麥當勞 (MCD) 2011 Q2 法說會逐字稿

Hello and welcome to McDonald's July 22, 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.

Good morning, thanks for joining us everyone.

With me on the call today are Chief Operating Officer Don Thompson, and Chief Financial Officer Pete Bensen.

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

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

Both documents are available at www.investor.McDonalds.com, as our reconciliation with any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.

Now I would like to turn it over to Don.

Thanks Kathy, and good morning everyone.

I am pleased to share our latest business results which continue to be strong.

For the second quarter, global comparable sales were up 5.6%.

Operating income increased 11% in constant currencies, and EPS reached $1.35, an 11% increase in constant currencies.

We also returned $1.4 billion to shareholders through share repurchases and dividends during the quarter.

Our momentum continues, with July global comparable sales expected to be about 4% to 5%.

Our performance is broad-based.

We continue to grow share in every area of the world despite an informal eating out market that remains relatively flat overall.

Now I've had an opportunity to spend time in many of our major markets around the world over the past several months, and I'm pleased to say that we are focused on taking our business to the next level.

The system is aligned around three global growth priorities that support our Plan to Win.

And we are confident that our emphasis on optimizing and evolving our menu, modernizing the customer experience, and broadening accessibility to our brand will continue to move our business forward.

Now when it comes to optimizing and evolving the menu, we are leveraging our iconic products and billion-dollar brands.

We are renovating in key menu categories like beverages and chicken.

And we are elevating our food image around the world.

Our second priority, which is modernizing the customer experience, is really all about improving both how our restaurants look and feel, and how they operate.

We keep looking for ways to create efficiencies and build capacity so that we can accommodate our continued guest count growth.

In addition to reimagining our restaurants, we are leveraging technology to enhance the customer experience and make the jobs of our managers and crew easier.

For example, innovations like our new point-of-sale system and self-order kiosks enable restaurant employees to focus on what matters most, the customer experience at what we call the moment of truth.

Our third priority, which is broadening accessibility to our brand, is about driving growth through value and convenience.

You see, to us value means a great customer experience delivered at a great price, so that our customers get the biggest bang for their buck, their yen, euro or pound.

The second component of accessibility, which is convenience, is about daypart expansion and continuing to open new restaurants when and where appropriate.

And sharing our plans focused on these three global priorities enables our team to be more effective in terms of integrating and aligning their initiatives under the Plan to Win.

This is particularly important as we execute against our biggest opportunities by leveraging one of our core competencies, operations excellence.

Now I'd like to share a few highlights from each of our areas of the world.

Let's begin with the US, where comparable sales for the quarter increased 4.5% and operating income grew 6%.

We continue to take share in the IEO marketplace, even as the overall industry traffic has been relatively flat.

These are strong results, especially in today's environment, where unemployment levels are still high and consumer confidence continues to waver.

Our performance has been driven by a combination of everyday value, the introduction of compelling new menu items, a sustained focus on core favorites, and an ongoing emphasis on improving restaurant operations.

We continue to capture an even greater share of the beverage market with the introduction of Frozen Strawberry Lemonade to our McCafe lineup.

To keep the news coming we added another great tasting smoothie flavor, mango pineapple, at the end of June.

Total McCafe beverage sales rose 29% over second quarter 2010, on top of the gains realized last year.

And we are still featuring dollar soft drinks and sweet tea in the majority of our restaurants.

The US has also been promoting its flagship products that offer great taste and value.

Advertising the Big Mac and Quarter Pounder drove unit sales up double-digits.

And the promotion of shareable 20 piece McNuggets and a new lineup of dipping sauces also delivered positive results.

Now at the same time customers appreciate the choices we provide during the early morning hours.

With signature breakfast products like the Egg McMuffin, the Dollar Menu, and our Fruit & Maple Oatmeal, breakfast continues to contribute to results.

Our oatmeal is just one example of how we keep evolving the nutritionals of our menu.

Another great example is the premium chicken sandwiches that have been reinvented with a new marinade and are now served on a roll with 8 grams of whole grain.

We are committed to continuing our focus on this important area and evolving as appropriate.

Now we also continue to make progress with our modernization efforts on multiple fronts, from reimaging and rebuilding restaurants to exploring new ways to expand capacity.

We have just begun to [tackle] capacity opportunities with the addition of side-by-side drive-thrus.

We now have about 2,200 in the US, in addition to a growing number of handheld order takers are also helping increase throughput in our drive-thrus.

The US also continues to roll out a new point-of-sale system to simplify the ordertaking process.

It improves accuracy and it enables our crew to better provide customer service.

Today, it's in more than 10,000 restaurants in the US.

The plan is to have it in virtually all of our restaurants in the US by the end of the year.

So let's switch over to Europe.

Comparable sales for the quarter increased 5.9% and operating income grew 10% in constant currencies.

While the overall IEO market was flat, we continued to increase our marketshare around Europe.

The big four markets in Europe -- France, the UK, Russia and Germany, continue contributing to results.

Now while austerity measures are pressuring consumers' purchasing power, these markets, and many more across Europe, have continued to grow sales, guest counts and operating income.

Results for the segment were driven by a compelling menu of signature offerings, new products across price tiers, a growing breakfast daypart, and a continued emphasis on modernizing the restaurant experience.

Our strong guest count numbers in the region have reaffirmed the fact that we are pulling the right levers to remain a compelling destination.

For example, premium products like McWraps, a new line of large chicken and beef wraps, are now in 17 countries across Europe.

11 markets are featuring the 1955, which is a burger topped with grilled onions, bacon and smoky barbecue sauce and served on a gourmet roll.

This nostalgic taste has become Germany's best-performing premium sandwich.

Mid-tier offerings like the Little Tasters in the UK and Snack Deluxe in Germany continue to elevate our position as a leader in great taste at mid-tier prices.

Europe also continues to elevate our food image as we increase our emphasis on telling our story.

A great example of this is the UK's new A to Z quality campaign.

Now this campaign celebrates the sheer quantity of great stories that we have to tell on topics including our farm-fresh produce, local sourcing, and the nutritional profile of our menu items.

It's also a fun way for us to talk about the many other great things that we do as a Company.

And when it comes to restaurant modernization, Europe has led the system in evolving the look of our restaurants.

This effort has clearly benefited our results in Europe and globally.

Our reimaging work is complex by a concerted effort to simplify the customer experience.

One example of this is the contactless payment technology that has rolled out in the UK and Switzerland, and is currently being deployed in Italy and Poland.

I'd now like to shift over to Asia-Pacific, Middle East and Africa, or APMEA, which delivered another strong quarter.

Comparable sales for the quarter grew 5.2%, and operating income increased 19% in constant currencies.

The region's growth has been balanced, with convenience, value and menu initiatives leading the way.

A sustained focus on the drive-thru and delivery service strategies is paying dividends as the top sales driver among convenience tactics in markets including Japan, Taiwan, Hong Kong and Korea.

Another convenience is the nearly 1,700 dessert kiosks, many of which are in China.

With disposable income being more and more widely spread these days, our kiosks provide a quick convenient treat for loyal customers, while also serving as a great way to introduce new customers to our brand.

On the topic of menu, breakfast continues to deliver results.

In China the launch of a two-item meal combo, featuring the new big Crispy Chicken Muffin and coffee, has driven early morning performance and contributed to more than half of China's total comp guest count growth.

This daypart is approaching 8% of sales in China.

And in Australia a new breakfast menu that includes items like bagels has made it the region's strongest growing daypart.

As all of you know, Australia has begun to feel some of the economic pressures that have been weighing in on much of the world these last few years.

GDP contracted 1.2% in the first quarter, its biggest fall in 20 years.

The cost of living and the level of savings are both high, and also contributing to concerns is the high Australian dollar.

Recognizing the need to turn up our attention to entry-level value, our Australian team has launched a value lunch initiative.

And it's similar to the one we launched in China.

Early results are promising.

On the topic of value, I am pleased to report China's value lunch sales, which offer an extra value meal at a discounted price for a set period of time during lunch, have grown by 20% versus the same period last year.

Now on to Japan.

A branded affordability platform in Japan at breakfast and a new value lunch initiative are driving sales and guest counts and growing our marketshare.

I would also like to provide a brief update on our operations in Japan.

Our business there is holding steady, and today all but 17 out of 3,300 restaurants are open.

Our team is doing an outstanding job managing through a very devastating situation.

Although Japan is starting its recovery, the road is still unclear.

As the country begins efforts to address summer energy consumption levels, measures like the rolling closures of manufacturing facilities and work week changes may impact consumer behaviors.

As we move past the midyear point, we remain very confident in our strategies as we continue to work toward becoming our customers' favorite place and way to eat and drink.

At McDonald's we deliver a great experience to our customers.

We deliver high quality food at a great value in an increasingly modern atmosphere.

This continues to resonate with our consumers, and that's why McDonald's is a destination for more than 64 million customers each and every day.

I am confident that we will continue to grow our marketshare while generating sustained profitable growth for our system and our shareholders.

Now I'd like to turn it over to Pete.

Thanks Don, hello everyone.

Through the first six months of 2011 the McDonald's system has remained focused on executing the Plan to Win strategy, and is continuing to produce positive results.

We are building sales, guest counts and marketshare in every area of the world, despite a global economy facing rising costs and volatile consumer sentiment.

Despite this environment, systemwide sales increased 6% in constant currencies for the six months ended June 30.

And we continue to strengthen our profitability with year-to-date combined operating margin up 30 basis points to 30.8%.

Our franchise business model relies on the entrepreneurial spirit of the local businessmen and women who operate 80% of our restaurants around the world.

For the quarter, franchise margins totaled $1.8 billion, an increase of $130 million in constant currencies, with every area of the world contributing.

The margin percentage was up 40 basis points to 83.1%, driven by positive comparable sales.

Franchise margins drive approximately 2/3 of our restaurant profits.

Global Company operating margins dollars grew $27 million in constant currencies to $891 million for the quarter, while the percent declined 90 basis points to 19%.

Rising commodity, labor and other costs more than offset strong comparable sales.

We are satisfied with these margins in this environment.

For a perspective, at 19% the 2011 second-quarter margin is the second highest of the past 10 years.

In the US, Company-operated margins declined 150 basis points to 20.7% for the second quarter, due primarily to 6% higher commodity costs, and to a lesser extent, higher labor and other costs.

The full-year outlook for the increase in our US grocery basket remains at 4% to 4.5%.

The cost increases were partly offset by strong guest count growth and a 1% price increase in March, and a 1.4% increase at the end of May.

As we move through the year, we will continue to consider future price increases, balancing our desire to maintain growth in guest counts and marketshare amidst rising input costs.

We remain mindful of food at home inflation while striving to remain below the food away from home index to maintain our strong value proposition.

Food at home inflation is rising faster than food away from home, providing us some room to take more pricing in the current environment.

In Europe, second-quarter Company-operated margins decreased 70 basis points to 19.6%, primarily impacted by 5% higher commodity costs, and to a lesser extent, higher labor and other costs.

Europe's projected full-year commodity cost increase also remained at 4% to 4.5%.

Europe is a collection of 39 different markets, so our price increases vary by market, with Russia at the high end due to its significant inflation, and all other markets averaging about 2% year-over-year.

As we move through 2011, we will continue to evaluate pricing, being sensitive to austerity measures and shrinking disposable income.

In Asia-Pacific, Middle East and Africa, Company-operated margins for the quarter decreased 10 basis points to 17%, also reflecting inflationary pressures in commodity, labor and occupancy costs, offset by comparable sales increases.

Similar to last quarter, the acceleration of new restaurant openings in China negatively impacted the segment's margin percent.

In terms of pricing, APMEA is averaging about 3% year-over-year.

Similar to the US and Europe we will continue to assess our pricing in an effort to alleviate some of the inflationary pressures, while maintaining our guest count momentum.

Looking forward, given our commodity pressures, we expect third-quarter consolidated margin comparisons to remain challenging with comparisons easing into the fourth quarter.

G&A control remains part of how we operate.

Compared to second quarter 2010, which included our biennial worldwide convention, G&A spending declined $5 million, or 1% in constant currencies.

We remain on track for full-year G&A to decrease about 2% in constant currencies.

On the other operating income line, the current quarter benefited from gains on partnership dissolutions in the US, as well as comparisons to charges related to voluntary glassware recall last year.

With half the year behind us, we've tightened our full-year effective tax rate guidance to 31% to 32%.

Through June the effective tax rate was approximately 30%, implying that both third- and fourth-quarter rates will likely be above the annual guidance range.

Our strong operating result continued to generate significant amounts of cash.

Our first priority for this cash remains reinvestment in our business to drive future growth and returns.

About half our CapEx is allocated to existing restaurants, with the other half to open new units.

As Don mentioned, modernizing the customer experience is one of the pillars of our growth strategy, and reimaging plays a central role, refreshing our interiors and exteriors so customers easily notice the contemporary look and feel of our restaurants.

Equally important, we are taking advantage of the opportunity to enhance operational efficiencies, such as adding dual lane drive-thrus, optimizing the spacing between the payment and present windows in the drive-thru, or expanding the kitchen to increase capacity, to name a few.

Through the first six months we have completed 200 reimages in the US, and are confident that we will meet our target of 600 by year-end.

Our owner-operators are enthusiastic about this initiative and view it as a way to capture a sustainable, long-term competitive advantage.

The other half of our capital expenditures is allocated toward opening new restaurants.

Over half of the projected 1,100 openings, or about 650, will be in APMEA, a key growth region for us.

China has opened 66 restaurants through the first half of the year, and will finish the year opening between 175 and 200.

Broadening our accessibility remains a key strategy for us in this region, and we see significant opportunities for new units for many years to come.

Lastly, let me discuss foreign currency translation, which positively impacted second-quarter results by $0.10.

At current exchange rates, we expect third-quarter EPS to benefit $0.07 to $0.09, with a full-year benefit of $0.23 to $0.25.

But as usual, take this guidance as directional only because rates will continue to change as we progress through the second half of the year.

McDonald's results for the second quarter underscores the strong foundation from which we are operating, a resilient strategy that operates effectively in any economic climate, a powerful alignment of our system around the key priorities that widen our gap versus the competition, and an unparalleled focus on execution that delivers a uniquely McDonald's experience to the 64 million customers served at our restaurants each day.

We remain confident that this formula will continue to deliver strong results over the long term.

Thank you.

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

I'll now open the call for analyst and investor questions.

(Operator Instructions).

David Palmer, UBS

Congratulations.

I have a question about your efforts to improve throughput and the effective capacity of your assets, particularly in the US.

I think it was last year you said that the lunch hour same-store sales have been flat for five years or -- and correct me, if I'm wrong on that.

I know you made peak lunch hour staffing a priority at your conventions again about a year or so ago.

And earlier in this call you reminded us of new point-of-sale systems.

And I hear your reimaging has a sneaky positive to throughput.

So could you perhaps let us know have you been able to restart same-store sales growth at peak hours, and perhaps give us sense of how this might play out in the coming years?

Thanks.

We've definitely have had a big focus on peak hour, both from what we call peak hour capacity -- so that gets into, as you put it, some of the staffing efforts.

Our staffing levels are up.

As you all know, nationally hiring day in the US, we targeted hiring 50,000 people.

Actual results are coming in at 93,000 people that were hired.

And that's increasing our staffing opportunities also for across dayparts, but also for the peak hours.

So we are staffed up better.

The new POS system, which is in 1,000 plus restaurants in the US, is also helping us from an ease of ordering perspective.

So we have been growing across all dayparts, but we definitely are growing at the lunch daypart as well.

Jeff Omohundro, Wells Fargo.

Just wondering if you could further address the sales and inflation trends in China, really in the context of the broader consumer environment, as well as how you are managing your daypart efforts on the value side?

Thanks.

We had a good quarter in China.

Second-quarter comps were up 14.4%, almost all of that driven by guest counts.

That was on top of a mid single-digit comp last year in the quarter.

So traffic and guest count movement obviously is very strong there.

And key to that in the environment you mentioned, the high inflationary environment, is our everyday value.

So our focus, as Don mentioned, I think it was late 2009 we introduced the value lunch in China, and now a renewed focus on value at breakfast, with a RMB6 muffin and coffee offering.

And recently introducing a snacking value menu around RMB7 and up from there.

So all efforts to drive traffic, yet at the same time realizing that with input costs rising we do have to do something to maintain our profitability there.

So we did in July look at adjusting prices.

And when you take some of the products that moved to the value menu, which effectively were price reductions, with some of the other actions, it did net out into a net price increase.

But early days we are seeing no negative impact from that.

Matt DiFrisco, Lazard.

(technical difficulty) and what you have still in the barn to come out as far as in the global markets, specifically some of the things that are working in the US so well, the timing of that being rolled out on the international stage and some of your future things in the pipeline?

thanks.

We missed the first part of your question, it was cut off.

I was asking about the beverages, and I was curious if you could talk a little bit looking back how much it helped the comp, but also what -- as far as products that are working so well in the US, what are still to come in the international markets, if you can give us a little bit of insight into drivers without obviously tipping the hand of the competitors.

Thanks for the question.

The beverage strategy has clearly been working very well.

Now the coffee side of that is being implemented in many areas around the world.

And frankly the coffee part of that started in New Zealand and Australia.

We are very strong in Germany with a number of McCafes we have there.

The US, they moved forward with the overall beverage strategy, which is inclusive of espresso-based drinks.

The frappes, the smoothies, pineapple, mango, strawberry, wild berry, those are all products that are being looked at in other areas of the world.

Many of the areas are looking forward to an implementation of those products.

We do have to be cognizant of our supply chain and be able to make sure that we have ample fruit supply before we move into those, and our supply chain team is doing a great job of readying us for that.

So we are looking at the smoothies and some of the other products for their applicability.

By the same token, some of the premium sandwiches that we have seen in other areas of the world, the US team is looking at some of those, whether they be sandwiches like the McWraps or 1955, to basically augment the existing menu pipeline that's in the US right now.

So we've got a lot of great -- both from a beverage perspective and a sandwich perspective -- snacking, Pete mentioned that.

Some of the desserts are really traveling around the world at a much quicker pace.

Joe Buckley, Bank of America Merrill Lynch.

Thank you.

Could you talk about the month of June?

It was extraordinarily good, seemingly everywhere around the world.

Were there specific initiatives in place in the US or in Europe or APMEA that drove that very strong performance?

Thanks Joe.

In the US, the US focused on nuggets -- chicken nuggets, with the new sauces.

Also we did have the benefit of the pineapple, mango smoothie, strawberry lemonade.

And those things really still comping on top of what we had last year, which was the introduction of smoothies.

So the US did very well there.

We also had the benefit of the price increase, and actually the two price increases that have been taken, and Pete talked briefly about those earlier.

So we've had those benefits on the US side.

Their continued focus on building capacity, that was mentioned earlier relevant to the peak, really supported the business.

In Europe, what we saw was a combination of the initiatives that they have had in place, combined with the [US] continuing to monitor some of the commodity-based pressures, taking appropriate price increases.

But we've had great sandwiches like -- I've mentioned the McWraps, I mentioned 1955 before.

We mentioned some of our value executions with Little Tasters and Petit Plaisir, the whole SAS value campaign that we have in Germany.

So we've got quite a few things that are taking place that really supported us.

The other benefit that we had was there was a holiday shift in Germany, particularly it was across Europe, but in Germany particularly, where in the month of -- in the month of May we saw some negative impact from some of the shifts of holiday.

We picked that up in a benefit in the month of June.

So very, very solid performance, very, very solid guest count growth.

As I mentioned earlier, continued momentum and we are looking at July comps in the range of 4 to 5 percentile.

Greg Badishkanian, Citigroup.

Thank you.

You have nice acceleration in your China same-store sales.

Your other big QSR competitor saw nice acceleration.

How much do you think was due to the industry, and why do you think it accelerated so much?

I think China clearly has -- we are seeing some growing disposable income there.

We know that the Chinese government has really put in play their perspective of continuing to ensure that minimum wage grows at a rapid pace.

And so we are managing that from a labor perspective, but at the same time we see the benefit from that increased disposable income in terms of consumer purchasing power.

And therefore our appeal as a brand across the lunch programs, breakfast daypart, the initiatives that we've launched, our service initiatives, more drive-thrus in the marketplace, more restaurants in the marketplace, a stronger marketing voice -- we made investments there -- all of these things are coming to bear, I believe, in China.

And we are seeing some really good momentum there.

Our team is very strong.

I was over earlier this year -- very, very pleased with the development plan and the process there.

Very pleased with our operational execution.

We are learning better and better how to start up new restaurants and do it at the rate and pace that we've got going now.

So the Chinese team is hitting on all cylinders now.

Jason West, Deutsche Bank.

Thanks guys.

Just on US a little bit and sort of back-half outlook.

You guys had a lot of innovation on beverages, a little bit at breakfast this year, but can you talk about the innovation pipeline for the rest of the year in the US, are we going to see some new food items in the somewhat near future?

Relative to the US, you'll definitely see some ongoing -- some new things.

What the US has done extremely well, though -- and I have to say is that beverage implementations have been great.

Strength at breakfast and the addition of oatmeal, along with advertising core favorites and breakfast, has worked well.

They are looking at some other products that they could implement.

Clearly the Angus Burger has continued to perform for us.

But we got some different products that are in different tests around the US.

Some burger tests -- a couple Burger tests that I think -- you guys, we will be able to tell you about at some point in the future, if the tests prove out, I'm sure they will.

I talked about Garden Wraps and McWraps from Europe; the US is looking at those clearly.

We've got a couple other things in the desert pipeline in the US we be able to talk about, and ongoing innovation from a beverage perspective.

We really lean on the US for some of the beverage focus and innovation, and we look to Europe, and have, for some of their burger innovation.

And we are seeing some really great innovation out of Asia in terms of chicken-based products and snacking.

So all of those things combined together really are part of, if you would, our global menu pipeline.

And you will see some of those come through from a US perspective.

Steven West, Stifel Nicolaus.

Real quick, can you maybe give us an update on McCafe?

I think when you first started advertising this, I guess about four years ago, you were talking about $125,000 per store.

I think last year you said it exceeded your wildest expectations internally.

Can you maybe talk about where you are now, where you think you can be, either in absolute terms or a percent of sales mix?

Is there any reason to think McCafe can't be 10%, 15%, 20% of sales as consumers continue to learn about the McCafe initiative and continue to use you as a drink destination?

That's a great question.

I think that the team has done a really solid job of executing McCafe.

Let's keep in mind as well, a big part of the McCafe change was really the improvement in our drive-thru layout and our drive-thru capacity.

But now that we have an appropriate layout, we mentioned before that it would not only be espresso-based coffees, but we would move into frozen blended drinks, and then we said proprietary-based drinks.

All of those things have played well.

Ice coffee is still in the lineup.

We have the products in the restaurant now to be able to do combinations of things.

I know but the chefs are looking at that and looking at more new products.

We've seen some of those products in the potential pipeline here.

And so I think it can continue to grow.

From a percentile perspective, how high can it go, we still view ourselves as an underdog in the beverage category when it comes to frozen blended beverages.

And so for us, being the underdog is a great thing because we have an opportunity to take even more business in this regard, and we can do it at the speed of McDonald's.

So the whole combination of drive-thru capacity is a big part of what we're able to deliver in this regard.

Michael Kelter, Goldman Sachs.

I wanted to ask you -- you had talked about one of the benefits of the comps in the United States for the price increases you put through, which if they flow through kind of implies very little elasticity.

And I was curious if that is the right takeaway, that there is very little elasticity you're seeing right now to the price increases you are taking, both in the US and abroad?

And whether you're seeing otherwise any pockets of different consumer behavior as prices go up?

Actually, you know what, actually we are seeing a pretty good reaction to the price increases so far.

So the one that we took in the US in March, I would say the flow through from that was probably above average what we typically get on a price increase.

Part of that I think is because we hadn't taken one in so long.

And it's still early to read on the May increase, based on our June results we think that is also being accepted.

And generally that's been the case around the world.

So we've been very cautious.

We've used our tools.

We've looked at all the other indicators that guide us, whether it be grocery store inflation or food away from home, and what's going on with competitors, and unemployment rates, etc.

So we've been judicious, and I think as a result of that, we are getting good reaction and good flow through on those price increases.

And in terms of is that changing consumer behavior per se, I would say no, because we aren't seeing any dramatic spike in the usage of our Dollar Menus.

That would be one indicator.

If we raised prices and then suddenly saw a big shift down to Dollar Menu items, and we're just not seeing that.

We're pretty comfortable with how we've gone.

We will continue to be judicious as we move forward to balance that guest count growth with those rising input costs.

John Glass, Morgan Stanley.

So the APMEA profits accelerated nicely this quarter, I think, versus prior quarters.

My question is simply what is the contribution now of China to that business?

You can talk about the total either dollar contribution or the percentage contribution of China?

And also can you compare their McOpCo margins to the McOpCo margin you reported 17% for the quarter?

You mentioned there was some pressure on the margin from development, maybe just talk about how much that pressure is.

China still remains about 3% of our global operating income, so while it obviously its operating income was up for the quarter, it continues to stay in that 3% range on a global basis.

The margins for China are a little bit below the average that we report for APMEA, but they were up for the quarter.

But (inaudible) as we've accelerated new unit openings, the new stores -- and this is not unique to China, but a new store tends to open at a lower margin than the market average.

And then over a couple years as the comps build, then it gets to the market average.

And that's what we are seeing in China.

We -- actually this quarter, the new store mix was less of a drag on the margin than it was in the first quarter.

So it's a combination, we are starting to come up against having fewer non-comp stores in the mix, as well as the performance of those stores improving.

David Tarantino, Robert W.

Baird.

Good morning.

Just a question about the overall environment in Europe.

Looking at your comps they were very strong.

I think, Don, you mentioned that even the informal eating out market there was flat, which is maybe better than you would expect, given all the austerity measures that are going on.

So perhaps could you comment on what you are seeing in the consumer environment, and is it trending better than you would have suspected at this stage?

And sort of what are the puts and takes as you look at the back half of this year and into next year in that segment?

Europe is still fragile, and I think we all know that.

Unemployment, the UK is at about 7.8%; Germany about 7.3%; France is about 9.7%.

So we are still seeing some fairly high unemployment rates across Europe.

From an IEO perspective, it is interesting.

If you look at some markets you'll see IEO from a growth rate perspective has diminished.

Other areas it's very, very lackluster.

Every now and then you get a bright spot, you see a Russia that is growing, but still not at some of the historic rates, and that's due to austerity measures.

So what we see across Europe, and it's also a mix in consumer confidence.

So you're looking at UK consumer confidence is eroding a bit.

Germany is going up a little bit.

France is fairly flat.

So it's an interesting market -- set of markets relative to all the economic indicators.

For our business, as we move forward, we just continue to focus on being able to have, first of all, value at each tier, bringing forth some new innovative news in terms of our menu.

At the same time make sure that from a convenience factor we are there, and from a base value factor, we are right there for the consumers across Europe.

And so right now still a mixed bag the second half of the year.

It depends upon too what happens with some of the additional austerity measures.

Some of the markets, like a Portugal, are looking at increased VAT.

So it's -- we just have to continue to watch what takes place with some of the austerity measures and make sure we are prepared from a value perspective and from an operating perspective.

Jeff Bernstein, Barclays.

Great.

Thank you very much.

Just to follow-up on the pricing and commodity front, it seems like you're now running in the US roughly 2.4% price.

In Europe I thank you said ex-Russia you are only up 2%.

I am just wondering whether you could talk about -- I thank you said food away from home still above food at home.

I think that's in both regions.

Is the 3% to 4% range that you guys talked about last call, is that still realistic or necessary in terms of pricing as we look to the back half of the year?

And perhaps could you actually see margin growth with that level of pricing, with COGS where they are?

Which kind of feeds into the COGS, where I guess the food basket you're saying is still unchanged, which we are happy to say at 4% to 4.5% inflation.

I am just wondering whether you think things are topping out there?

And while you haven't locked in 2012, presumably whether you think the 2012 basket in US and Europe would be above, below or in-line with that for 4%, 4.5% range?

Thanks.

Wow, that a lot of them.

So our best estimate right now, and I think the folks that focus on this are suggesting that food away from home will still grow in that 3% to 4% range for the year.

So we'll keep an eye on that.

Our goal would be to kind of be in that range, I think.

But again as I mentioned earlier, we're going to be judicious about this and continue to read not only what has happened with the price increases we have taken, but what is the sentiment and expectation going forward.

But it does feed into your second question.

So we think for the year our cost of goods -- our basket is going to top out here in the third quarter, and then we would see relief in the fourth quarter.

The 2012 -- it's still too early for me to give you a number, but directionally my guess is we would see the basket up again in 2012.

I think the anomaly of having a large decrease in our basket that we saw in 2010, I'm afraid those days are behind us for a while.

And so as we think about price increases for the rest of this year, we also have to think about what is coming in commodity costs in 2012 and beyond.

Our suppliers are, as they always do, looking at the markets and putting on positions where it makes appropriate to help lock in and secure some of that predictability to our pricing in 2012, but at this point it would be premature for me to put a number on that.

Mitch Speiser, Buckingham Research.

Thanks very much.

Can you comment on emerging markets?

Let's exclude China for a moment.

Do you have a general emerging markets strategy, or is it just by region?

And I guess my direct question is could you give us a sense of what your unit growth is for your emerging markets ex-China?

And is there an increased focus on stepping that up?

I think your global unit growth is about 1.5%, so I'm just primarily asking about the emerging markets piece ex-China.

Thank you.

In terms of our opening plan for 2011, of the 1,100 restaurants roughly 150 of those are going to be in the US.

Another 225 of those are going to be in Europe.

90 plus are going to be in Latin America.

So regarding emerging markets, we're going to get nice growth in Latin America.

And if you recall, that's a developmental licensee, so no capital from us for that.

And then 650 in APMEA.

So ex-China let's say that's 450.

Japan is going to give 100, South Korea 30.

There's a lot of the markets that are 20 plus, whether it be the Philippines or Turkey or Malaysia or Indonesia.

So there are a lot of openings and growth going on in these markets that you would refer to as emerging.

So while it's not a strategy per se, our strategy is we are looking around the world for the opportunities to grow restaurants where we have good demand, and we can get good returns.

And so we're going to continue to do that.

Nicole Miller, Piper Jaffray.

Good morning.

In regards to beverage sales, I think I heard being up 29%, could you help us understand which dayparts benefit most?

So assuming not every daypart was up 29%, but where did you see most of the increases?

Thank you.

It varies based upon the product.

And so we see great regular menu, regular daypart, if you would, afternoon, later evening movement with products like the smoothies and the frappes.

However, interestingly enough, we do sell frappes at breakfast -- in the breakfast daypart and the smoothies.

But interestingly enough, smoothies are skewed more toward the rest of the day, like frappes are.

Counter to that is espresso-based coffees and our drip coffee in general, that is skewed towards the morning daypart.

Strawberry lemonades, we continue to look at those products to see whether or not the buying habits change.

But snack daypart, mid daypart for those.

Also add-ons in early day.

Our dinner daypart, typically the more indulgent-based products sale at the dinner daypart.

So we get a mix across the dayparts, which is very, very good because it smoothes the capacity impact in our ability -- helps our ability to deliver at the speed of McDonald's.

Sara Senatore, Sanford Bernstein.

Thank you.

Just actually two on the US, I wanted to drill down.

One was labor costs.

I was interested that you mentioned, I think, pretty much across the board you did see some pressure on the labor line.

I am just trying to understand that obviously here in the US the labor market are still really flat.

I was hoping you could talk a little bit about what you're seeing there.

And then the second follow-up question was clearly in the US you're taking share from somebody.

[Informally], do you think it's coming from other fast food restaurants, is it coming from full-service?

If we could just give a sense of where -- from whom you think some of your growth on whose -- on whose expense maybe some of your growth is coming?

I'll start with the labor question.

The average rate in the US was up just about 1%.

So not a huge increase, but certainly enough to have an impact on the margin a little bit.

And really as you noticed and mentioned, the employment rate obviously continues to remain high.

But one of the factors -- the positive factor for us is that turnover is at record lows.

So that's great for customer service.

That's great for staff continuity.

That does put upward pressure on the wages though.

The longer the folks are there, the wages creep up a little bit.

So it's that dynamic really that probably had the biggest impact on the wage in the US.

And I'll let Don talk about where we are taking all the share from.

I think if you look at some of the product introductions, you'll get a feel -- really, and that's the best way for us to really approach it.

Beverages, we are gaining share clearly based upon the McCafe beverages.

They been go growing at a really good pace.

Also though we are growing beverages on the value platform.

So when you look at dollar drinks and dollar sweet tea, those areas we're growing our business there.

Breakfast-wise, clearly we are growing business at the breakfast daypart.

Oatmeal has been a large incremental for us at breakfast.

So we are getting the incrementality of an oatmeal.

So where exactly those dollars are coming from, we haven't dissected that or really pinpointed from other competitors.

We just know coming from the broader marketplace.

Clearly in the area of chicken with the success of nuggets, we grew our chicken business quite a bit.

The other thing we are doing in the US though is extending and expanding hours.

So we've gone from about 36% up to about 40% in terms of our 24 and extended hour operations.

So when you look at that, we are becoming more accessible.

We are definitely getting in some of the product categories.

And we are improving our peak hour service and our ability to satisfy customers during the peak periods where we have higher flow through of customers.

So all of those things are areas where we are seeing some business gains.

John Ivankoe, JPMorgan.

Hi, thank you.

The question was on the self-order kiosk that you have, and actually I've seen it in Germany.

If you could remind me how many stores that is in, and just in terms of what some of the initial reaction has been from a customer perspective?

In other words, is it driving average ticket?

What its overall effect might be on throughput, how it might be affecting labor, and whether you kind of think this is potentially a really big idea that you could use elsewhere in the system?

Relative to self-order kiosk, so France has really been our primary test market for self-order kiosks.

We do have a few in some other areas, but the real key has been France.

That's where we are really modeling out the benefit of self-order kiosks.

It is not for every restaurant.

It is one of those things that helps us pull traffic away from the front counter and helps us get basically another initiation point in terms of being able to place orders which go back into the kitchen.

So that is what self-order kiosk has done.

Now would it help some of the areas in terms of early read, is that when you have an opportunity as a customer to be in a position where you are placing your own order you take your own time.

So if you're a person that takes a little longer, or if you are mom and dad with kids, they tend to like the ability to go at their own pace with a self-order kiosk.

So those are the things we're really testing.

I think right now we've got 760, 770 or so in France.

And we will probably stay around that number until we have really proven out the business case for this.

Keith Siegner, Credit Suisse.

Thank you very much.

I have a question.

I'm very, very impressed with the Europe performance, it has very strong.

And while it's kind of broad-based across-the-board contributions, the modernization and remodel is definitely, definitely part of this.

As you get closer to being done with that and have more critical mass, I'm just wondering are you finding better or worse sales lift now the you have more critical mass and awareness?

And is this more than just an initial sales let's say upon remodel, but now that you are really establishing critical mass, do you get more of a broad-based lift across the rest of the system?

In other words, is it a one-, two-year or even three-year lift do you think as you get closer to critical mass?

Just if you could help me think through that, that would be great.

We know the reimaging is having a significant impact as you look around.

But in Europe, by the end of next year we hope to have 90% of the interiors done.

But to date we only have 40% of the exteriors done in Europe.

So we do still have opportunity to continue there.

And in France, which is probably -- they were the leader in this area, they are looking at, I would call it, second generation of interior remodeling.

So they are essentially done.

They are looking at what the next version of the reimaging.

And the good news is the way it was done and the materials used and the way it was all put together that second round of reimaging is much less expensive from a cost perspective.

It could be just changing some of the wall coverings or some of the seating, and you're able to get an updated, refreshed environment without a significant capital outlay.

But we are not really seeing a slowdown in terms of the impact when you do a new reimage relative to the marketplace.

So it still in that let's say 6% to 7% sales lift when we do a reimage, and we aren't seeing that slow down.

We know it's a great investment for today and for the future.

And not only does it drive sales, but when we look at all the customer attributes, they tell us the service is friendlier, the food is hotter, the restroom is cleaner.

They give us a lot of credit in that reimage surrounding that does help the brand halo and helps their intent to revisit us.

Rachael Rothman, Susquehanna.

This is Jake Bartlett in for Rachel.

I just had a clarification on the pricing.

I know in the past you have talked about 2% to 3% in the US.

I just want to see if that still the case.

I know you're talking about food away from home up 3% to 4%, and I think you mentioned being in that range.

I just wanted to clarify on the pricing.

The second question is about mix in the US.

We know what pricing is.

I am wondering what happened to mix, and maybe what that says about the consumer, whether the consumer is trading up in the menu.

I know beverage has a beneficial effect, but whether in the rest of it they kind of are moving towards more premium, higher-priced items?

Thank you.

We've said in the past that in what we call a normal year, a 2% to 3% price increase should allow us to maintain margins.

And underlying that assumption is that we have a normal commodity cost environment, so that's commodity costs in that 2% to 3% range.

And that's also assuming that 2% to 3% gives us -- half of that growth is coming from pricing and half of that is coming from traffic growth.

So in years like now, we've got more of our growth coming from traffic, which means you need a higher comp.

And we've got commodity costs above that average.

So it's something more than a 2% to 3% comp to maintain margins in this current environment.

And so obviously we're going to -- as we said before, we are not solely going to monitor the Company operating margin and focus solely on growing that, we're going to look at that balance between continuing to drive customers, continuing to take marketshare, with the need to cover some of these input costs.

So that's our perspective on the pricing.

Relative to mix, and Pete mentioned it earlier, we are still seeing -- if you looked across the menu board, so if you look at a mix between the value component products and the rest of the products that we have, those that are on value menu versus the rest, we are still seeing about a 10% to 11% in terms of the Dollar Menu.

If you add double cheeseburger in there, then it's up just a couple of points.

So the mixes stay basically the same.

Now what's happened is we've got a lot more customers coming into the restaurant.

So that part is good.

We are still seeing about the same mix there.

Clearly we are selling more beverages and seeing more of those kind of transactions, which is very good for us.

But all in all the mix has not varied that much.

I think the balance of being able to talk about core products and premium products like Angus, along with beverages, along with value, has helped us to manage that mix.

We have time for one more question.

Larry Miller, RBC.

Thanks, maybe since I'm the last questioner, I'll slip in two, if you guys don't mind.

A quick one on real estate ownership, can you give us an update there?

That was something you are looking at as real estate became more attractive.

And then secondly, I'd love to get your thoughts on the premium burger segment in the US, there's a lot more competition there, and your sense of how they are doing, and is this any credible threat to your business?

Thanks.

Regarding real estate ownership, I think -- our desire in every restaurant opening is to own the real estate, if we can do it at a reasonable price and get the unit economics to work.

Securing that tenure forever and that occupancy cost forever is our goal.

So in terms of 2011, we do have a greater proportion of purchased sites than we had in 2010, primarily in Europe, where we focused a little bit more.

I still say our expectation was maybe we'd see a little bit more distressed real estate on the market or opportunity to buy sites that maybe we couldn't in the past.

But we really aren't seeing that to a meaningful degree.

So nothing dramatically different in that regard.

We will continue to focus -- our 2012 development plans are starting to come together.

I expect we'll continue to see again an increase in purchased sites, but not dramatically different than our expectations.

On the premium burger question, and I'll speak of it from a US perspective, clearly is where you see more of [the add] than more premium burger outlets, if you would, coming into the marketplace.

And frankly, I think it's good for us.

I think it is a benefit, because those premium burgers have higher margin, and we've got some of those same premium burgers.

When there is advertising on those we get a benefit.

So we are able to Angus now.

As I mentioned earlier, we've got a couple other things we are looking at in the burger lineup.

Keep in mind, Europe has already tested the 1955 very successfully, [Big Burger], Big Tasty has been out.

So I'm really looking forward to us having even more premium burgers.

We'll manage it appropriately from a price perspective and be able to deliver that, we think, at an even much more of a value proposition, based upon our supply chain and the efficacy of it.

But we will also not only look at beef, we will look at chicken.

We are doing this around the world.

So our menu pipeline is pretty strong, and we look forward to capturing even more of the market.

We're about out of time.

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

I want to really thank everyone for joining us this morning.

And in closing I'd like to just reiterate our confidence in the continued strength of our business around the world is very strong.

We are delivering solid results because the entire McDonald's system remains aligned behind executing our Plan to Win, and focused on driving toward our mission to become our customers' favorite place and way to eat and drink.

We'll continue to focus on being smart and strategic in the current environment, as we have talked about today, while always striving to deliver the best customer experience that we can in each of our 33,000 restaurants around the world.

So thanks again, and have a great day.