麥當勞 (MCD) 2011 Q3 法說會逐字稿

Hello and welcome to McDonald's October 21, 2011 investor conference call.

As a 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 Miss Kathy Martin, Vice-President of Investor Relations for McDonald's Corporation.

Miss Martin, you may begin.

Good morning, everyone, and thank you for joining us.

With me on the call today are our Chief Executive Officer, Jim Skinner; and our 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 Jim, I want to remind everyone that, as always, the forward-looking statements in our earnings release and 8-K filings also apply to our comments; and both documents are available at our website, www.investor.McDonald's.com, as are reconciliations of any non-GAAP financial measures mentioned on today's call, with our corresponding GAAP measures.

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

Thank you, Kathy.

Good morning, everyone.

I'm pleased to share the latest business results from McDonald's, which highlight our continued strength.

For the third quarter, global comparable sales were up 5%, and constant currencies operating income increased 8%, and EPS increased 6% to $1.45.

Our global success continues with every area of the world contributing.

In the United States, comparable sales for the quarter were up 4.4% and operating income grew 6%.

In Europe, the comparable sales for the quarter increased 4.9% and operating income grew 6% in constant currencies.

And in Asia/Pacific, Middle East, and Africa, comp sales for the quarter increased 3.4%, and operating income grew 15% in constant currencies.

And our momentum, I'm happy to say, is continuing into October with global comparable sales expected to be up 4% to 5%.

McDonald's continues to drive results around the world by offering what customers are looking for today more than ever -- great value, outstanding convenience, a modern restaurant experience, and relevant great-tasting menu offerings.

Our entire system of franchisees, suppliers, and employers are aligned around our plan to win, and we continue to focus on executing at the highest level against our 3 global priorities -- optimizing the menu with the right food and beverage offerings; modernizing the customer and employee experience by upgrading every aspect of our restaurants from service to designs; and broadening accessibility through continued convenience and value initiatives.

Now, as I've said before, it's not just one initiative, but the combination of all of them, that continue to drive our growth.

In the area of menu, we are staying focused on the right balance of core products and new offerings that are helping us stay relevant with consumers.

We've continued to build on our equity in chicken.

In the United States, this quarter, McNugget units were up nearly 10% over last year, as we featured 4 new dipping sauces.

In addition, our Premium Chicken Sandwich line, with a new flavor profile and bakery-style whole grain bun, continued to perform strongly.

In Australia, we launched 2 new chicken offerings, a Chicken and Cheese Snack along with a Bone-in McWings, and both have been strong sellers.

And in Japan, a renewed focus on Chicken Tatsuta, the Chicken Sandwich, helped grow sales.

Beverages also remain an opportunity around the world.

In the United States we energized our McCafe line with 2 additions -- Frozen Strawberry Lemonade and Mango Pineapple Real Fruit Smoothies.

These new offerings, added to our specialty beverage line-up, helped to increase total McCafe beverage sales by 16% over last summer's strong numbers.

McCafe is expanding globally as well.

We're building the business across Europe, where we have more than 1400 McCafes, with Germany leading the way at over 750.

In APMEA, Australia has 650 McCafes, and we're planning to have approximately 250 in China by year's end.

And while international McCafes are focused on hot beverages right now, we have a number of markets planning to test or add Real Fruit Smoothies and Frappes over the next few years, starting with Australia next month.

Our breakfast continues to be an important day part for McDonald's, as well as an opportunity for the future.

In China, breakfast is achieving double digit comparable sales increases, and today has reached over 8% of sales.

Europe has only begun to scratch the surface, with the UK continuing to experience strong sales results at 13% of sales.

And in the US, where breakfast represents about 25% of sales, we focus consumers on our line-up of wholesome offerings, from Oatmeal and Egg McMuffin to our Yogurt Parfait and Fruit and Walnut Salad.

Total units on all of these products combined to increase more than 20% over last year, and helped us to continue making gains during this very important part of the day.

In addition, Premium products have continued to deliver results, with France being the most recent market to launch McWraps.

These are large wraps with chicken or beef that have performed well across Europe.

Rounding out our menu news, Europe drove results with the use of customer-focused food events, often featuring Premium products.

The UK built sales with a successful summer food event highlighted by the return of the Bacon Chicken Onion Sandwich.

Leveraging the success experienced in Europe, the US is planning a number of promotional food events in 2012 that will feature new food news.

Around the world, our markets are also making gains through strong experience and accessibility initiatives.

Europe is furthest along in modernizing their restaurants with new and relevant designs to provide customers with a great experience.

Each area of the world has benefited from Europe's experience and are making steady progress.

Meanwhile, all of our top markets continued their trend of improving customer satisfaction scores, through a stronger focus on operations and service; and technology, such as our new POS ordering system, which elevates speed and accuracy and is now in nearly all restaurants here in the United States.

On the accessibility front, we are staying focused on serving more customers more often in a variety of ways.

Across all geographies, we continue to expand our extended hours in order to be able to be open and available for when and where our customers want us to be.

We are also growing capacity, especially at the drive-thru.

Drive-thru optimization helped drive results across APMEA, with countries such as Australia and Japan registering a lift in sales from a focus on their service excellence at the drive-thru.

In the US, they're also elevating their commitment to drive-thru, by side-by-side drive-thrus, where real estate will allow, and hand-held order takers where space is limited.

We're also broadening our accessibility by continuing to offer the most relevant value.

Our value programs at breakfast and lunch continue to be important to growth across APMEA, including Australia, which has made gains from its new value campaign.

And all of our major markets in Europe continue to focus on the value provided by their popular mid-tier offerings, from Little Tasters in the UK to Snack Deluxe in Germany, to Petit Plaisir in France.

With new flavors and promotions, we are keeping these lines fresh and engaging for customers and elevating our position as a leader in great taste and quality at a great value.

We recognize today that the environment out there is still fragile.

The economists say we are officially out of the recession.

But it hardly feels that way.

Unemployment is back up over 9% here in the US, and at similar rates around the world.

The stock market just ended its worst quarter in 2 years, and many major economies are barely growing, if at all.

Consumers everywhere continue to be cautious and hesitant to spend; and the informal, eating-out industry is growing at a very slow pace.

So we remain in a market share battle with every victory continuing to be hard won, but we plan to keep winning.

The examples I highlighted from across our system demonstrate how we strategically have strengthened our business in a comprehensive way.

We remain committed to listening to our customers and meeting their needs at every turn, whether it's in today's environment, or down the road as the economy improves.

Now, moving forward, we're equally committed to maintaining a strong financial foundation and maximizing value for our shareholders.

Our intent remains to return all of our free cash flow after reinvestment to investors through a combination of dividends and share repurchase.

We recently announced a 15% increase in our quarterly cash dividend to $0.70 per share, with the equivalent of $2.80 annually.

And combined with share repurchases, we expect to return total cash to shareholders in 2011 to reach approximately $6 billion.

Now, I'd like to say, overall I'm very pleased with our latest quarterly performance.

While the economic recovery continues to be fragile around the world, we stay focused on what we can control, staying committed to our winning plans, and delivering an exceptional experience for our more than 64 million customers around the world every day.

I'm confident that by continuing to innovate, invest and execute, we will help to continue delighting our customers and growing our business around the world.

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

Thank you, Jim.

Hello, everyone.

McDonald's continued to deliver solid results despite another quarter marked by rising costs and macro-economic uncertainty and volatility.

We are successfully navigating through this environment because of our alignment and focus around the plan to win.

This continues to yield significant increases in comparable sales, market share, and operating income.

Through the first 9 months, revenues increased 8% in constant currency; and over that same period, our combined operating margin increased 40 basis points to 31.8%.

Since 80% of our 33,000 restaurants are franchised, our profitability is primarily driven by franchise margins.

In the third quarter, franchise margins reached $1.9 billion, an increase of $133 million in constant currency, with each area of the world contributing to this growth.

The franchise margin percentage for the quarter rose 40 basis points to 83.7%, driven by positive comparable sales.

Global company operating margin dollars increased $26 million in constant currencies for the quarter to $972 million.

The margin percentage decreased 100 basis points to 20%, as strong comparable sales were more than offset by higher costs, primarily commodities.

Our McOpCo margin percentage remains at impressive levels, considering the current operating environment.

In the US, Company operating margins declined 90 basis points to 21.1% for the third quarter, due to an 8% rise in commodity costs, and to a lesser extent, higher occupancy and other costs, partly offset by positive comparable sales.

The third quarter margin percentage benefited by about 40 basis points due to the recognition of a special payroll tax credit created by the HIRE Act.

These prices, which typically moderate after the summer, have remained high.

As a result, we now expect commodity costs in the US to be up a little more than previously expected -- 4.5% to 5% for the full year, with fourth quarter increases easing compared to second and third quarter.

Partially offsetting the rising costs are the 2 price increases taken thus far in 2011 -- the 1% increase in March and the 1.4% increase at the end of May.

We are seeing good flow-through to the bottom line from these increases.

In addition, food-at-home inflation is rising faster than food-away-from-home, which might allow for additional pricing actions in the near term.

We will continue to evaluate additional price increases in light of this inflationary environment, always balancing our goal of driving traffic and market share gains with effectively managing the impact of rising costs.

As we look into 2012, we expect commodity cost increases in the US to be similar to this year's.

In Europe, third quarter Company operating margins declined 110 basis points to 20.9% primarily due to higher commodity and labor costs also partly offset by positive comparable sales.

In addition to prudently managing costs across the continent, our European Management team has developed effective marketing plans that feature value throughout the menu to drive sales.

In third quarter, several Premium products offered in our predominantly reimaged interiors were showcased within promotional food events.

This included The Big Tasty in France, The Stars of America in Germany, and the launch of the Premium 1955 Hamburger in the UK.

Our price increases vary across the 40 European markets.

Russia, which is experiencing higher inflation, is an outlier.

Most other European markets are averaging year-over-year price increases around 2%.

As we consider future price increases, we remain mindful of the extreme economic uncertainty, cautious consumer sentiment amidst the austerity measures, and shrinking disposable income.

We will continue to monitor this closely, aware of the ongoing inflationary pressures while doing what is right for the long term health of our business.

Similar to the US, Europe slightly increased its estimate for the full year commodity cost increase to 4.5% to 5%, primarily due to higher beef costs.

This implies a fourth quarter increase slightly above the annual guidance.

Turning to Asia/Pacific, Middle East and Africa, Company operating margins for the quarter decreased 50 basis points to 18.4%, also reflecting inflationary cost pressures partly offset by comparable sales increases.

Similar to the first half of the year, the acceleration of new restaurants openings in China negatively impacted the segment's margin percentage.

Menu continues to be a significant driver of comparable sales growth in APMEA.

Innovative locally relevant product offerings of chicken, the dominant protein in this region; as well as breakfast, compelling value offerings, and a sustained core menu focus, are building loyalty among our customer base.

Strong consistent financial performance from our unique business model generates meaningful amounts of cash flow.

We reinvest a significant amount of this cash back into our business to drive future growth and returns.

Our restaurant development teams are making excellent progress against their plans for reimaging and building new restaurants, taking advantage of improved tools and capabilities.

As a result, we are slightly increasing our 2011 capital expenditure guidance to $2.6 billion.

Reimaging remains an immense opportunity for us because the majority of our exteriors and interiors do not reflect our current contemporary look.

We continue to make progress across the globe on our reimaging efforts.

As of last week we have completed over 360 reimages in the US; and given what we have under construction, we are on track to complete and likely exceed 600 by the end of the year.

On average, it is taking about 8 weeks to complete the exterior and interior reimaging.

And as we head into the winter months, construction times will likely increase.

During construction, the front counter is often closed for a period, but in nearly all cases the drive-thru remains open to minimize any sales declines.

Most of the owner/operators who have committed to reimaging their restaurants this year sought to avoid construction during the busy summer months.

That explains why over 270 projects have broken ground since Labor Day.

Our owner/operators remain committed to reimaging.

Our pipeline of projects is growing because they also view this as an important evolution of our brand.

I think it also speaks to their long-term commitment to making the necessary investments to keep McDonald's increasingly relevant to our customers.

In Europe, we have reimaged over 600 restaurants through September.

France plans to have all of its interiors and half of its exteriors reimaged by the end of this year.

And the UK expects nearly all of its restaurants will be reimaged by the end of 2012, having just recently completed its 1000th project.

In APMEA we are also making significant reimaging progress, having completed 100 reimages in both Japan and China.

Currently about 20% of China's store base reflects the updated image.

But with new restaurant openings and planned reimages, that number should approach 40% by the end of next year.

We expect to open between 1100 and 1200 new restaurants this year on our base of 33,000, an increase of over 3%.

New openings by area of the world include over 150 in the US, more than 225 in Europe, and about 650 in APMEA.

China is on track to finish near the upper end of the 175 to 200 new opening range.

Lastly, let's turn to foreign currency translation, which positively impacted third quarter results by $0.08.

At current exchange rates, we expect full year EPS to benefit by about $0.20, which implies a minimal fourth quarter EPS benefit.

But as I always say, this is directional guidance only, given the volatility we are experiencing.

Our 3rd quarter and 9 month results are a testament to the strength of the plan to win and its effectiveness in a persistently challenging and volatile macro-economic environment.

Our business model is resilient.

The alignment within our system is strong.

And we are seizing opportunities now to secure an even brighter future for McDonald's.

higherI remain confident that we will continue to drive value for our shareholders over the long term.

Thank you.

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

Thanks, Pete.

We are now going to open the call for analyst and investor questions.

(CallerInstructions) If you can limit yourself to 1 question, we would appreciate that, so we can give as many people as possible the chance to ask questions; and we will come back to you for follow-up as time allows.

Our first question is from Jeff Omohundro from Wells Fargo.

Thank you.

The Europe performance, the Europe sales seem to be holding up very well in the face of the economic and political challenges there.

I wonder if you could give us any color on changes in consumer behavior you might be seeing there, and perhaps elaborate a bit on the strong performance in September.

Thanks.

Jeff, first of all, we're very confident in our business model in Europe; and we've continued to perform there.

I think, really August was a bit of an aberration in the overall scheme of things relative to play on days and promotional activities from a year ago.

And so we continue to be confident in our initiatives there.

And we're not seeing a big impact really to our guest counts and the growth in the marketplaces with some of the austerity measures and some of the economic issues that are there that are impacting certainly discretionary income.

And so it's been actually a good example of how well our business model adapts in these various marketplaces around the world, and in different kinds of economic environments we find ourselves in, which has been our history.

As you know, it's not the first time we have had to deal with these kinds of things around the world.

We've had a presence in Europe for a long time, and have gone through various ups and downs in the economies, and yet have been able to deliver steady performance on behalf of brand McDonald's, because of our business model and the way we are structured, the everyday affordability, as we like to say, our customers are getting pinched everywhere.

They shouldn't get that at McDonald's.

Even these austerity measures and the lifestyles in Europe, although they can be more harsh in some environments than others, I think the standard of living and the discretionary income has to be impacted very, very severely for us to start to feel that impact at the McDonald's front counter and drive-thru.

Next is David Palmer from UBS.

You have been ramping up pricing through the years slowly, and I can understand why you feel like you have more pricing power than the 2.5%, given that 6%-type pricing that's going on at home-food lately.

But my question is on Europe.

It feels like you have been fairly stingy on pricing there, too, away from the VAT, only 2% outside of the hyper-inflationary Russia.

And given that VATs may not soak up as much of your pricing power in 2012, I would wonder why you wouldn't feel like you can't maintain some sort of moderate pricing next year.

What is giving you the conclusion or the feeling that maybe you don't have as much room there, if I'm getting that vibe correct?

David, first of all, you are very familiar with our discipline around pricing.

And we take it at a point in time in terms of the impact in the marketplace, food-away-from-home, food-at-home, and as you know we try to balance that across the indexing and of course, the economic environment.

But mostly we measure this by the cost environment and this food-away-from-home.

It doesn't mean, based on everything we've said, that we won't look at pricing for next year.

We probably will.

We look at it on a regular basis, but can't really predict when we would take a price increase because it matters in terms of what we are seeing in the indexing at that point in time.

I don't know that we've said that we don't feel like we have the elasticity there.

I just think we are very, very cautious in the face of the economic environment we find ourselves in over there, and we are going to be very prudent about the way we go about pricing.

As you said, though, we did take the 2.5% right off of the top in the UK when they had the VAT change.

And I think the important thing is that it hasn't had any impact really on our guest counts and traffic in the restaurants.

Next is Michael Kelter, Goldman Sachs.

-- Europe, and what's going on over there, what about the emerging markets?

It seems like, as I understand it, GDP is starting to roll over a bit in China, more severely, at least at this point, in Brazil and a few other places.

Are you seeing any impact to your stores?

Michael, really, I would say, no, we haven't.

China for the quarter delivered another strong comp.

It was 11.3% for the quarter, on top of a double-digit comp last year in the third quarter, with double-digit guest count growth in both periods.

So China continues to perform strongly for us.

The other emerging markets within APMEA, so the South Koreas, the Taiwans, the Philippines, the Hong Kongs, et cetera, all of those helped contribute toward the performance in the quarter, and are seeing good sales and traffic growth.

We've always talked about the importance of value in that particular region of the world especially, and it continues to be important.

But our formula over there is working well; and we are continuing to see not only good sales and traffic, but good profitability.

Next is Keith Siegner from Credit Suisse.

On China a little bit, continued very strong results there.

With the commodity outlook, at least at the last update, was impressively below the trends in both the commodity markets and what we are seeing from basically almost everyone else in that market.

I'm just wondering, what is the current commodity outlook for China for this year?

And to achieve such a dramatically low inflation relative to others, was this effective contracting or was it something else?

I only ask because if 2011 was a result of really wise contracting, could 2012 turn out to be a much more inflationary year there?

And then how do you think about pricing in China as a result?

Thanks.

Well, Keith, I will start, and then I will let Pete talk to you about the details in terms of what he thinks is happening with the commodity costs there for the future.

Our supply chain, connected with our treasury and our suppliers, do a magnificent job relative to mitigating the impact on an overall basis regarding these commodity costs around the world.

And sometimes I don't think they get enough credit for this, because we take it very seriously and the process works very well for us, and it's not the case for everybody.

They don't simply have that sort of structure or capability.

And so, I think that's the reason why you have seen the results you have seen in China in that regard.

Relative to the future, I will let Pete talk to you a little bit about what we are looking at.

Keith, I know we had an investor meeting over there, where we gave some commodity information.

It isn't something we're going to typically update every quarter.

But I will tell you that it's based on the things Jim mentioned.

And as we have a preliminary look at next year, we don't see any dramatic spike from that.

I don't see us having to do anything dramatically different on the pricing side as a result of commodities.

As you know, there is continual pressure on labor over there.

And while we continue to keep our rates ahead of the minimums, there is always going to be some constant labor pressure as well.

As we sit today, we don't see anything dramatically different about next year compared to this year that's going to cause any different pricing perspective.

Next is Nicole Miller Regan from Piper Jaffray.

Good morning.

If we could turn back to the US, and like everyone else, I have a question on pricing.

I've heard through this third quarter earnings season so far, some companies reference [barbell] strategy, and I know you use a tiered approach.

Could you talk about the importance of the tiered approach?

And as specific as you can, where do you have the flexibility, and what categories or types of items can you tell us where you feel like you could take the price?

Thank you.

Nicole, I couldn't tell you specifically about each one of those categories, to be honest with you.

I leave that up to the US team to figure that out.

The tiered pricing process has given us opportunity to be able to have value across the menu.

So if you look at Dollar Menu and then the tiered pricing in the middle on some of those great value offerings that we have in the menu, Snack Wraps, et cetera, and then on the Premium end with the Premium Sandwiches and Premium Salads and that sort of thing, we weigh all of that when we take a look at the menu mix relative to pricing and value for our consumer, and then make a decision around that.

I couldn't tell you exactly where the elasticity is.

If I could, you'd probably think I'm spending my time in the wrong place.

But the US team is, as every geography is very, very good at this, and it's all based on market consumer data that we use in the pricing mix, as Pete mentioned, food-away-from-home, food-at-home, and it gets broken down then across the menu based on what we know about our product mix and the elasticity there.

Next up, Greg Badishkanian from Citigroup.

Just as a follow-up on the US pricing, are you looking more at what your competitors as well as other channels are doing in terms of pricing, or are you looking at your own transactions, and talked about sensitivities with your customers, so just looking at that economic sensitivity?

What's pretty much the biggest driver of what will determine -- .

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Greg, I think the biggest driver is certainly our consumer, and their feelings about our pricing and everyday affordability on the menu.

Yes, we take a look at what competitors are doing, but not because we will necessarily make a decision based on that, but we take all things into consideration as we look across the marketplace.

But mostly it's about this index of food-at-home and food-away-from-home; and we are very judicious about price increases because maintaining everyday affordability, particularly in the environment that we are in today, is paramount.

And we have a pricing model that we use very, very effectively.

And yet it takes intuition and a gut feeling about when to pull the trigger on these kinds of things.

And we take all of those factors into consideration, because our pricing model in and around our commodity costs and our supply chain and our ability to manage the impact of those costs at the restaurant level is very important to us.

And not every other organization that takes prices or moves their pricing up and down has that strength or capability.

So, although we'd look at what others do, and pay attention to that, really it's an inside game here at McDonald's relative to pricing based on what our consumers are expecting from us.

Next is Joe Buckley, Bank of America Merrill Lynch.

Thank you.

Could you talk about the modest step up in expansion plans for 2011, and just reflect maybe a little bit more aggressive posture those expansions going forward into 2012 and beyond?

Yes, Joe.

This is Jim.

When you look at our numbers around return on incremental invested capital, which, as you know, has been one of our hurdle rates since our revitalization plan in '03, have shown us that we -- because the results have been so great, the goal was high teens.

And we have been in the 25th to 40th percentile, depending on what segment of the business you are looking at.

And much of that, combined with the average unit volumes that these new restaurants are coming out at, and our development tools that we have been able to use around the world to determine where best to grow, and have all come together and sort of given us permission to grow more restaurants around the world.

And that's the simple reason.

But we spend a very great amount time around here on due diligence, and not just throwing numbers out because we've had good results and saying -- well, we will just up it.

We take a real hard look at the metrics around new store openings, and demand that our geographies pay attention to that and continue to deliver on those things that are important as we grow the business.

But that's really the reason is -- we have had good results, and the ROIIC has demonstrated that those new restaurants have come online at a very productive and profitable way, and therefore more opportunity.

Next question is Jason West from Deutsche Bank.

Thanks.

Just had a question on the restaurant level margins, and I recognize most of the profits are coming from the franchise side, but just touching on the restaurant margins.

Looking at the items away from food, it would seem you guys would have maybe seen a little more leverage on those items this year given the strong comps.

And I just didn't know if there was anything there that is a little bit out of the ordinary, or a little more inflationary than you expected.

And is there some opportunity on some of those items next year to improve the restaurant margins if we have another tough year on inflation?

Jason, I would say there is nothing in there that was significantly different or is a particular outlier.

It just so happens that almost every category of those costs is going in the wrong direction -- utilities up a little bit; depreciation up a little bit, that in part due to our reimaging efforts; labor is up.

The average wage is up in the US and generally around the world.

There is no 1 particular item or no particular item is driving a significant piece of it.

But just a general inflation across all of the line items is really what is underneath that.

So as we look to next year, I don't know that there is going to be anything dramatic on those line items either.

It's also important to note that we're right around all-time highs in the margins on the Company side.

And this all gets back to pricing and a top line and how much of that you can mitigate, and certainly don't want to do that at the expense of the customer.

We take all that into consideration, but you have to continue to look at the fact that that number is at a pretty high level relative to the overall history of margins in the Company.

Next question is Matt DiFrisco from Lazard Capital Markets.

Thank you.

Two questions.

You mentioned China and some of the margins there being impacted a little bit by the new store development.

I wondered -- can you describe what we should see over the next couple of years looking at 50% of your store base is under 3 years old.

When does it flip where the new, younger stores are actually starting to ramp up, and what does that look like as it progresses on the margins?

And then also, on Europe, the remodels, I was wondering if you could tell us what we should expect and what you are seeing as far as same-store sales trends off of those stores that have been now remodeled maybe 2 or 3 years ago?

Thank you.

Matt, Jim Skinner.

I will start off with China, and I'll let Pete talk about Europe and add his two cents in on China.

First of all, the way we develop in China, and the major cities where we are mainly focused, is through new developments, if you will.

The Chinese are very disciplined around developing new retail outlets and a whole combination of things.

They do these cities, if you will.

So we go into those because we know we need to be there, but in fact, we go in there early as compared to the overall development.

So you are going to see a benefit I think in year 2 and 3 on some of those new stores, which should start to have an impact on that overall margin relative to new store growth.

And it's the best way for us to develop the market because we need to be in those environments, but it takes a little time for them to come on as the other population and retail engagement in those properties begin to come online in a meaningful way.

Matt, that isn't dramatically different from what we see in other countries.

It may be 10 basis points higher in China because of some of the specifics Jim mentioned.

But generally, they start out a little bit lower; and then by the 3rd year, they have pretty much caught up to the market average.

So, if you think about what we are doing in China from a development standpoint, we opened 166 last year.

We're going to open close to 200, or 200, this year.

That kind of incremental ramp up in new stores is really what's kind of causing that impact.

As we continue to increase the number of openings every year, we will slightly have more impact.

But it's definitely, at the same time, you have more stores that are maturing to help offset that.

Again, it's not dramatic, but it is something we keep an eye on, but it's performing consistent with how other markets perform during their development ramp-up phase.

And in terms of the reimaging across Europe, similar to the US, those first-year comps are up 6% to 7% ahead of the marketplace.

And as you've seen the results in Europe over the last couple of years, sales continue to grow in that regard.

We're comfortable, and we're still seeing sales increases above the market in those restaurants.

And yet there is more than just that sales increase that drives improvement in the customer's attitude about McDonald's, and the surroundings they are in, their perception of the cleanliness of the restaurant, the quality of the service and the food.

So it helps build that customer loyalty and drive more repeat visits.

It's performing the way we had hoped and expected it to.

Next question's from Andy Barish from Jefferies.

Quick look out to 2012, and I'm sure we will get a little more detail on this at the analyst day next month.

As you look at the US business promotionally, product-wise, is there new elements in the marketing strategy for next year?

Would you characterize the year, next year, as more of kind of a line extension and rehit some of the more recent things?

Andy, I think it's probably closer to the latter.

I think if you look at the success we've had in 2011, so here we are 9 months in, we had some pretty significant weather the first couple of months; and yet we are still at a 4% comp 9 months in, with really we're a combination of line extensions and what we call these premium food events, which is a limited time offering.

So, from the introduction of Oatmeal to the Barbecue Bacon, fourth flavor on the Angus, to the Asian Salad, which was on for a limited time, and a couple of new beverages, et cetera, I think as we review the 2012 calendar for the US, it feels like a similar year to 2011.

Next question is Mitch Speiser, Buckingham Research.

Great, thanks very much.

As we think about 2012, and Pete, I think you mentioned food costs about in line with 2011 -- if we look at the third quarter, I think we all probably think that comps were better than expected, and margins were worse than expected.

When we think about 2012, given the cost outlook is the same, should we think about continued store level margin pressure as we try to build out our models?

Well, Mitch, if you look at the third quarter, specifically in the US, costs were up 8%, which was the highest for the year so far.

They were up 6% in the second quarter, and about 1% in the first.

So it's by far -- was the worst quarter.

Europe was up about 5% for the quarter, which was kind of similar to the second quarter for them.

But the one thing you have to consider is -- certainly in the US when we flip the calendar to January of 2011, we had zero pricing increases rolling over from the previous year.

Whereas when we flip the calendar to 2012, those first 2 months will have the benefit of the previous 12 months of price increases that we've taken in the US.

So that's certainly a factor, and something we consider as we think about price increases frankly the rest of this year.

And I think something similar in Europe, why we don't have a preliminary estimate nailed down quite yet in Europe with the volatility and some of the currency markets over there and the commodities, they're going to have a year probably that is similar or maybe a little bit better than the US from a cost side, but we'll have an opportunity to refine that and maybe share it at the analyst meeting.

But it's going to continue to be, as we look at what is going on in the marketplace -- is the consumer in a place that we are comfortable, we can continue to add price increases or continue to monitor the impact on them.

If you look, as Jim made some comments about Europe, with everything going on there daily around the sovereign debt crisis, and what's going on, especially in the 2 big markets we do business in, that are the ones that are supposed to bail out the Continent, hearing that all the time in the press does play on the consumer psyche.

We will continue to be mindful of that, and we will do what is going to be best for the long term business from a price side, and manage the input cost as best we can.

Next question is from Jeff Bernstein from Barclays.

Great.

Thank you.

Just 2 follow-ups.

First, on the food cost side of things.

It seems like with 1 quarter to go, that you raised both the US and European basket 50 basis points, which would seem to imply the fourth quarter is probably running 200 basis points above a plan a quarter ago.

Just trying to understand more conceptually how something like that has happened throughout the year, in terms of what's locked, what's kind of still exposed.

It sounds like it's beef that's the primary driver.

I'm just wondering if you could look at potentially what's contracted, whether we should assume that kind of continued pressure.

I don't think you said that you finalized the European basket yet.

But trying to understand how it's contracted out, and how it continues to rise.

And then the follow-up question was just on foreign exchange.

I think you gave good color on the fourth quarter as the impact, and I know, Pete, you don't want to be too specific for next year.

But if rates remained where they were right now, what would the early read on 2012 FX?

Thanks.

Jeff, the 1 issue with the commodities is -- we only give you guidance updates once a quarter.

And so, you can't necessarily assume that all of the increase in our guidance is going to be felt in the fourth quarter because actually we started experiencing that in August and September.

And so, while we knew the third quarter was going to be probably the highest cost increase quarter of the year heading into that quarter, and that's what we had messaged in July, it actually, primarily because of the beef costs, which as you know historically is our least protected and hedged item, that drove the increases.

You're not seeing a 200 basis point deviation from our expectations in the fourth quarter on cost increases.

It's actually much closer than that.

And you know, we're not going to get into item by item, how much of this is protected.

But we've consistently said that beef is the wild card for us in terms of it has the least amount of locked-in pricing.

And so, while we didn't see the traditional fall off in prices after the summer grilling season that we've historically seen, and that fall off frankly was built into our last forecast.

But it's manageable for us, and the good news is in the fourth quarter in the US those cost increases are going to be well below what they were in the second and third quarter.

So that's good.

And probably at the analyst meeting is when we will start to give a first look at currency.

To be honest with you, I haven't even formulated a view on that yet.

Next question is from John Ivankoe from JPMorgan.

Thank you.

Question I think related just to products overall in the US for 2012.

I mean certainly the new point of sale system does allow increased speed and accuracy.

I wanted to get a sense of how that might influence product development, what you offer to the customers, and -- whether 2012 or beyond.

And secondly, given the fact that some of your competition has backed off, focused, perhaps by necessity, on their value menus -- what your thought is of promotion of your Dollar Menu in 2012.

Might it be less than what it's been in previous years based on less from the competition?

This is Jim.

I don't know for sure exactly how much emphasis we're going to put on Dollar Menu for next year except to say Dollar Menu is here to stay.

We have support by our franchisees for the Dollar Menu going into 2012.

There's just an alignment around everyday affordability, is extraordinarily strong.

And it's going to continue to be important.

And we will continue to communicate that to our consumers.

And so, I don't see a lot of change there.

Relative to overall menu development and new product news, the US is going to probably continue to talk about breakfast; they'll talk about big sandwiches and other mid-tier.

The problem we have with a company like McDonald's is that the expectation around communication around all of those things is expected by our consumers.

Providing them that choice on the menu has to continue to get better, not get stale or go south.

And so I expect that we will continue to communicate strongly around all of those day parts, and all of those menu platforms.

And John, as you pointed out, the new register system is certainly one of the tools that will help facilitate that.

Our old register system couldn't have handled, in any reasonable way, the additional choice and variety that Jim is mentioning.

And it helps facilitate the introduction more easily as some of these, what we call, premium food events or rotating events that items will come on the menu for 6, 8, 12 weeks and then go away.

We couldn't have done that as easily or efficiently with our old register system.

So it is definitely a key piece of our menu strategy.

Next question is from David Tarantino, Robert W.

Baird.

Peter, just a question on overall franchise profitability.

I was wondering if you had any insight on how franchisees have been able to manage through the current environment, in terms of their own cash flow profitability, and whether they are seeing some of the similar pressures you are seeing on the restaurant cash flow margin line.

And if so, has that made them any less enthusiastic about investing in initiatives like reimaging or any of the product initiatives you have coming?

David, this is Jim, although I think you asked Pete the question.

I was just with the franchisees last week and the week before that, here in the United States.

And of course, we pay very close attention to franchisee cash flow and profitability, going all the way back to Ray Kroc, who said -- first the franchisees make money, and then everything else follows.

We have not changed our philosophy around that in 55 years.

And so the headline is that it continues to be very, very good.

It is off slightly this year, but it's off a record high last year.

And the franchisees I think are very, very pleased, particularly when you look at the alignment of the organization around our initiatives, which we collaborate on very closely, first of all.

We don't make decisions here at the center, and then bark out orders to our franchisees.

They are part of the process in the plan to win.

The profitability regarding those initiatives is always a factor as we move forward with the progress and the sustainable growth of the organization, which revolves around the cash flow for the franchisees.

It's at a very good place right now, and continues to be in a good place.

And much of this because of the system support for the franchisee profitability, as we talked earlier about supply chain and locking in food costs, that are going to be appropriate for them to be able to maintain some level of cash flow that is important to them.

In spite of the fact that we have these enormous commodity cost increases that we've operated with, we've worked together and we do a very good job on this; and I think you would find that they are very happy and supportive of the initiatives, because we decide together.

Next question is from Sara Senatore, Sanford Bernstein.

I wanted to kind of wrap back to the US comp broadly, and say -- I think it's been so impressive in terms of how much you have outpaced the market, and certainly the macro indicators.

You've talked a little bit about the initiatives.

Can you bucket where -- are you spending more on advertising in total?

Is it just that your competitors are spending less?

Are you doing better?

Are your comps better in breakfast, for example, or snacking where you tend to be more dominant?

Just trying to understand, in the absence of a major product launch, how it is that your comp trend has been so sustainable for so long.

Thanks.

Sara, this is Jim.

First of all, on the communication and the share of voice on the advertising with our consumers, it's remained as a percentage of store expense, about the same, and about the same nationally except to say that we will continue to maintain those levels during the recession and the downturn.

And so our share of voice continued to be very, very strong; and we've always had the attitude at McDonald's that we need to be communicating at the same or greater levels during difficult times as compared to Halcyon times.

That's continued to grow and be very, very effective for us, but that's been the case really forever around here.

Relative to day part growth, we've had day part growth really across the board.

And I talked in my comments this morning about the growth around breakfast and some of the items, the Egg McMuffin and the value items and the nutritional items, Oatmeal and the rest.

So, we are very balanced in our communication with our consumers around these things, because we don't have the luxury of pushing one side of the business versus another side of the business, because we have such high hurdles to really get over regarding the overall experience throughout the entire business day.

And so, we are very pleased with the results, but I think you would see a very sort of deliberate focus around all day parts and communication.

And continuing to maintain our share of voice, which, by the way, is very supported nationally by our franchisees; and they are somewhere in the 1% to 2% range.

And overall store contribution with local contribution is somewhere in the 3% to 6% range; and it's sort of been that way for the last few years.

Next question is from Brian Bittner, Oppenheimer.

Thank you.

Most of my questions have been answered.

When you look at the stores you will be remodeling across the globe over the next 2 years, what percentage, if you can quantify, are more than just an interior/exterior facelift?

What percentage of these really have the opportunity to meaningfully increase the through-put in efficiency of the store, kind of outside of just implementing new POS systems?

Brian, I don't have the specific reimage plan by country in front of me over the next couple of years.

I will tell you that a majority of them have an opportunity to undergo a major improvement.

What we see in the US, and this probably should make sense, but when we are able to, because we have enough real estate, add the side-by-side drive-thru at the same time we are doing the full interior and exterior reimage, we are seeing the greatest sales increase.

And anything we can do to increase that capacity is going to just kind of exponentially improve the sales that you'd get from just doing the reimaging interior and exterior.

But we look at that.

And as Jim mentioned in his remarks, if we don't have the real estate to do the side-by-side, then we go down and say -- all right, let's use a hand-held order taker to try to get those multiple order points in the drive-thru to increase our capacity.

And I think today we have almost 1,000 of those hand-helds in the US, and increasing those numbers.

There is plenty of opportunity to continue these improved results that we are seeing today.

Next question is from RJ Hottovy from MorningStar.

Thanks.

Just a quick question about the international McCafe rollout, especially as you move past hot beverages.

Just wondering if you had any expectations in terms of incremental sales per location.

In the past, you talked about adding about $125,000 per location in the US, and I believe that's the whole beverage platform.

But just any kind of expectations with the international McCafe rollout.

RJ, this is Jim.

First of all, good job this morning on CNBC.

Appreciate your comments.

Secondly, on the McCafe, we've served beverages around the world differently forever really.

If you take McCafes, McCafes really started in Australia and McCafes have expanded in Europe.

Europe really had what they would call their McCafe program before the United States.

So the United States version, of course, in line at the front counter so we can facilitate drive-thru.

These are all really different concepts, and yet with the expansion of the blended ice drinks and the smoothies and the other kinds of things into the markets around the world, I would say that as we review our plans coming up in the next month or so for 2012 from the area of the world, I would doubt whether they really have that quantified to the extent where I would be able to tell you what that expectation is on a store-by-store basis.

The reason why we quantified it the way we did for the United States is because you asked us to, one.

And two, because at a wholesale basis, we were rolling out something that was going to impact nearly 14,000 stores.

And so, we were capable of doing it that way because it was a unified program that was consistent throughout every store.

We don't have that same experience in every store, other than the fact that if you are selling Fruit Smoothies, that might be consistent.

But the footprint, the platform and the ability for us to be able to expand McCafe is somewhat different in every market.

And this will be our last question, as we are running out of time.

It is from Jon Tower from Morgan Stanley.

Given what's going on in the European macro environment, just curious to know if you are beginning to see any lower labor turnover at the store level and/or any lower costs to advertise in that market.

I wouldn't say, Jon, that we have seen anything significant there.

We've had very good results over the past number of years because of our people migration plans, and understanding the relationship as you modernize the experience in the restaurant.

It has to be modernized for the customer -- or for the employees as well.

We do a lot of things there to retain our people in the organization.

And yet I wouldn't say that because of austerity or the unemployment numbers or any of these other issues that are facing all of our people around the world, that that has changed significantly.

Okay, with that, I will turn it back to Jim with -- he has a few closing comments.

I'd just like to say thanks for joining 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.

I think we have demonstrated our fundamentals and plan-to-win strategies are strong; and I'm optimistic that we will continue to drive results in the future.

Thanks, and have a great day.

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