麥當勞 (MCD) 2012 Q2 法說會逐字稿

Hello and welcome to McDonald's July 23, 2012, investor conference call.

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

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

(Operator Instructions)

I would now like to turn the conference over to Ms. Kathy Martin, Vice President of Investor Relations for McDonald's Corporation.

Ms. Martin, you may begin.

Thank you and good morning, everyone.

With me on the call are our President and Chief Executive 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.

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

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

And now I would like to turn it over to Don.

Thank you, Kathy, and good morning, everyone.

My pleasure to join you today in my new role as CEO.

I am honored to lead this great System of first-class owner/operators, supplier/partners, and Company employees, and I am confident that together we will continue to build this business for all of our stakeholders under the umbrella of our global Plan to Win.

As I said on our last call, we will stay the course.

The recent change in management does not mean a change in strategy.

With that, let me provide a perspective on the quarter results and an overview of our plans as we continue to navigate this environment in the short term and drive the business for the long-term benefit of our System and our shareholders.

McDonald's continued its solid performance in the second quarter.

We've continued to grow market share despite a slowing global economy.

For the quarter, global comparable sales were up 3.7%; operating income increased 3% in constant currencies; and earnings per share reached $1.32, a 3% increase in constant currencies.

And in July, global comparable sales are expected to be positive, but less than second quarter.

We're experiencing stronger headwinds on both the top and bottom lines.

Some of the headwinds are macroeconomic, such as declining consumer sentiment and higher commodity and labor costs.

Other pressures are the result of planned strategic decisions we have made to grow the business.

These include actions we have taken to enhance our value platforms, our worldwide owner/operator convention that brings the System together every two years, and investments in technology initiatives.

Despite these demands, the System remains aligned around a Plan to Win in our three global priorities -- to optimize our menu, modernize the customer experience, and broaden accessibility to Brand McDonald's.

We're focused on driving results in this environment by continuing to refine our efforts around these priorities to address local market conditions.

So let's start with the US, where comparable sales increased 3.6% for the quarter and operating income rose 2%.

The US continues to build sales and guest count.

It is, however, happening at a slower pace amid an unpredictable economic environment and increased competition.

Sales gains during the quarter were driven by everyday value across a variety of price points and new menu news.

Breakfast continued its strong momentum with local market emphasis on core breakfast sandwiches and the introduction of blueberry banana nut oatmeal in May.

Beverages were also a key contributor to growth.

The new Cherry Berry Chiller helped drive beverage sales on top of last year's strong results from the launch of frozen strawberry lemonade.

Relative to our core products, our 20-piece Chicken McNuggets were highlighted on the new Extra Value Menu, which provides value across multiple price tiers.

As a result, total sales of Chicken McNuggets increased nearly 11% during the promotional period when compared to the same time last year.

Now, our focus remains on driving guest count; and we are refining our plans as the environments shift.

These plans are balanced across product categories and price tiers.

For example, we're enhancing everyday value with new-news and promoting core and premium products through exciting games like the Olympics tie-in which is starting today.

And to ensure customers have more reasons to visit us in the near term, we will continue to leverage promotional food events like Spicy Chicken McBites and also additional McCafe flavors.

Our new product pipeline also includes several new beef and chicken products and additional innovations around breakfast and beverages.

We're currently testing a number of new products, some of which have been adapted directly from other areas of the world.

Turning to Europe, second-quarter comparable sales were up 3.8% and operating income grew 8% in constant currencies.

The UK and Russia delivered strong sales for the quarter.

And while France and Germany are also positive, these two markets are feeling the pressure of the ongoing Eurozone difficulties.

Europe's IEO industry has contracted as austerity measures continue to impact consumer purchasing power and confidence.

Despite this, however, the UK, France, and Spain have gained market share.

And in Germany and Italy we are maintaining our share.

So although year-to-date guest counts are down in several markets, we are faring better than the competition.

Europe is re-energizing its 2012 plans.

Those plans are being reenergized to drive traffic in this environment.

Markets are also placing an even stronger focus on value offerings across the menu and on promotional food events featuring premium products.

The UK's success has mainly been driven by a balance of popular menu offerings in the second quarter.

The Great Taste of America food event, as an example, boosted average check.

A focus on daypart expansion also contributed to results, especially at breakfast with a new wrap that offers pork sausage, bacon, eggs, potatoes, and cheese wrapped in a soft flour tortilla.

Russia also continues to perform quite well with a strong focus on breakfast, lunch, and beverages.

Second quarter marks the seventh consecutive quarter of double-digit comparable sales growth in Russia.

In France, we're increasing our media spend to further strengthen our share of voice and increasing the focus on our popular Petit Plaisir lineup of smaller premium sandwiches that are priced at a mid-tier value.

German consumers remain deal conscious in an increasingly competitive environment.

We stepped up our value messaging to consistently remind customers of the great everyday value that they can get at McDonald's.

The market recently implemented McDeal, a value mail that offers a McChicken Classic or a Hamburger Royal with cheese, along with a fry and a drink, for EUR3.79.

This contributed to strong sales and guest counts in the month of June.

Germany is also leveraging its nearly 800 McCafes with new-news including bubble tea.

This is helping strengthen multiple dayparts including breakfast and afternoon snacking.

From value and variety on our menu, including the McWrap, which is now available in 24 markets, to our ability to offer more convenience options like cashless payment in 85% of our restaurants, we are providing European customers with what they want.

And our commitment and ability to execute a great, relevant experience for the customer is evident in our improving customer satisfaction scores as well.

Now shifting to Asia/Pacific, Middle East and Africa, or APMEA, comp sales were up 0.9% for the quarter and operating income increased 1% in constant currencies.

Across this region we are seeing fragile consumer confidence in Australia, Japan's uneven recovery, and an economic slowdown in China.

We are positioning our markets appropriately in this environment with strong value platforms to build traffic.

And we will complement these platforms with average check builders that include new food news and brand extensions.

Australia's second-quarter comparable sales growth was due in part to strong breakfast results as well as the successful launch of its Olympics promotion.

Additionally, the Loose Change menu introduced in late March has helped drive guest counts and sales.

And as expected, once customers realize that this value offering is not going away, the use of the menu has leveled out and they are beginning to trade up to other items like Extra Value meals.

Japan continues to grapple with a difficult economy, coupled with ongoing disaster recovery and anticipation of energy restrictions.

This is taking a toll on consumers, who are now eating more meals at home.

Despite a significantly contracting IEO market we continued to grow share this quarter.

We responded to customers' needs by rolling out a new multitier platform, the JPY100, JPY250 and JPY500 menu.

We are appealing to even more customers with this new branded affordability platform, and, like any market that implements value, our strategy is to drive sales and profitability by trading these visits up to Extra Value meals and other premium offers.

Utilizing our philosophy to learn, share, and scale, Japan is growing its beverage business by promoting trial of iced coffee from the US through sampling events.

Turning to China, in China, consumers are reacting with greater caution as the economy has slowed.

We have seen this particularly in our Tier 1 cities, where we are more heavily concentrated.

We are also seeing heightened competitive activity focused on value.

In China, branded affordability has been a key part of our strategy over the last few years, and we are staying the course.

Value Lunch and the recently launched Value Dinner are driving sales and guest counts that contributed to second quarter's comparable sales increase of 2.2% and market share gains in our top 5 cities.

China's fastest-growing daypart continues to be breakfast.

Our ability to bundle convenience with uniquely McDonald's products is resonating with customers.

Not only does this daypart now represent more than 9% of sales in China, it continues to grow.

We're also making sure that the brand is accessible.

We remain on track to open 225 to 250 restaurants this year and also continue to focus on conveniences like McDelivery and dessert kiosks.

As you can clearly see, we are operating in a more difficult global environment, and this environment requires us to be even more flexible and aggressive, particularly as economic and consumer volatility persists.

Although we've continued to deliver positive results, let me be very clear -- we are not satisfied.

We remain focused on appealing to customers more than anyone else as we run the business for the long term.

The headline is this.

We have a resilient business model, a talented and aligned System, and experience in every type of operating environment.

We are staying focused on the things that will continue to differentiate us, like our new restaurant designs.

We have already reimaged 1,000 restaurants around the world this year and remain on target to meet our goal of more than 2,400 reimages in 2012.

And we are on course to build over 1,300 new restaurants this year in emerging markets like China, Brazil, India, and Russia and also in more established markets including the US, France, Germany, and Australia.

We will continue to go after these new store development opportunities when and where appropriate.

We have the discipline, the capital, and resources to continue to do this successfully.

Now, as our business grows and continues to generate significant levels of cash, our philosophy for its use remains the same.

We will reinvest in the business first; and after that we will return all free cash flow to shareholders.

In fact, in the second quarter, we returned $1.6 billion to shareholders through a combination of dividends and share repurchases.

In closing, we understand what we are facing, from a macroeconomic environment to an increasingly competitive landscape.

We have been in situations like these before and we are drawing on that knowledge and experience to manage through these times.

By remaining committed to our long-term strategies to optimize our menu, modernize the customer experience, and broaden accessibility to Brand McDonald's while continuing to fortify our short-term plans, I am confident we will continue to grow the business for the System and our shareholders.

With that, I'll turn it over to Pete.

Thanks, Don, and hello, everyone.

Our focus on the Plan to Win and the three global priorities of optimizing the menu, modernizing the customer experience, and broadening accessibility continue to fuel solid top-line performance.

I'd like to start with a few higher-level comments about the quarter and then get into more detail on the results.

As you know, the macroeconomic environment for the past several years has been challenging and unpredictable.

Our global diversification has been an advantage as pressures felt in certain markets were often balanced with stronger performance in others.

In second quarter 2012, this wasn't necessarily the case.

While we faced significant cost pressures, as expected, we also experienced slower sales growth in most of our major markets.

Persistent unfavorable economic conditions are weighing on consumer sentiment and spending.

In many markets we are continuing to experience flat to declining IEO traffic along with a heightened competitive landscape.

We're employing different tactics in each market to address this, with the common theme being increasing the emphasis on value in the short term to drive traffic, which is a critical element of long-term, sustainable growth.

These tactics are likely to take hold beginning later this year.

Relative to cost pressures, Company-operated margins are negatively impacted by higher commodity and labor costs.

In many markets, this was on top of mid-single-digit commodity cost increases last year.

Higher G&A expenses were also a headwind.

As previously communicated, the $100 million of incremental G&A investments this year are negatively impacting operating income growth, especially in second and third quarters.

We believe these investments in technology enhancements, Olympic sponsorship, and our worldwide convention are foundational to future growth and the long-term health of our business and brand.

While we are not satisfied with these second-quarter results, they are not entirely unexpected.

We previously communicated that second-quarter operating income growth would be affected by the volatile global economy and related headwinds, along with our near-term investments.

In keeping with our historical practice, we will not be updating or providing earnings guidance going forward.

While earlier this year we disclosed that we expected to meet our long-term average annual constant-currency financial targets, based on what we know today, considering recent trends along with the heightened global economic challenges, it appears likely that we will end 2012 at or somewhat below the 6% to 7% constant-currency operating income growth target.

Now turning to results.

In second quarter, systemwide sales increased 6% in constant currencies.

We continued to grow both global comparable sales and guest counts and are now serving 69 million customers per day, 3 million more than a year ago.

This contributed to a 6% constant-currency growth in franchise margin dollars.

And at $1.9 billion, they represent approximately 70% of total restaurant margin dollars.

The franchise margin percent was up 10 basis points to 83.2%.

Global Company-operated margin dollars for the quarter totaled $850 million and were up 1% in constant currencies.

The margin percent decreased 80 basis points to 18.2% as a result of softer top-line results coupled with increased cost pressures.

To put that 18.2% into perspective, it is our third highest second-quarter margin since the year 2000.

In the US, second-quarter Company-operated margins declined 90 basis points to 19.8% as positive comparable sales were more than offset by 5% higher commodity costs and, to a lesser extent, higher labor and occupancy costs.

As a result of risk management efforts and supplier production efficiencies, the full-year outlook for the increase in our US grocery basket has been lowered to 3.5% to 4.5%.

This implies a second-half increase of approximately 2%, which should be fairly balanced between third and fourth quarters.

In terms of pricing, the US is running about 3% for the trailing 12 months.

The Food Away from Home inflation index is projected to be up 2% to 3% in 2012.

If it ends the year closer to the bottom end of the range, we may have a little less room to take pricing in the back half of the year.

As always, though, we will be thoughtful with future price increases, seeking to maintain positive guest counts.

In Europe, second-quarter Company-operated margins decreased 30 basis points to 19.3%, primarily impacted by higher labor expenses, 4% higher commodity costs and, to a lesser extent, higher occupancy costs.

Europe's projected full-year commodity cost increase remains at 2.5% to 3.5%, which implies a second-half increase of approximately 2% to 3%.

As noted earlier this year, we have less pricing power in Europe than in the US primarily due to the austerity measures.

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 lap prior-year increases during the second half of this year, we will likely replace them with lower increases.

Turning to Asia/Pacific, Middle East and Africa, Company-operated margins for the quarter decreased 170 basis points to 15.3% as modestly positive comparable sales were more than offset by higher labor, commodity, and occupancy costs.

In addition, new restaurant openings in China negatively impacted the segment's margin percent.

APMEA's guest count increases significantly outpaced comparable sales increases for the quarter.

So we are encouraged by the efforts of our franchisees and Company employees that resulted in increased demand for Brand McDonald's throughout the region.

As Don mentioned, in Australia, where we introduced a more robust Value platform in mid-March, comparable sales are steadily improving as consumers migrate beyond the Value platform to the rest of the menu.

This overall trend is in line with what we have seen in other markets when new Value platforms are introduced.

Turning to G&A, second-quarter costs increased 8% in constant currencies primarily due to higher employee costs, our biennial worldwide convention in April, and investments in technology enhancements.

Our convention was a great success, with 16,000 attendees walking away focused and aligned on our key strategies.

It also provided a great opportunity to learn and share ideas from markets around the world, allowing us to better leverage our size and scale.

Looking to third quarter, we expect a double-digit increase in G&A given our sponsorship of the upcoming Summer Olympic and Paralympic games in London.

With regard to other operating income, gains on sales of restaurants included the sale of 13 restaurants in two provinces in China to developmental licensees, bringing our total number of franchise restaurants in China to 54.

The second-quarter effective tax rate was 33%, 120 basis points higher than a year ago.

Last year's second-quarter rate reflected a nonrecurring tax benefit related to certain foreign operations.

For the year, we continue to expect the effective rate to be between 31% and 33%.

Our business model continues to generate significant amounts of cash.

Our first priority remains reinvesting this cash in our business to build future returns and enhance shareholder value.

This year, these investments are balanced between opening more than 1,300 new restaurants and reimaging over 2,400 existing locations.

We remain committed to this effort and are making steady progress.

Through June we have open 450 new restaurants globally.

Regarding reimaging, over half of our 33,700 restaurants offer a current contemporary interior, while more than a third of our exteriors reflect the new look.

Reimaging our restaurants is powerful because it is a multiyear, multilayered initiative that can enhance restaurant operations, capacity, menu, and perceptions of our brand.

We continue to invest on a scale that is unmatched in our industry.

It is an increasing point of differentiation and is foundational to our long-term success.

Our franchisees are financially strong and have sufficient access to capital, allowing them to coinvest with us to secure our collective future.

Through the first six months we have completed over 330 reimages in the US, 350 in Europe, and 230 in APMEA.

We continue to be encouraged by the results of our reimaged locations around the world.

Lastly, let me discuss foreign currency translation, which negatively impacted second-quarter results by $0.07.

At Friday's exchange rates we expect third-quarter EPS to be negatively impacted by $0.08 to $0.10, with a full-year negative impact of $0.21 to $0.23.

As usual, take this as directional only, because rates will change as we progress throughout the second half of the year.

In closing, we remain focused on positively impacting those things within our control and executing on our strategy that has proven to be a winning formula.

We will continue to prudently invest today to drive growth into the future.

While our business model is resilient, we are not immune from the effects of the ongoing significant global economic challenges.

At the same time, we are making some short-term tactical adjustments to address the current environment while continuing to build a solid foundation for long-term success.

We will not waver in our commitment to create enduring value for our shareholders and the entire McDonald's System.

Thank you.

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

Thanks, Pete.

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

(Operator Instructions)

Michael Kelter, Goldman Sachs.

Hi, guys.

I wanted to ask about the focus on value and the potential impact to profitability.

In the short to mid term what are the risks that you have to meaningfully invest your margins from here to achieve the traffic results you are looking for?

And then in the long term, how do you balance any potential risk to the McDonald's brand itself in Europe and the world when you're refocusing the conversation on value and ostensibly training consumers to want to pay less for your products?

Hey, Michael.

This is Don.

Just first off, thanks for the question.

You know, a couple of different things.

Relative to value, this is part of a base -- it is part of the platform relative to any of the media expenditures in any one of the countries that we operate in.

So, value is not a new thing.

The question is how much you address it relative to your marketing and media mix.

The other thing that we have to do is to make sure that we have a consistent value platform.

So we have talked about consistently last year and this year several markets, whether they be Australia which was facing some economic difficulties and tough times and the need to have a consistent value base.

And now they have Loose Change, which was implemented really at the end of the first quarter and really into the beginning of the second quarter.

We talked about Germany relative to McDeals.

Our new Chief Operating Officer, Tim Fenton, was just out with them, and it is an appealing value to consumers.

At the same time, we've mentioned that we have to also have a premium product messaging in the marketplace.

So we have not given up on that.

All it is, is a tweak, if you would, relative to our media expenditures.

But we will continue to talk about the premium products, whether it be in the US, Australia, Germany, Japan, France, any of these markets.

All right, thank you.

Next question is David Palmer from UBS.

Good morning, guys.

Just a question on the cost side.

When I listen to other global consumer companies, often on the staples side they talk about managing the costs and scrutinizing CapEx particularly as the going gets tough.

I was wondering and thinking, as you think about these coming years, it doesn't look like this environment is going to be easy going forward.

Right now, McDonald's is in what looks like to be an investment phase, both on the overhead side and the CapEx side.

Is that the side -- when it comes to cash flow and P&L, are you thinking about those things and thinking about scrutinizing those a little bit more as you settle into a reality that is tougher?

David, that's a good question.

First of all, I would say around McDonald's we have always had a practice of scrutinizing the costs.

So while you reference the investment in overhead, I think we tried to make it clear when we talked about the $100 million of incremental G&A this year that that is not necessarily a run rate that you can project into the future.

Two of those items, the Olympics and the convention, are isolated to 2012.

And our investments in technology, while those will continue, the rate of increase relative to prior year, next year will not be at the same level that it was this year.

So, take those things aside, we are always scrutinizing costs and looking to be as effective and reallocate costs to drive more sales, as we can.

Regarding CapEx, while you indicate take the environment going forward may be a little tougher, we don't see a fundamental shift in our business model.

So we continue to know that if we reimage our restaurants we will create that brand differentiation.

We know that even in these environments there continues to be increasing demand for Brand McDonald's going forward, so we'll continue to build new restaurants where we see there to be good opportunities and we can generate good returns.

So, while we're a little more cautious going forward, we don't see a dramatic change.

All right, thank you.

Next question is John Glass from Morgan Stanley.

Thanks.

I also wanted to come back at the margin question, maybe just a little more specifically.

Your global comps are 3.7% this quarter, so nearly 4%.

And yet at the store level, excluding food costs now, you didn't really lever labor and some of the other items.

And on the franchise side you got a little bit of leverage, but not much.

So is this just an expression of the minimum comp you need?

And if we have a view that comps are going to go down below this in, say, the third quarter, is there a risk to delevering those items?

Or, going back to the prior question, are you able to flex?

Then secondly, since you talked about food cost pressures abating in the back half, which is good news, obviously the current commodity market doesn't suggest that is going to stay good news for long.

Can you maybe comment about your early views about '13 in that context?

Thanks.

Hey, David -- John, I'll talk a little bit about the flex piece and then ask Pete to talk a little more specifically about margins.

One of the things that we do on a routine basis is we have clearly reviews and visits with all of the markets around the world, particularly our top 10 markets.

And what we really talk about is where they're positioned in terms of the opportunity to grow the business.

As we look at the totality of all the markets, we then make any adjustments or capital allocations, reallocations, necessary for us to grow to the real market opportunity, but always being mindful of what is taking place from a consumer level.

So there are markets today, that initially we began out -- thinking we would deploy even more capital into, that right now may not be performing at a level that merits that kind of capital, based upon comparable sales increases and therefore returns.

So we on a constant basis look at each of the markets and how we will flex in and out in terms of any of the investments that we make.

And then I will ask Pete to speak to some of your margin questions.

Yes, John, regarding the commodities, our supply chain folks, our suppliers, our treasury folks really spent a lot of time earlier this year looking at the markets and did a great job in securing a lot of our grains and other commodities at costs before they ran up related to the recent drought.

So that is why we are able to lower our outlook for this year.

You can imagine, while I won't get into specific details, we have taken a greater amount of coverage for the next year sitting here at this time than we did have a year ago.

So we feel pretty good that the impacts from the drought are going to be minimized on next year's results as well, to the extent we can see that sitting here today.

But as you reference, margins are still a top-line game.

So if -- they are dramatically impacted by our comp sales; and to the extent the comp sales soften, that is where you'd see that deleveraging.

All right.

Our next question is Jeff Bernstein from Barclays.

Hi, this is Ashwin Shandilya filling in for Jeff.

I just wanted to ask, basically in Europe where you're emphasizing more value and in other markets as well, using history as a guide, can you maybe talk about the consumer response to such a focus in the short term?

I know it may be some pressure on average check in the short term; but for how long does that occur before customers revert back to more normal ordering behavior?

And separately, are there any major markets where you are perhaps being more or less aggressive on value?

What are the expectations in those markets?

Thanks very much.

Thanks for the question.

There are certain markets that we have focused quite intensely on this year and also the latter part of last year, to establish what we call a value platform.

We have talked about some of those markets.

Australia.

Germany, where we knew consumer confidence was really in question relative to their expenditures, and they also have a higher propensity for savings.

France, we have talked about relative to consumer confidence and the advent of austerity measures.

Japan we have talked about relative to what they have come through.

And now in this post-recovery from the tsunami, they are also in a tough economic environment.

And clearly, markets like the Spain's and the Italy's of the world and that Southern part of Europe that are having some difficulties.

In the US, value will always be a major factor.

But we have to balance it, as one of the earlier questions was mentioned, with premium products, with some of the beverages, to offset some of the potential erosion in margin.

Relative to how long it takes before you recover and what you see initially, typically when you bring forward a new value platform, as I mentioned in the comments, customers are not used to that and sometimes think it's going to go away.

So what they begin to do initially is they will use that menu from a purchase intent perspective much more so initially.

That usually does wane.

Sometimes it may take six months, sometimes it may take a little less or a little more depending upon the overall economic situation in the country.

Keith Siegner, Credit Suisse.

Thanks.

I have a question just more about the branded affordability in the US.

I know you just talked about how it's always been a major factor, always been important.

But one of the things that was mentioned in the call was -- should the Food Away from Home inflation come in at the low end of your expectations, it may limit your ability to take some pricing in the second half.

Just looking back over the last couple years I think it is interesting, because after several years of running below Food Away from Home inflation, year-to-date you have been running in line, maybe even slightly above.

Thinking longer-term, how do we think about the broad-based positioning against that?

Maybe regardless of the outlook, should we think of a low pricing environment in the US to continue to maybe combat some of the competitiveness?

Hey, Keith, a couple of things, and Pete may have a comment on this as well.

So, Food Away from Home is one -- it's the baseline; it's the most predominant measure that we have historically used.

But I have to say this; we have also used Food at Home from a grocery store price index perspective, as well as commodity costs and labor costs.

So what we have to do is look at what we think will be -- what will be within the range of price sensitivity and acceptable to a consumer, which has typically been Food Away from Home.

But also we have to look at the direction of commodities.

So if commodities look like they are going to really ramp up, we want to make sure we're in a position to minimize the impact of margin erosion by taking appropriate price increases.

There are times when we will bump up against, as you mentioned, Food Away from Home.

Or even for a very short period, we may actually eclipse it; but we will bring that right back in line.

That is just part of the ongoing management of what is taking place in the broader marketplace in terms of food costs, labor pressures, and then understanding what's happening with consumer confidence and disposable income.

I think, Keith, it also is fair to assume in that pricing equation, if you will, or pricing formula, we do look at what is going on, on the menu boards at the competition.

So the competitive environment does also factor into it.

But Don highlighted that the more macro factors, that we do look at.

Our next question is from Matt DiFrisco from Lazard.

Thank you.

Pete, I wonder if you could talk about the dynamic of the franchise margin in the US and try and help us understand maybe how that looks going forward.

As far as, it's been several quarters of a run of margin expansion on the franchise side in the US, and now it is sort of flat year-over-year.

If you could put that into the context of what -- how that dynamic works going forward in an environment where -- I think in the press release you said that the same-store sales are going to be a little -- or guided to be a little slower in July and ahead than they were in 2Q.

All right, Matt.

First, let me -- July -- and I know this is generally out there.

But July we are facing a negative 1.8% trade day impact, so that is impacting July as well as the fact that Ramadan is starting or started last week.

So we are going to have 10 days' impact of Ramadan this year in July, when that was entirely in August last year.

So those are a couple things to think about when reflecting on that July guidance.

But as we said earlier, the same thing applies to franchise margins even more so that applies to Company-operated margins, is that they are a top-line game.

So they are really driven -- we get tremendous leverage when we are driving comps and they tend to slow down as comp sales slow.

The other thing specific to the US is, with the reimaging that is going on, we are seeing a greater increase in depreciation expense.

Typically depreciation is one of those fixed costs that you can leverage with the increased sales.

But with the progression of increasing the reimagings, we are continuing to layer on some additional depreciation expense, which that will continue into the near future.

All right.

Our next question is from Joe Buckley from Merrill Lynch.

Thank you.

Pete, I was wondering if -- maybe you have done this already.

But could you break down the $100 million of G&A among the three things you mentioned, the April convention, the Olympics, and the technology program?

So, Joe, we have somewhat broken it down in that we have said half of that relates to the convention and the Olympics, and the other half relates to the IT investments.

Okay, thank you.

All right.

Our next question is from Mitch Speiser from Buckingham Research.

Great.

Thanks very much.

I would like to ask another question about margins.

The global margin at the store level, I believe was down about 80 bps.

Pete, is it possible just to give us a sense of maybe how much of that contraction was due to increased focus on value?

And as we look out over the next couple quarters, do you expect that emphasis to heighten?

Or are we kind of there already?

Thanks.

Yes, Mitch.

It is hard to pinpoint precisely how much of that is related to our increased focus on value.

Specifically -- Don alluded to this a little bit.

When we say value, it is not just that entry-point value.

So it is not just the Dollar menu or the 1-Euro items menus.

It is also some of those premium food events that are a relative value compared to the rest of the marketplace.

So I know we talked a lot about value to drive transactions, and the implication there is that is that entry-level value, and a lot of that is; but it also has different forms across the menu board.

But I would say that as we focus more over these next couple of quarters, it is likely that the impact will be a little bit more -- will be greater in the next couple quarters.

Hey, Mitch.

Just one point on this one is what we are facing now from a global economic perspective is we are just seeing more markets that have consumer confidence issues at what we would consider to be more substantial levels.

So this notion of value and the way we are talking about branded affordability, while it is not necessarily new in all of the markets, what we are finding is that we have to again crank up our messaging, our GRPs, our marketing spend just a little bit more to appeal to some of these consumers who, frankly, have less confidence in the overall economy and therefore reduce their disposable spending.

So that is why we are having as many conversations about it.

But having said that, we have been doing this in each of these markets over time.

So it's not -- they are not typically new things.

There are a couple markets where it's new, where -- a Japan, say, or an Australia with Loose Change.

But Petit Plaisirs have been in France; the US has had a value-based menu; Germany has had SMS.

But what we are finding is we may need to crank that up just a little bit more to appeal to some of these consumers.

This is the time for us to really focus on guest count growth and market share gain.

So we really go at this very hard in times like these even though it means an investment.

Our next question is from John Ivankoe from JPMorgan.

Hi, great.

Thanks.

First, just a really quick follow-up and then the question.

Pete, will any of that IT investment recur in fiscal '13 or is the $100 million gone from fiscal '13?

So that is the first question.

Then secondly, just thinking about the UK, obviously there is the Jubilee and the Olympics and there has just been so much going on in that market overall.

How do you think about the UK in general in the second half of the year and into '13?

Is McDonald's doing anything proactive to perhaps prepare for -- I don't know if it happens or not, but a slowdown that could happen in the UK per the rest of Europe, as some of these events come in the past.

John, I will take the first part of your question and then Don can give you a perspective on the UK.

But the $50 million incremental technology investment spending this year, that will stay in our base and that level of spending will recur next year.

So said differently, $50 million for the Olympics and convention does not repeat next year; but the technology spend continues, but obviously it's a zero increase if we spend the same amount.

With that, I'll ask Don to talk about the UK.

Hey, John.

So if I look back, Beijing, Vancouver, post the Olympics what we typically do is we go back to business as usual.

So we don't foresee a huge shift or change in terms of our base trendline in the UK as we move forward.

Now, having said that, the UK will be facing some tougher austerity measures in the latter half of the year.

So as those things come into play, we have got to again make sure we are looking at all of the macroeconomic factors in the market and making appropriate adjustments.

We have done quite well in the UK with balancing our growth across all the menu tiers, and that will continue.

But we will have to continue to look at the market.

But right now we don't foresee anything that will cause a substantial change in the base trendline.

All right.

Our next question is from Jason West from Deutsche Bank.

Yes, thanks, guys.

I just wondered if you'd talk about the US market a little bit.

You have obviously seen somewhat of a downshift in the sales trends, though they are still healthy.

You seen a slowdown from the last couple quarters.

If you'd talk about how much of that is consumer macro driven, seeing people trading down to Dollar menu, Value menu, things like that, versus competitive activity that you alluded to.

It seems like the competitive activity -- not necessarily value oriented all the time; some of it's new product oriented and just marketing oriented.

If you could just compare that to maybe other periods of slowdown.

Thanks.

Great question, Jason.

A couple of things.

We are seeing heightened competitive activity across the IEO marketplace -- which is an interesting point, because it is not just in QSR.

We are seeing it across all of IEO, from fast-casual to convenience and grocery stores.

Having said that, for us as McDonald's what matters most is to remain focused on what is within our realm of control.

So we will talk about the value platforms, we've talked about beverages, breakfast, we talk about premium-based products and promotional food events like McBites.

We have just got to make sure that we are appealing to customers more so.

But we are seeing -- to your point -- we are seeing that competition now.

The other thing is that there is an increase in terms of marketing spend by many of the folks in the competitive set.

So we have to clearly be able to make sure that our strength of voice and our share of voice is still resonating with consumers out there and we build awareness for the McDonald's brand.

So this is not new.

We go through competitive pressures and there will be resurgences, and it ebbs and flows from time to time.

But what it means for us is we've just got to be focused on our business plan and execute that at the highest level.

All right.

Our next question is from Andy Barish from Jefferies.

Yes, can you just give us a little sense on the China business?

How much the last quarter slowdown was, your thoughts, internally more value?

Value dinner having a negative impact on mix, etc., versus the external environment?

If there is a way you are looking at that.

Yes, Andy.

Relative to China, so clearly we are seeing a little bit of a slowdown economically.

We talked about the Tier 1 cities, which is where we are -- which is where our presence is absolutely the strongest.

It's where we are concentrated.

Those markets seem to be facing much longer macroeconomic pressures than clearly the Tier 3s, 4s, those cities that are outside of the core in terms of where our focus has been.

So we are seeing some macroeconomic pressures.

On the value side, we are seeing a little bit more media and marketing around value-based products.

Clearly I think we're in a pretty good position there relative to the overall marketplace in China.

But the other thing is, and for us, it's got to be consistent when you execute value.

So if you look at last May/June time frame, we were running 13% and 16% comps.

So as we went into this year, we knew that those were fairly high hurdles.

Nonetheless, if we execute the existing value lunch strategy, value dinner was the added strategy, breakfast is our fastest-growing daypart in China, we will continue to do well in the marketplace.

But we have focused a little bit more based on consumer confidence measures -- we have focused a little bit more on the value side in China as well.

Our next question is from Howard Penney from Hedgeye.

Thanks very much.

I was wondering if you might be able to quantify what you are seeing in the global markets as you've described it on the call today.

The slowdown, anyway, that you are seeing from the consumer.

Because you have done 5.4% comps for the six months this year.

Your worst year in the last five was 2008 at 3.8% -- or 2009, excuse me, at 3.8%.

So you are doing I think significantly better and you had a better earnings performance.

I don't believe you missed the numbers back in 2008 and 2009.

So what is it in the global marketplace that you are seeing is causing the issues McDonald's is seeing?

Because from a top-line perspective you are doing much better than what is arguably a far more difficult economic environment in 2008 and 2009.

You know, Howard, a couple of things.

One is, we started this year and we had the benefit of the leap year and we had the benefit of the unusually warm winter in a lot of places around the world.

So the first quarter, while it was strong, there were a couple things that boosted that beyond what I would say our normal performance trend had been.

But as you look around the world, I would say one of the changes is just the length of this economic challenging period.

Back in '08 and '09 I think people felt this was an issue; it was going to come; it was going to go.

It didn't dramatically change consumer behavior.

It changed some, but not dramatically.

I think now that it's persisted for so long and especially in Europe it has gotten so much deeper in some of these countries that it is really starting to constrain consumer behavior.

Several of the markets there, the eating-out market is just simply declining.

People are staying at home, they aren't going out.

And the magnitude of the issues in Europe are having ripple effects around the world.

The most significant is it is impacting the consumer's behavior.

And whether that means they are saving more or they are just going out less, all in all it is meaning more flattish to declining eating out generally around the world.

Hey, Howard, an interesting point and we look at a quite often is we have been -- at points what we have seen is one or two markets of our top 10, maybe three or four, that might be experiencing some of these consumer confidence issues.

This is one of the first times where we have seen it in a much broader-based perspective.

So it's a little bit more than a European cold if you would.

It is a little bit more of a global piece that we are seeing across the board.

So all it means for us is that the things that we have employed historically, we have got to make sure that we're in the best position again to drive in additional traffic in the restaurants, to be able to trade those up.

But we are making substantial investments to be able to do that now in all the markets that we've talked about.

And we are seeing some results in terms of some of the guest count movement.

But we may not necessarily see those sales flow down to the bottom line until we have gotten to a point where we can really trade those guest counts up.

All right.

Our next question is RJ Hottovy from Morningstar.

Good morning.

Just wanted to follow up on the product pipeline that Don had mentioned in the US.

You gave some hints about some new products that may be in the pipeline.

But maybe the broader question, just more specifically what we may be seeing in the back half of the year and 2013.

And based on the success of the McBites program earlier in the year, if there is any learnings or any product platforms you have seen elsewhere in the world that may be successful or you think may have potential in the US, just any commentary on that would be helpful.

Thanks.

Yes, RJ, a couple of them you guys have seen, that we showed at-- whether it was [NIM] or some of you have seen these in visits to the Innovation Center etc.

But clearly the beverage platform we are seeing has quite a bit of resonance, and it is being looked at by many markets around the world as we move forward there.

But also wraps as a platform; you guys have seen the wraps.

The wraps are being looked at in many markets around the world; we're in quite a few countries across Europe right now.

But the variations of the wrap, whether beef or chicken, the ability to even go into shrimp and fish, have been quite tremendous.

We have even done some breakfast work with those wraps, as I mentioned today.

So we are seeing those kind of platforms move around quite a bit.

On the premium sandwich side, there was -- I think it was at the investment meeting -- investor meeting, we showed you guys a burger called the Pub Burger in the US.

Those type sandwiches that are more premium beef sandwiches -- and we can also do premium chicken -- are some of the sandwiches that have resonated in Europe.

So you can look forward to seeing some sandwiches similar to that next year for sure and possibly, possibly even the latter part of this year.

Our next question is from Sara Senatore from Sanford Bernstein.

Hi, thank you.

I wanted to ask a question about the unit growth that you are seeing.

You mentioned them growing in emerging markets.

Then you also subsequently made a comment about thinking about allocating CapEx and making sure that the returns are there.

I guess when I think about your growth algorithm, the one you laid out, you've said that you expect to return to, it usually I think has some low-single-digit comps, low-single-digit unit growth for the top line.

I am just trying to understand if your growth shifts more toward emerging markets, shouldn't that mean that for any given amount of unit growth you do you will probably have less of a contribution to the top line?

Because they tend to be either lower volume or in the case of Latin America licensed.

So should we be thinking -- will that mix become more pronounced over time I guess is the question?

So that your system-wide unit growth may increase but it will have a diminishing impact on your revenue growth.

Hi, Sara.

So we talked about Brazil.

I highlighted Brazil as one of those countries, but -- and Brazil is a developmental licensee.

It was the only country that I mentioned in large part that is a developmental licensee holding from that perspective.

When you look at the other countries we are growing in, whether it be China, yes, lower average unit volumes, but we are growing quite aggressively, as you know, in China.

The growth that we have in some of the others, the India's and the Russia's of the world -- in India we have a developmental licensee and a joint partner.

In Russia, that is a wholly-owned market so it is McOpCo.

The US we have a mix.

Markets like France we have a similar mix in closer to that 80% to 90% franchise range, but it's a traditional franchising.

So, we have growth across many markets and the ownership structures are a little different.

So as we look at the allocation of capital, we are looking to see how we can get maximum returns; but we're also looking to see where customers want more McDonald's.

That is the first and most important thing.

Where are the true growth opportunities to build the business and build systemwide sales?

Our next question is Phillip Juhan, from BMO Capital Markets.

Yes, thanks, guys.

It's Phillip Juhan at BMO.

Pete, I was hoping you could maybe quantify some of the labor wage rate pressure you are seeing and where that might be the most acute in terms of geography?

It is a little tough to reconcile with 2% to 3% pricing in place how you guys are actually seeing deleverage on that line against the backdrop of economic softness in general.

You know, Phillip, we are seeing wage pressure in virtually every market around the world.

US, there continues to be increases in the average rate.

I think there were seven states that hit minimum wage at the beginning of the year at a 4% the 5% clip which are impacting that.

In addition in the US, we continued during the quarter to invest labor in growing the peak hour; and so that added a little bit of pressure to the labor line.

If you go into Europe, not only are wages increasing, but some of the austerity measures in Europe include additional social charges and additional payroll-type taxes that are putting pressure on the wage rates.

In Asia, a lot has been written about China and the pressure on wages there, so we are experiencing wage pressure there as well.

So, it is clearly a global phenomenon for us.

All right.

We're about out of time, but we've got a couple additional folks in the queue so we are going to take these next couple of questions.

Joe Buckley from Merrill Lynch.

Yes, just wanted to ask about the European same-store sales increase in the month of June.

Actually it looked pretty strong.

You mentioned McDeal in Germany, but were more value initiatives in place?

What is the timing of the stepped-up focus on value in Europe?

Hey, Joe.

Thanks for the question.

A couple of different things.

Clearly in Germany, SMS -- and we talked about this back I think it was April or May.

SMS has been stepped up.

We have put more marketing dollar, media dollars behind it.

Also, they created the EUR3.79 McDeal.

So Germany, they did implement that, albeit toward the end of the second quarter.

In France, Petit Plaisir is across-the-board now, is something else that we had mentioned.

What they don't have yet is a one sandwich type price point value.

But their base value platform is Petit Plaisir.

So we haven't gone all the way to a Eurosaver there.

At this stage, the franchisees are discussing next steps; but we believe we're in a pretty good competitive position in France right now.

The UK has continued on Eurosavers.

Markets like Spain and Italy are in a value proposition called Uno por Uno.

and I will tell you, Spain has executed this quite well over the last several years, and they are performing well even in the state that the economy in Spain is at.

But there are other markets.

Italy is a tough market for us.

Italy right now, even with the value proposition -- for those of you who visited Italy, you know there is a lot of streetside cafes and their value proposition is a lower tier even than what we propose at McDonald's through Uno por Uno.

So we have to continue to try to see how we can break through in a marketplace like that.

So it does vary a bit, but we are seeing some early results.

Nonetheless we will have to stay diligent in all of those markets.

Our final question is from Peter Saleh from Telsey Advisory Group.

Great, thanks.

I know it's a little early to be talking about 2014.

Just wondering what your thoughts are on healthcare costs and if you have any estimates around what that could do on a per-unit basis.

And what steps could you take in 2013 to get ahead of that?

Peter, you know, we are -- our current estimate is healthcare is going to impact each individual restaurant in the range of $10,000 to $30,000.

So obviously a wide range, but there's a lot of different factors when you look at the healthcare law that impact.

You know, the number of employees, the number of full-time employees, what is the current healthcare offering from the owner/operator or McOpCo.

So there are a lot of variables.

But I will tell you that we are significantly increasing, now that the Supreme Court has ruled, increasing our conversations and disclosures with franchisees around what does this mean for Brand McDonald's so that they can be as educated as possible around what is happening, so that they can start to anticipate and make any changes that they have to, to try to minimize the impact of this.

On just a dollar basis, that $10,000 to $30,000, we have years like last year where commodity cost increases were even greater than that.

So while it is a significant item and it is gaining a lot of attention as a P&L item, we have managed through items of this magnitude in the past and I am hopeful we can do that in the future.

Great.

All right, I will turn it over to Don now who has a few closing comments.

First off, I want to thank everyone for joining us this morning.

In closing, we continue to deliver solid results because the entire McDonald System, of franchisees, and supplier/partners, Company employees, is the most aligned it has ever been as we continue to execute our Plan to Win and the three global priorities that we have established in optimizing our menu, modernizing the customer experience, and broadening accessibility to our brand.

I am also confident that with our solid strategic plans to gain market share over the long term and the experienced senior leadership team that we have, and the ongoing communications we have with franchisees, we will continue to grow the business for the System and for our shareholders.

We remain steadfast in our commitment to our long-term strategies as we make smart and strategic decisions to mitigate short-term pressures in these challenging times.

So again, thanks for joining us today and have a great day.