the Japanese people as they work to put their devastation behind them, and rebuild their country.

Our business in Japan was certainly impacted, and continues to face some challenges, although the effect on our overall income, as you know, is minor.

Our foremost concern is to ensure the welfare of our people and then getting all of our restaurants back up and running.

I want to take this opportunity to thank the entire McDonald's system for its support of everyone on our Japan team, for all their doing to help their people, their country, and their business.

So, in addition to menu, we are driving gains by making our restaurants even better, and more relevant for our guests.

We are staying focused on improved service through training, technology, and an unyielding commitment to operations excellence.

All of this helping to lift customer satisfaction scores across our system, especially in APMEA, with China and Japan continuing to lead the way in service and hospitality, and Australia which scored its highest customer satisfaction marks ever in January.

In addition, more than 70% of our APMEA markets have increased their peak hour guest counts through optimized operations and capacity initiatives.

The US and Europe also achieved higher customer satisfaction scores, and Europe continues to make our dining experience more convenient than ever.

France and Southern Europe are equipping an additional 250 restaurants with self-order kiosks to deliver a more convenient ordering experience, while the UK is bringing a touch pre-payment option to all of its 1,200 restaurants this summer, providing even greater speed and convenience for our customers.

And, the new, more user-friendly POS system that we've talked about is now in 7,500 restaurants across the US, and it's easing the job of our crew, so they can spend more time on customer service.

We're also continuing to ramp up our system-wide re-imaging efforts, with all areas of the world focused on making our restaurants more contemporary, and in tune with modern demands and tastes.

Australia and Europe remain out in front on this effort with the US making progress and planning to complete 600 re-images this year.

In Europe, we are targeting 850 re-images and another 500 in Asia.

We continue to see the desired results from our re-imaging, with improved perceptions of our brand and higher sales differentiating McDonald's from the rest.

Our brand, our business, and our operators are all strong, making this the perfect time to invest in our future.

Finally, we're driving the business by continuing to make our brand more successful and in step with how customers work and live.

In the US, we're delivering greater convenience and accessibility through extended hours, which also continue to drive sales and guest counts.

In APMEA, we are building on our convenience by advancing our dessert kiosks and delivery service in Korea as well as China, where each platform is achieving double-digit comp sales.

And, we're opening restaurants in markets where the opportunity exists to strengthen penetration and expand our customer base, including China, and many countries in Asia, as well as Russia, France, and Italy.

Meanwhile, we remain committed to value across our menu, as consumers everywhere continue to count on McDonald's for everyday branded affordability.

In the United States, our Dollar Menu at breakfast continues to be a strong traffic driver, while Dollar Menu, the rest of the day, remains a consistent highly-valued platform for our consumers.

Across Europe, markets have put an emphasis on everyday affordability.

Like the UK Saver menu, the Little Tasters give consumers a wider range of menu and price options.

And, in APMEA, value remains an important part of our business, with our popular value lunch program driving strong results in numerous markets.

Now, those are a few highlights of how we maintained our strength into 2011 and we'll continue to drive success.

Executing all these drivers and building the business for the long-term is achieved through our world-class owner-operators, suppliers, crew, and staff.

Together, we're committed to supporting the restaurants that serve our 64 million customers every day.

Whether it's through our training classes at Hamburger University, which is celebrating its 50th year, or by hiring new employees to better serve our growing customer base, as we did earlier this week in the United States and Canada, during national hiring days.

We also remain committed to our plan to win strategy, as well as our philosophy of financial discipline and enhanced shareholder value.

We continue to have a healthy balance sheet, the highest credit rating in the industry, and a robust business that generated $6.3 billion in cash from operations in 2010.

After reinvesting in the business, we remain committed to returning all our free cash flow over the long-term to investors through a combination of dividends and share repurchase.

And, in our first quarter, we bought back 18.4 million shares, totaling $1.4 billion, and paid a dividend of $0.61 per share for an additional $635 million.

Overall, I am pleased by our first quarter performance.

The fundamentals of our business remain strong and our entire system is aligned behind our proven strategies and delivering the very best customer experience, every time.

And, with that, I will now turn it over to Pete Bensen.

Thanks, Jim.

Hello, everyone.

Our plan to win strategy, with a balance across the Five Ps continues to deliver higher sales and improve profitability.

Against the backdrop of tentative and uneven improvement in the global economy, system-wide sales increased 6% in constant currency in the first quarter.

Operating income reached $1.8 billion, up 7% in constant currencies, and combined operating margins reached 29.9%.

The largest driver of operating income is our franchise margins, representing nearly 70% of consolidated restaurant margin dollars.

Franchise margin dollars rose to $1.6 billion, an 8% increase in constant currencies, with each area of the world contributing.

Consolidated franchise margin percent rose 70 basis points to 81.9% as positive comparable sales more than offset cost increases.

Before I turn to Company-operated margins, I wanted to provide some perspective on our updated commodity cost outlook, and how we view pricing in relation to some of the increased pressures on margins.

Since January, the global commodity markets have experienced significant increases.

As a result, we expect additional pressure as we move throughout the year, especially in the US We're seeing cost increases on virtually every item in our basket, with beef accounting for about a third of the additional increase.

Reduced herd sizes, increased demand, and a weaker US dollar driving up exports, are all contributing to the increase in beef costs.

As a result, our US grocery basket is now projected to be up about 4% to 4.5% for the year, with greater pressure being experienced in the second and third quarters.

In Europe, our range of increase has narrowed as we now expect commodities to rise 4% to 4.5% this year.

This is not significantly different from our previous guidance, as many of the global factors impacting US commodities are having a smaller impact in Europe.

Our goal in managing our supply chain remains unchanged, to maintain competitive and predictable pricing to the restaurants, and ultimately to our customers.

With our scale, infrastructure and relationships, we believe our supply chain continues to be a competitive advantage for the McDonald's system.

Balancing cost pressures with menu pricing and market share growth is not new to our system.

We have successfully managed this in the past, and are confident we can do so again.

Considering the current inflationary environment, along with the strength of our business, we believe we have some pricing elasticity.

We plan to offset some, but not necessarily all, of the inflationary pressures, with price increases, Opting to take smaller increases over the course of the year, to balance impact on the consumer and our traffic.

We look to keep increases below the food-away-from-home growth rate, while also being mindful of what's happening at the grocery stores.

Our demand-based pricing tool will guide the system in making the best pricing decisions for the business.

Growing guest count and market share has been the key to our success these past few years.

Accordingly, in the current environment, we are willing to invest some margin in the short-term, to continue to grow our business for the long-term.

Each area of the world has taken some price in 2011.

In the US, we took a 1% price increase in early March, and will likely take additional increases during the year.

Across Europe, we have also increased prices by about 1% in the first quarter.

In addition, when the VAT increased in certain markets, additional increases were taken to cover the tax, with no net benefit to sales.

Further price increases, while likely, will be balanced amidst the many cost pressures and austerity environment in this region.

With that as a backdrop, let's discuss first-quarter McOpCo margins.

Global Company-operated margin dollars increased 4% in constant currencies, to $736 million.

Company-operated margin percent declined 50 basis points to 17.7%, reflecting positive comparable sales that were more than offset by higher commodity, labor, and other costs.

In the US, our basket of goods was up nearly 1% for the quarter.

This increase, along with small increases in many other costs including labor, contributed to a 90 basis point decline in Company-operated margins to 19.5%.

Despite some of the near-term cost challenges, all of which are manageable, our US business remained strong and we continued to see market share growth.

Turning to Europe, Company-operated margins decreased 10 basis points to 17.2%, as strong comparable sales mostly offset increased commodities and labor, including the increased social charges in Russia.

Europe's grocery bill was up 3.7% in the quarter.

In Asia-Pacific, Middle East, and Africa, Company-operated margins decreased 50 basis points to 17.5%, primarily due to inflationary pressures of labor and commodities, partly offset by comparable sales growth.

In addition, the acceleration of new restaurant openings in China is contributing to the lower margin percent as they initially experience pre-opening and higher labor and training costs, just like all other markets.

China's new restaurant sales and margins then grow significantly over time.

We continued to get leverage on G&A spending, which rose about 2% in constant currencies.

This increase was in line with our expectations, and we are on track for full year G&A to decrease about 2%, in constant currencies.

Similar to what we have experienced the last few quarters, the earnings contribution from other operating income declined in the first quarter.

With fewer affiliated restaurants and the majority of refranchising gains behind us, we will not be recognizing the significant levels of income that we have in recent years.

As indicated in our the February sales release, the first quarter tax rate of 28.8% was lower than the full-year guidance due to a non-recurring deferred tax benefit related to our foreign operations.

Our guidance for the year remains 30% to 32%, implying the subsequent quarters' effective tax rates will be at the high-end of our guidance.

We remain committed to building future returns and enhancing long-term shareholder value through growing our business, by adding new units and driving same-store sales at existing restaurants.

We are on track to open 1,100 new restaurants this year, with 156 open in the first quarter, including 40 in China.

Reimaging will be a key differentiator for our existing restaurants, in the years to come.

We see tremendous opportunity to update our asset base, as only 20% of our exteriors and 45% of our interiors currently reflect a modern contemporary look.

This year, we plan to reimage another 7% of our restaurants, or about 2200 locations.

We made good progress in the first quarter toward that goal.

The US completed almost 90 reimages and has over 60 sites under construction.

We are on track to completing 600 this year, and are expecting to do more in 2012.

Europe continues to lead our reimaging efforts, particularly its major markets.

Over 70% of our interiors have been reimaged, with the remainder to be reimaged by the end of 2012.

About 40% of exteriors have been reimaged, so we'll take another few years to complete those.

We completed 100 reimages in Europe in the first quarter.

Lastly, let me touch on foreign currency translation, which positively impacted first quarter results by $0.03.

The US dollar has recently weakened against most currencies, especially our four major currencies, the Euro, Pound, Australian, and Canadian Dollars.

As a result, at current exchange rates, we expect second quarter EPS to be positively impacted by $0.06 to $0.07, with a full-year benefit of $0.15 to $0.17.

Please take this as directional only, because we know rates will change as we move throughout 2011.

McDonald's first quarter-results are a testament to our system's focus on the customer and execution against the plan to win, despite a volatile and unpredictable global environment.

That focus and execution is yielding long-term value for our shareholders and our system.

Looking ahead, our fundamentals are strong, our strategies are sound, and our system is aligned.

I'm confident our commitment to executing our plan will continue to deliver strong results.

Thank you.

Now I'll turn it o

ver to Kathy to begin our Q&A.

All right, thanks Pete.

I'm going to open the call now for analyst and investor questions.

(Operator Instructions).

We are going to try to get as many people as possible the opportunity to ask questions, so if you can limit yourself to one, we will come back to you for follow-up questions as time allows.

So our first question is from David Palmer of UBS.

Thanks, Kathy.

A quick question on the US business.

It feels like cold beverage innovation has been a bigger driver of your sales then hot beverages, at least over the last couple of years.

Even iced coffee, I remember, was sneaky big at the driver, and of course you had some hits as recently as last summer.

It even looks like the seasonality of this beverage sort of lift has been a key reason for your gap to the industry numbers being wider in the summer then they are in the winter.

Do you see it this way?

Is this something that you continue to believe will occur with summer beverages, perhaps widening your gap again?

David, this is Jim.

Thanks for the question.

We're very fortunate this morning, we have the guy that initiated the combined beverage initiative in the United States, in Don Thompson.

And Don's going to respond your question.

Hey, David, how are you?

Just a couple of things.

One is, I think as you look at cold and hot beverages, our goal has always been actually to have enough in the pipeline that we were able, to be able to kind of mitigate some of the seasonality impact you talked about and we're still focused on the McCafe hot beverages.

We did hot mocha last year.

I think the team is doing a solid job of advertising those.

On the cold side, you're very astute in terms of the question, but there's other weapons in the arsenal there.

So not only frappes and smoothies, which were really, really big hits.

To your point, iced coffee, but also don't forget the entire cold beverage movement in terms of $1 drinks, which typically are across the summer months.

And so we have got quite a bit going on with those cold beverages.

The US also has quite an inventory in the pipeline, relative to looking at things that are upcoming like strawberry lemonade.

We've got another smoothie flavor that's coming out this year.

So, we've been able to be very successful, and it has helped the business tremendously.

However, we also want to make sure we continue to stay focused on the hot drinks.

Lastly, on the hot drink side, also we can't forget the predominance of hot drinks is in drip coffee.

So, we have quite a lot of business, clearly, as we have gone from just, if you look at overall beverages in terms of the McCafe, 2% several years ago, when we talked, to over 6% today.

I think the other thing, David, to think about, as we have invested a lot of this, and even changed the footprint of the store relative to the McCafe offerings.

And we have therefore provided the technology, equipment, and capability to prepare these drinks, if you will, in a rather seamless fashion.

And what I would say is that all of them are contributing at a level where we wouldn't think about changing the mix or taking anything off the menu.

Our next question is from Joe Buckley from Banc of America-Merrill Lynch.

Hi.

Thank you.

I want to ask two questions.

First, if you could share with us what the China same-store sales were for the quarter.

And secondly, Pete, I want to go back to your comments on the US, I believe you said the food basket in the US in the first quarter was up only 1%, yet you had about 90 basis points worth of margin pressure on a pretty good comp.

So, I guess I'm wondering how that all gels together.

Sure, Joe.

First of all, we were talking before the call, we knew you would ask about the China comps, so we're prepared for that.

6.5% was the comp for the quarter, compared to a 1.4% comp a year ago, first quarter.

Regarding the US, the commodities were still the biggest -- it's a couple of things.

One, as I mentioned, we did a 1% price increase, but that was not until early March.

And we hadn't done another price increase since, late 2009.

So we had no benefit from pricing essentially in the quarter.

We did have the food cost pressure, and compared to the first quarter last year, we had, let's say 150 basis point of benefit from lower food costs.

Here, we had a 40 basis point drag from the higher food costs.

And then, every other line item, it seemed, was going just slightly negative.

So we had a 10-point hit from labor and a 10 basis point hit from higher promotional costs, which were some of the oatmeal giveaways and discounting.

We had higher utilities.

A little higher depreciation.

A little higher snow plowing expense, those couple of months.

We saw most of these other expenses higher in those first two months of the quarter when the sales were a little bit softer.

And we didn't have A benefit from refranchising that we have had in the last several quarters.

So predominantly, it was the change in food costs that was the biggest driver.

Yet we had a lot of these other small items that accumulated to the impact.

Our next question is from Greg Badishkanian from Citi.

Great, thanks.

Just kind of following up on the lineup for 2011 in the US, I mean, really solid -- you had a really solid lineup in 2010.

And you talked about the beverages, are there some other factors that might be able to help continue that momentum in 2011?

Hi, Greg, this is Don.

Actually quite a few things that are in the pipeline.

And one of the points, too, we've got quite a few questions relative to the menu pipeline.

Here's the thing that's really working well.

We really have a global menu pipeline, and I'll talk about the US pipeline here too.

As I talk about it, I'll talk about a couple of the products that the US is now looking at that are coming from overseas.

But also some of the products from the US that are being exported overseas, because we got a lot of traveling around.

Right now the US is focused, and you guys will see in the next -- I'll say in a short time, you will see more innovation relative to the smoothie drinks.

I think you are probably already know, we probably already talked about pineapple mango and there's strawberry lemonade coming up on the beverage side.

We have additional nugget promotions.

We have got the revamping of the chicken line-up in terms of the sandwiches that are there.

The whole nugget piece has been phenomenal for us, and I know the US is going to hit that again, along with the ongoing support in the restaurants, clearly of Angus and the return of the Asian Salad.

So those are some of the things that you're going to see in a relatively short period of time.

If you look a little longer out, there's a few products, actually quite a few products, that the US has in test, and we will have to wait to see which of these make it to market.

But everything from spicy chicken sandwiches, we have some of those across APMEA, the US is looking at those quite intently.

There's a smaller product called McBites, a snacking-type product that we're testing over in Australia.

Actually its rolled out in the market in Australia now.

The US is looking at -- clearly they're looking at some sandwiches like Chicken Myth and Chicken Legend that we have from Europe, just as Europe is looking at the frappes and the smoothies.

So there are quite a few things that are in the pipeline now.

We have a discussion with the US team last week relative to the pipeline, and it looks solid.

All right.

Our next question is from Jason West from Deutsche Bank.

Thanks.

I just want to get a little more color on the margin outlook.

Particularly in the US, I know you guys don't give specific guidance, but with the pressure this quarter, with the commodities picking up, but then you've got some pricing coming in.

Should we expect margins to get worse before they get better in the US?

Or do you think you have enough pricing and sort of maybe not some of these one-time or small items that added up in the first quarter for the rest of the year that maybe the margins won't get a lot worse from here?

Jason, it's Pete.

You hit on the two drivers.

The costs are going to get a little bit worse, and we know we will get the benefit of our March price increase, along with additional price increases benefiting some of those, what I call one-time things that were a nuisance in the first couple of months, won't recur.

It will be challenging to grow margins in that environment.

There's no question about that.

I'm not going to attempt to predict if 90 basis point decline is going to be the benchmark for the year or not, but you hit on the things we're focused on, which is what is going to be the price increase and how to best manage the costs, but at the same time, as I did mention in this environment, the last few years we've been very successful at driving guest counts, and we don't want to do anything on the pricing side that's going to dramatically change that, yet recognize that food-away-from-home is projected to be up 3% to 4% this year.

So, that's what gives us the opportunity to get some price.

So, we're going to balance all that.

We don't just manage to the one margin number, but I think you've hit on the things that we're focused on.

Jason, just to remind us too, we've had similar conversations in years past.

A couple of years ago, I remember having similar conversations when we began to focus on guest counts.

And the reality is we have continued to outperform the market, and we'll outperform all our competitors in the space.

And the reason for that has been because of the guest count growth, and then at the appropriate time, being able to take price and leveraging the overall product mix.

And last year, we were focused very heavily on menu and value.

This year, the US is beginning to focus a little bit more also the higher-margin products.

So all of those things will go into the mix as we attempt to manage this even further throughout the year.

Our next question is from Rachael Rothman from Susquehanna.

Hello.

This is Jake Bartlett in for Rachael.

I had a question just on your view of the US consumer.

I think in the past, you have talked about maybe switching some promotional activity, more towards the premium end.

I'm wondering if that's changed at all in the last few months, whether you think you're going to need to focus on value, whether the industry itself is going to remain fairly focused on value for the balance of 2011?

This is Jim.

Were not going to change our strategy around what we deliver to the consumer on value.

That's number one.

Everyday affordability is a mainstay of McDonald's strategy, regarding the menu.

And the combination of all of the things that I talked about this morning is how we deliver consumer relevance.

So, whether it's the strategy around what we're marketing in that particular month or the things that Don talked about, the menu coming up throughout the year, some of those are standard process.

So, if you take value drinks for example, and the proliferation of some of the new drinks, that's an annual thing, particularly in the United States.

And of course, we view the opportunity to add relevance for our consumers around all of these things.

And so whether it's increasing the marketing around a particular premium item our everyday affordability and the balance around all of that, I think it's business as usual as we go through 2011, because not much has changed regarding the consumer in 2011.

Consumer confidence took a dip in March, where it had gone up in February, and the unemployment is just under 9%.

There's certain things going on in the marketplace that would lead you to believe, as Pete mentioned, that consumer spending is expected to be up, but not substantially different from how it looked in the business over the last couple of years.

It's a mix, and it's a balance.

And we're pretty good at it.

Okay.

Next question is from Sara Senatore from Sanford Bernstein.

Thank you.

Just actually a couple questions there to follow-up about -- one about the US and one about China.

The US, I just wanted to touch on the announcement about the hiring that you've done, and part of it, the rationale seems to be about more 24/7 and maybe building up service.

Can you give any sense of whether this -- what kind of impact on comps or on margins we might expect to see from some of the initiatives that you seem to be hiring in support of?

And the other piece was on China.

I noticed your 6.5% comp, which is obviously a very good comp, but maybe a little bit softer than some of the other local competitors who are a little bit higher.

Were you promoting more, was there something about price there that maybe you had a little bit less on price than some of your competitors?

Thanks.

Well, Don just came back from that market and I'd also like to have him chat with you about the issue of -- What was it?

National Hiring Day.

Oh, National Hiring Day.

Sorry, yes.

Hi, Sara.

First off, on National Hiring Day, the intent really for us was to be able to, in a solid voice, be able to leverage the McDonald's strength to be able to put a call out in terms of employment.

We thought it would be good for us as McDonald's.

We do and have continued to hire through some of the economic downturns, but we also thought it would be a more unified way to get the message out that McDonald's is hiring.

Our focus internally is on leveraging that labor to continue to help us grow the business.

We've grown guest counts tremendously, and so we want to make sure that we are able to provide the same level of operational excellence in the restaurants that we've been able to provide.

Now, relative to specific focal points, we are very focused on our peak hours.

And how we continue to build our business during the peak hour guest count time frame.

So, we'll leverage primarily labor for that.

However, were also extending and expanding in terms of our extended hours, so we're going to use the labor wherever we need it in the business.

So, that's what's happening with the National Hiring Day.

Relative to China, I just came back from China, and I tell you, it's my third visit.

And I was extremely impressed with our development strategies and extremely impressed with the talent.

We've brought on some really outstanding new talent in the development arena.

The training that we have going on right now, as we accelerate for the new openings, and we accelerate openings, has been phenomenal.

These restaurants have opened up, and I saw quite a few of them in my three days across China, both in Shanghai, Beijing and even Tianjin.

We are opening restaurants that look great and are operating at very high levels.

So, to do that, we've got to train our teams, and we train them in existing restaurants.

So, we have an accelerated pace there, which is really working out well.

In terms of things we do that others don't do, I can't speak to all that others do.

I will say this.

Our 6.5 is based upon also a tremendous guest count growth, not just taking price.

And having said that, what that means is that we are building quite a bit of breakfast traffic.

We are building quite a bit of lunch traffic with our value strategies.

Back in November, we went off of that strategy for one month and saw a little business dip, so we have gone right back to our value messaging around lunch and breakfast, and it's paying great dividends.

So, when we take price in China, we will take price in China, have taken some price, but not at the scale possibly of some others.

So, we're going to continue to stay focused on guest count building.

Next question is from Jeff Bernstein from Barclay's Capital.

Great.

Thank you very much.

Pete, just one qualification on your earlier comment, and then a separate question.

Clarification relates to the discussion of margins and I think you said you got to make a conscious decision to invest some margin in the short term to grow the business in the long-term.

As it relates to the US, it seems like your running 1% of pricing now.

You mentioned the food-away-from-home being at 3% to 4%, so I'm wondering as inflation gets higher, what the detail is behind that kind of investing in the margin?

Would you be willing to go a whole lot closer to that 3% to 4%, or would you be cautious of that?

And then the extra question on the European market, entering 2011, it seemed everyone's focus was on austerity measures and how that would negatively impact everyone there, including yourselves.

You're now running at 5% plus comps.

Is there anything you're seeing across the menu, or across day parts, or have you changed your promotional campaign, or just things like -- any color in terms of how you been able to help those numbers when there's more or less resilient type of markets?

Any type of color would be great.

Thank you.

All right, Jeff.

In the US, the food-away-from-home, the trailing 12 months through February is up about 1.5%.

The 3% or 4% was the full-year projection.

I think you knew that, but just to clarify.

Historically, what our lesson tell us is getting ahead of food-away-from-home is bad for traffic.

But staying at, or just below it, is kind of the optimal place.

So we're going to continue to watch that as we move throughout the year.

It's one of the inputs to our pricing.

This is really more of an art than it is a science, but it definitely is an input that were going to keep an eye on.

As well as, like I said, what is happening at grocery stores and food-at-home and gas prices and some of those other things.

But it will be a guide for us as we move throughout the year.

Regarding Europe, we have not seen any significant change in consumer behavior as a result of some of the austerity measures going on.

UK, for example, they had the 2.5% VAT increase and some other austerity measures in the country.

They ran a nearly double digit comp for the quarter, very strong sales momentum and guest count growth.

And across Europe, the strategies have been similar in the first quarter to what we had in 2010 and prior.

Promotion of premium products, rotating food events, at the same time, hitting everyday affordability with the equivalent of their dollar menus, and their mid-tier menus, the fourth tier, it's been, again, a combination that has been relatively consistent this first quarter, relative to 2010 and we're cautiously optimistic that environment will continue for us.

Next question is from Mitch Speiser from Buckingham Research.

Thanks very much.

My question is for Pete, and I know no one has a crystal ball, but three months ago, your US food cost outlook was 2% to 2.5%, and I think it sounded like you had pretty high confidence in that.

And then, even three months before that you had high confidence in a 2% inflation forecast.

Now three months later, that food inflation forecast has doubled.

And I was just wondering, as you look back the last three months, what was missed in that forecast?

It seemed like a lot of folks on the sidelines were maybe ahead of that, because we do want to have confidence in your food cost outlook going forward.

So, maybe what was missed over the past three months and how much confidence do you have in the US food cost basket outlook of 4% to 4.5%?

Thanks.

Mitch, it's nothing that was missed in the outlook in January.

It's actually the events that have happened since then that have dramatically moved all the markets.

From floods in Australia which were impacting the beef markets to the unrest in the Middle East, which has driven oil to over $110 a barrel, to release of the grain stock inventories, which are at all-time lows, to the weak US dollar, which has driven beef exports up over 30%.

It's been all of these factors that have impacted, to a significant degree, in the course of just three months, virtually every item in our basket.

So, our supply chain had great visibility into matters of the time when they gave the forecast.

And several significant things have happened.

None to offset.

So, everything going in the direction of higher costs.

And I would be surprised, as you listen to other companies, that they aren't also out there updating their guidance, as I've already seen a few of them do.

The next question is from John Ivankoe from JPMorgan.

Hi, great.

Thank you.

Just a couple of follow-ups if I may.

Your first is on the point-of-sale system.

I think you said 7,500 in the US, I want to get a sense of how many Company stores that's gone in, and what the experience has been when that system has changed, whether there's any integration costs short-term, and what the cost benefit is after that integration.

And secondly, Jim, I think in our remarks, you did say that you are going to keep value, but I do wonder, especially with some changes competitively, whether you could perhaps change some tactics around value?

Perhaps changing the products, or maybe even price points, given the current commodity environment, and what might be a slightly easing competitive environment on price in the US.

John, thanks for the question.

I will let Don talk about the POS system in a moment.

But relative to value, we are changing our tactics around that, and have, over time.

You go back to the double cheeseburger and into the McDouble and some of those other kinds of things.

But on a wholesale basis, relative to providing everyday affordability, both in terms of the Dollar Menu, now in the United States, the Euro Saver in Europe and various markets, and those other kinds of things, the fundamental premise of that is not going to change.

And yes, you've seen over the years that different menu items have moved on and off the Dollar Menu here in the United States.

But on an overall basis, the expectation is that we will stay the course on the underlying everyday affordability, without a whole lot of shifting in that regard.

And John, as a perspective, before Don talks about new POS, even with these cost increases that we're seeing this year, that brings our commodity costs really just back to 2009 levels.

So, the input costs for those items is very similar to what it was two years ago.

So, although its high this year relative to last year, it's not at an unprecedented level.

And our franchisees, who I talk to and stay in touch with on this obviously, they're our number one constituents relative to the success of the brand, and they lead the charge.

We're 80% franchised around the world, 89% in the United States.

And they all are supportive, relative to how we need to go after everyday affordability and stay the course regarding that.

At least in terms of my last two conversations I've had with them, and I don't think that will change because they are just as concerned about maintaining guest count growth that we've experienced, and they know that's the driver of our success over the long-term and their success.

And John, relative to the POS system, it's in all of the Company-operated restaurants now.

It allows us to do several different things, some of which you've seen.

Whether that be operational ease in the drive-through, dual drive-through lanes, hand-held order taking, which we're beginning to implement in more and more of the restaurants, which help with operational ease and speed of service.

Also, I think, John, you may have been in one of the restaurants, I can't remember, but to see us actually -- see a crew person actually go through the ordering process.

They have to use far less screens now as they're taking an order, which means that the speed of service time is being decreased.

All of these things help us again at peak hours, so we have a high level of capacity to move more customers through, and they're enabling us to be able to drive some of the guest count numbers that you guys have seen.

All right.

The next question is from Larry Miller from RBC.

Yes, thanks.

I just had a couple of clarifications and follow-ups.

Pete, when you are talking about challenging to grow margins, I think you were referring to McOpCo.

Is that correct?

In theory, as long as your same-store sales are growing, your franchise margins should continue to expand?

Franchise margins, as you know, are insulated from the commodity costs, so we get a lot of leverage from growing comps there.

Yes.

Next question is from Andy Barish from Jefferies.

Thanks.

Question, just back on China.

I know it's not a huge part of the business, but within the overall context of APMEA, are the opening costs, is that ongoing through the year, with the acceleration?

And then, how does that jibe with just inflation and wages and commodities over there?

It that big enough, I guess, to weigh on the overall APMEA margins for the year?

Andy, this is Don.

At this stage of the game-- there was a time when we were actually behind in terms of the wage rate game, and we were trying to catch up.

As you know, the Chinese government has determined that they want to double wages by the year 2015.

At this stage, we are above, actually we are double-digits above the actual wage rates now, in the way that they're planning on increasing.

Part of the reason for that is to be able to one, get the kind of people that we want to have in the restaurants, and the right talent.

So, as we move through the year, we don't see this -- what's happening is, as we accelerate the sites, clearly we will train more people.

At some point, we will get to a steady-state, but right now were accelerating our growth.

We have an inventory and the pipeline to build a lot more sites.

This year we're targeted, as we said, to do between when 175 to 200.

When I was there, I had a chance to review many of those sites with them, and look at the trading areas, surveys, fantastic sites that we have.

The challenge in China, and it's not as much a challenge as it is really a business planning piece, and that is we go into many of these pre-planned master-planned communities about a year to a year and a half ahead of time so that we can get a good, stable footing.

So, what we're seeing is our first year sales are a little softer.

Second year sales, we're seeing double-digit comps, which is exactly what we've seen historically, and those comps have remained strong in the third year.

So, the development strategy right now is sound, we can manage the margins relative to labor and we are in a really good position.

Some of the other folks in the marketplace are trying to catch up to the position we're at.

There will be another wage increase coming up soon in China.

It will not impact us as much as is going to impact others.

All right.

Next question is Keith Siegner from Credit Suisse.

Just a question for you on the franchisees.

And really what it relates to is, over the last couple of years you've done a tremendous job of taking market share, while at the same time expanding margins.

So, getting the franchisees over a large part of the system to follow the lead of the Company was really easy.

In the first quarter for the first time, this program of like using a little margin to take some market share, actually required to use a little margin to take some market share.

Now with some acceleration in the inflation outlook, what I worry about here is this great opportunity to continue these market share gains, facing increasing inflation.

Will the franchisees follow the lead do you feel confident that they will follow your lead and stay kind of below that food-away-from-home pricing level?

Or have they started to push for maybe more pricing or change in strategy?

What's their response to the actual use of margin for the first time?

Keith, this is Jim Skinner.

Thanks for the question.

First of all, I think it's very important to understand how much we collaborate with the leadership of the franchisee community, regarding our strategies from everything from how we execute at the front counter and drive-through, operationally, customer satisfaction expectations, all the way through how we market to the business and how we communicate to the business, as well as what we decide to do around everyday affordability, as I mentioned earlier.

And that collaboration has served us so well under the last number of years, and they also understand one thing.

We are in this business for the long-haul.

So whether you're talking about China and some investment in the margin to grow the business over time, it's a long haul view.

It's not a quarterly view.

It's not a 12 month view.

Our franchisees are in the business for the long haul, and they are on board relative to our strategies around this and maintaining guest count growth.

Now that doesn't mean that you don't have people out there that are stressing and concerned, just like we are in the Company, but for the most part, they follow the Company lead on the pricing and the expectation.

Company lead meaning McOpCo.

It's not about -- we have skin in the game in this issue, as well as we start thinking about taking margin, most of the time that is in regard to how we price in McOpCo.

But the franchisees typically follow our lead regarding that.

I see nothing out there relative to where we find ourselves in the business today, which yes, we got some headwinds, but just like in another six months, we may have some tailwinds.

Our consistent approach relative to how we manage the business and collaborate with the franchisees over the long-term is a great benefit to our growth as a business.

Keith, this is Don.

Just a little texture to Jim's point.

Having lived through this from 2006 as the President of US just up until last year.

One of the things to keep in mind, and Jim has said this repeatedly, but we really have a lot of ongoing collaboration with the franchisees.

There is a standing value team as part of our op net organization.

The continue to look at pricing on our value menus, margin, operating cash flow, in the restaurants, we also have a supply chain management collaboration with the franchisees.

So they're up to speed on this ramp up in terms of commodities.

As it ramps up, those teams will give feedback to the overall system, and that's in conjunction with our own folks.

So these are not once every quarter meetings.

These folks are meeting on a routine and a frequent basis.

Also, our cash flows have been strong.

This is not the first time we've been through this.

2007, 2008, we have seen commodity stresses and pressures before.

Each time we have, we have gotten together to focus on what are the most critical things to make sure we manage the business for the long term.

So, these are some more commodity pressures, but to Pete's point, it was the same thing we saw, we are at the same level we were in 2009.

All right.

Next question is from John Glass, from Morgan Stanley.

Thanks.

First, if I could get, Pete, you just to clarify one thing and then I have a question on the remodels.

As it relates to your outstanding commodity guidance with the 4% to 4.5% in the US specifically, what assumptions are you still making?

In other words, is it assuming a certain level of commodities flat or up from here, and which ones are you assuming, just so we know how to track that going forward?

That's the clarification.

And just thinking about how we can get at longer-term sort of your pricing power mix shifts, in the remodels you've done in Australia and Europe, have you seen favorable mix shifts in those versus the existing units?

Have you tried to take more pricing in those units versus existing?

Does it give you more pricing power, or do you have any actual data that suggests you have more when you remodel restaurants?

Thanks.

Pete, can I just--?

Let me talk about the present our relative to reimaged restaurants.

And I go back to many, many years ago when we used to think that because we had a modernized restaurant, that because we had ferns and brass, that we could take an extra nickel on the big sandwiches, or do whatever because our customers would understand, because of that wonderful environment that they're in, that they ought to pay more for their sandwich.

And that was a mistake.

And we don't do it that way.

The modernization of our restaurants really does not give us additional pricing power on the menu, and we do it because our restaurants either need to be re- modernized, or they're going to be built in a contemporary manner.

But it has little to do with overall pricing power.

And regarding the commodity outlook, John, we don't get into the individual line items with you, and things like that.

I think it's fair to say now, compared to where we were in January, we have more secured positions.

So we have more hedges and things like that in the supply chain.

But follow the market today.

This is reflective of what has happened in the commodity markets over the last three months, really on several small unhedged positions.

And so if the commodity markets move significantly from here, and the main ones obviously looking at beef, looking at corn, wheat, coffee, et cetera, our guidance reflects where the markets are today.

If they stay around these levels, the 4% to 4.5%, should be locked in.

If they move dramatically, up or down, then we'll have to reflect that as we move forward.

Next question is from R.J.

Hottovy from Morningstar.

Great, thanks.

Just a follow-up question with regard to the pricing strategy.

I appreciate all the color you'd given us on that particular topic.

Knowing that you're no stranger to a rising gas price environment, I just want to get your thoughts about how you're thinking about that with respect to pricing in the back half of the year.

As it changes, what particular area of the menu that you might be increasing prices on, and just how that plays into the strategy.

First of all, R.J., we always look at this and I've always said it -- if you can't go far, you can get to McDonald's.

We're convenient.

We went through this one time before, gas prices up over $4, I forget what year, it was just a couple of years ago, and really, it didn't have substantial impact on our overall business.

Some of the interstate sites and some of the road stop sites had some small impact, but on an overall basis, it wasn't a major impact.

And relative to how we look at pricing around that, that specific item, is just one of -- one more nick relative to the spending that consumers have.

And so it's really melded in, into our overall pricing philosophy.

Don, do you want to say something else about that?

Jim, you said it.

The only other aspect of it is, and that's the reason we have a value menus that we have.

So, that if discretionary income begins to become impacted, we have opportunities for customers to still be able to visit McDonald's.

Okay, great.

We are just about out of time, but we'll couple last questions.

One from Steve West from Stifel Nicolaus.

Yes, Don, can you talk about McCafe, you're starting to roll out second-generation products now.

One, have you tested -- you don't have to give specific results on frozen lemonade, but what have you seen as far as cannibalization rates with the new products you've been testing?

And two, when you look at McCafe in the future as you roll out new products, how much capacity do you have to continue to put new products on that same system and do you start pushing kind of the envelope there as far as your operations?

Steve, we actually built, as you all know, the big part of McCafe was us to build of that sale in the restaurant so we'd have higher capacity.

And we also had a strategy at that time of moving from the coffee-based drinks to the blended iced drinks to proprietary blended drinks, which is exactly where we are now, we are looking at strawberry lemonade and others, in terms of the pipeline.

So capacity-wise we're in really good shape.

It's the reason that we did the build-outs of the sales and also to help us in drive-through speed.

And then pipeline-wise, we're going to continue to look at proprietary blended drinks and more of those.

Continue to look at things that we can do -- we've got dairy in the restaurants, we have got coffee in the restaurants, we've got fruit of the restaurants, fruit purees in the restaurants, so we're going to continue to combine those, and the chefs are working on other blended drinks there.

Lastly, McCafe beverages, the McCafe average check is higher than our other average checks in the restaurant, and when you look at McCafe, it's always a trade-up when that drink gets purchased.

So we feel real good about the ongoing progress that we have and opportunity in McCafe.

Thanks.

And our last question is from David Tarantino from RW Baird.

Hi, good morning.

Just another question on the pricing front, and I hate to beat this to death, but I just want to understand.

Are you concerned about your pricing power for the McDonald's brand in this environment?

Or is this approach that you're using one more of trying to balance pricing, with the opportunity to maybe take some share relative to competitors?

No, I don't think, David, that we're concerned about our pricing power.

I just want to reflect on the question about when we reimage a restaurant whether we have more pricing power.

What we have is an opportunity to serve more customers.

Because we increase the capacity typically, whether it's the drive-through or whether it's the service and the technology capabilities in the restaurant.

So, I didn't mean to say that we don't have opportunity to grow the business.

But it doesn't reflect directly on our ability to tell someone, well, you're in a reimaged restaurants now so we get to raise the prices.

Our pricing elasticity in the brand moves up and down based on inflation, consumer spending, consumer confidence.

All of those things that we've talked about, many times before.

And we're not worried.

We have the capability to take price over this next number of months in the US, as Pete and Don have talked about.

It's just a matter of timing, and when it makes the most sense for us.

Always keeping an ever-vigilant eye on everyday affordability, which is the most important thing for our consumers.

I've said it many times before, they get pinched everywhere.

They should not suffer the same fate at McDonald's.

So this look that we have of food-away-from-home, and even food at home, and paying attention to that, relative to the long-term credibility with our customers and pricing.

It's the most important thing that we do.

And so the answer is no, we're not worried about that elasticity or that pricing power.

But we pay very close attention to it in the overall mix of how we decide to price going forward.

And we never pass on directly all of our costs to the customers.

Great, so thanks for all your questions.

I'm going to turn it over to Jim, who has a few closing comments.

Thanks, everybody, for joining us this morning.

In closing, I want to reemphasize the ongoing strength of our global business, and our confidence in the continued success of our brand.

We are focused on smartly and strategically managing the market forces around us, while relentlessly working to serve our customers better.

Our fundamentals and Plan to Win strategies are strong, and I'm optimistic that we can continue to drive results in any environment moving forward.

Thanks and have a great day.