麥當勞 (MCD) 2013 Q4 法說會逐字稿

Hello and welcome to McDonald's January 23, 2014 investor conference call.

(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.

Hello everyone and thank you for joining us.

With me on the call today are President and Chief Executive Officer, Don Thompson; our Chief Financial Officer, Pete Bensen; and Chief Operating Officer, Tim Fenton, who is joining us for Q&A.

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

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

Both documents are available at www.investor.

McDonalds.com as are reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.

Now I would like to turn it over to Don.

Thank you, Kathy, and good morning, everyone.

As we embark on a new year, our system is focused on leveraging our competitive advantages to deliver great-tasting and high-quality food and beverages at the speed and at the convenience that only McDonald's can provide.

We have high expectations for ourselves and we have high expectations for our brand and we will not waiver in our commitment to delivering an exceptional experience for the 70 million customers who visit us every day.

Given the challenging year that we had in 2013, I want to reiterate that we remain committed to adapting to keep pace with changing markets.

We remain committed to investing to meet future demand and we remain committed to addressing performance opportunities in the current environment.

As we shared at the November investor meeting, our primary focus is on resetting and strengthening the relationship that we have with our customers.

They are the driving force behind our mission and we continue to place them front and center in all that we do.

We continue to execute against our three global growth priorities to optimize our menu, modernize the customer experience, and to broaden accessibility because these are the areas where we have the most significant opportunities to differentiate ourselves.

Our near-term opportunities revolve around optimizing current initiatives for greater customer relevance, broader consumer reach and better restaurant execution.

In addition, we prioritize our near-term efforts on improvements in key opportunity markets.

These include Germany and Japan which are experiencing sustained negative trends and the US and Australia, which are significant contributors to consolidated performance.

Specifically the leadership teams in these markets are developing more locally relevant solutions based on stronger consumer insights and more recent market learnings.

This will help us to make the appropriate adjustments to regain momentum as we more clearly align with our customers' needs.

Now let's turn to 2013 global results.

In constant currencies, operating income was up 1% for the quarter and 3% for the year.

Earnings per share growth increased 2% for the quarter and was up 4% for the full year in constant currencies.

For the full-year, global system-wide sales grew 3% in constant currencies and global comparable sales were up 20 basis points.

Comparable sales were down 10 basis points for the quarter.

Guest traffic was down across major segments reflecting initiatives that didn't resonate as strongly with consumers amid a sluggish IEO industry.

2013 was a difficult year and we are keenly aware of our short-term challenges.

Future economic predictions are mixed but most assume some limited global improvement in 2014.

However, we don't expect significant changes in market dynamics given modest growth projections for the IEO industry.

Looking to January, global comparable sales are expected to be relatively flat.

Now let's shift to the markets.

US comparable sales decreased 140 basis points for the fourth quarter and 20 basis points for the entire year.

Operating income was up 1% for both periods.

Our US 2013 results fell short of our expectations.

We introduced a number of significant new products and limited time offers at a quick pace that challenged more effective restaurant and marketing execution.

Our 2014 menu and marketing strategies better balance affordability with core products, new choices and limited time offers.

For example, the recent evolution to Dollar Menu and More is intended to drive customer visits by offering greater value and variety while improving restaurant profitability.

To date, results are in line with initial expectations.

We've also adjusted the sequencing of product introductions, making it easier for restaurant teams to execute especially when it comes to training and staffing.

So customers can truly enjoy an even better experience.

Now these adjustments are complemented by a consistent focus on core equities like breakfast, where a unique competitive advantage exists for McDonald's.

We are enhancing the breakfast experience by creating more of a coffee culture through high-quality McCafe products that pair very well with delicious foods both existing and new.

An additional change that's underway hones in on our brand strategies as we work to better resonate with our customers.

In concert with other changes that we made in the marketing organization, yesterday we announced that Deborah Wahl will be joining our US business as Chief Marketing Officer.

We look forward to the fresh perspective that Deborah will bring as she leads the team -- as we refine our marketing strategies and our execution plans.

Now let's move to Europe where comparable sales were up 1% for the quarter and flat for the year.

In constant currencies, operating income was flat for the quarter and up 4% for the year.

Despite persistently low consumer confidence across the zone, the UK, Russia and France generated positive comparable sales for the quarter partially offset by negative comparable sales in Germany and Southern Europe.

The UK and Russia continue to grow; promotions like Russia's American Classics generated excitement and the introduction of appealing menu platforms including blended ice in the UK, created additional reasons for our customers to visit McDonald's.

The UK also remains committed to daypart expansion.

Efforts centered on extended hours, breakfast and family business are driving momentum throughout the day.

In France, December marked five consecutive months of positive comparable sales.

Strong promotional activity and an ongoing emphasis on relevant value offers like Casse-Croute helped fuel our momentum.

Given uncertainty around consumer reaction to recent VAT increases and current economic indicators that do not reflect improvements in market dynamics, we remain cautiously optimistic about France.

Let's turn to Germany where we see significant opportunities for improvement with new Company leadership in place and fresh perspectives among our franchisee leadership team.

The market's goal is to stabilize its trends and begin rebuilding brand relevance.

Driven by deeper insights we are refining our plans to focus on fewer yet better tactics that more closely align with local customer needs.

For example October's launch of the McBaguette, a two item value bundle that mirrors the very successful Casse-Croute in France however with a German influence, exceeded expectations because it is a high-quality product at a price point where we previously had a gap to consumer expectations.

Let's now shift to Asia-Pacific, Middle East and Africa or APMEA, where comparable sales were down 2.4% for the quarter and down 1.9% for the full year.

In constant currencies, operating income was relatively flat for both the fourth quarter and the year.

Japan comprises roughly a third of APMEA's comparable sales though the market contributed less than 15% to the segment's operating income.

Amid a highly competitive environment, Japan continued to experience significant comparable sales in guest count declines.

Along with new leadership in this market, Japan is taking the steps necessary to strengthen the McDonald's brand connection with consumers.

This includes repositioning its affordability strategy in concert with additional emphasis on hospitality and more relevant menu news for both the new and core foods and beverages.

In Australia, comparable sales were relatively flat for the quarter, the appeal of new McWraps and salads did help to build average check.

Looking ahead, the market's plans are anchored around being even more relevant with local consumers.

We are emphasizing value across all price tiers and we are launching more premium products to create excitement across the menu.

In China, comparable sales decreased 40 basis points for the quarter, a sequential improvement over the last nine months and were down 3.6% for the full year.

Our enhanced all day value platform is generating improvement and we will continue to expand convenience initiatives including dessert kiosk and delivery and we will work to grow the family business across the market.

Given the opportunities inherent in a growing more prosperous middle-class, we also continue to grow through expansion in China.

We opened 275 restaurants last year.

Around the world, our holistic approach which begins with the customer experience is guiding our actions and as our business continues to generate significant levels of cash, our first priority is making disciplined investments in the opportunities that will grow the business over the long term.

In 2013, we opened more than 1400 new restaurants and reinvested in our base of existing restaurants including our reimaging efforts.

After capital expenditures, we expect to return all of our free cash flow over the long term to our shareholders through a combination of dividends and share repurchases.

Last September our Board of Directors announced a 5% increase in our quarterly cash dividend to $0.81 per share in the fourth quarter.

For the full year 2013, we returned a total of $4.9 billion to shareholders through dividends and share repurchases and in 2014, we expect to return approximately $5 billion.

In closing, I remain confident in McDonald's future and more specifically our ability to strengthen our relationships with our customers.

My confidence is grounded in the fact that we are targeting the opportunities that exist within our three global growth priorities to optimize the menu, modernizing the customer experience, and broadening accessibility to brand McDonald's.

Our plans are supported by a comprehensive execution approach which leverages all three legs of the system to satisfy customer expectations and drive improved business performance.

The alignment of franchisees, supplier partners, and employees is strong and critical to our success.

Our strong local market structures enable us to more deeply understand and better execute those initiatives which are most important to our customers in their local markets.

These distinct competitive advantages are the reason we are well positioned to deliver enduring profitable growth today and for the long term.

Thanks again, everyone, and I will now turn it over to Pete.

Thanks, Don, and hello everyone.

Though McDonald's grew revenues, operating income and earnings per share in 2013, our financial performance did not meet our high expectations.

However, I am confident in the underlying strength of our system, our business model and competitive advantages to deliver strong performance over the long term.

We entered the year with a renewed energy around engaging more deeply with our customers.

We place the customer at the center of everything we do and we have the resources and infrastructure to meet our goal of becoming our customers' favorite place and way to eat and drink.

So how will we do this and what will be different in 2014?

We are leveraging consumer insights to better understand how we can deliver on evolving customer needs.

This includes enhancing our value-based messaging and re-engaging with customers in more compelling ways from our marketing and promotions to the order points at our restaurants.

We have identified areas where we can improve and are prioritizing the initiatives that are most impactful to our customers.

We continue to move forward with investments that will drive long-term growth and returns.

Turning to 2013 performance, though revenues grew modestly at 2%, we prudently managed our expenses and maintained full-year combined operating margin of 31.2%.

Our operating margin continues to compare quite favorably to other large global consumer companies and restaurant businesses.

Our profitability is driven by restaurant margins.

Franchising remains core to our business model with 81% of our global restaurants operated by local businessmen and women.

Franchise margins account for about 70% of total restaurant margins.

In constant currencies, consolidated franchise margins increased 2% to $1.9 billion for the quarter and 3% to $7.6 billion for the full year.

Our franchise business model is resilient, ultimately dependent upon topline growth to maintain or expand margins over time.

As a result of relatively flat comparable sales and higher occupancy costs, the consolidated franchise margin percent declined 90 basis points for the quarter to 82% and declined 60 basis points for the full year to 82.4%.

Consolidated Company operating margins declined to 60 basis points to 17.2% for the quarter and fell 70 basis points to 17.5% for the year.

Higher operating costs in both periods amid weak comparable sales contributed to the margin declines.

We are diligently managing restaurant expenses but we expect cost increases to continue pressuring margins in 2014.

Looking at segment performance, in the US negative comparable sales in fourth quarter combined with 2% higher commodity costs and increased labor costs resulted in a 50 basis point decline in Company operated margins to 19%.

For the full year, margins declined 110 basis points to 18.4% primarily due to higher labor, commodity and other expenses coupled with weak comparable sales.

From a pricing standpoint, we ended the year with a 3.1% increase in the US.

This is the result of several smaller menu board increases taken throughout 2013 and an effective 50 basis point increase in November due to the introduction of the Dollar Menu and More.

The food away from home inflation index ended the year up 2.1% which was at the low end of the expected 2% to 3% range.

For comparison, the food at home inflation index was significantly lower at 0.4%, well below the expected range of 1% to 2%.

Over time, we seek to price in line with food away from home.

As we look to 2014, both food away from home and food at home inflation is currently projected to be up 2.5% to 3.5% although updated forecasts are due in the coming days.

We will continue to monitor these two indices closely balancing our desire to drive traffic to our restaurants with strategically managing margins and cash flow.

On the expense side, we expect 2014 US commodity cost increases of 1% to 2% with more pressure in the first half of the year.

Turning to Europe, in fourth quarter the segment increased Company-operated margins 30 basis points to 19.4% as positive comparable sales performance offset 1% higher commodity costs and increased occupancy expenses.

For the full year, margins increased 10 basis points to 19.2%.

Europe's Company-operated margins benefited from strong performance in France as well as Russia and the UK.

Combined these markets contribute over 60% of Europe's Company-operated margin dollars.

At year end, Europe's price increase excluding Russia was about 1.5%.

We remain very deliberate with our pricing given cautious consumer sentiment, VAT increases in markets like France, and ongoing austerity measures all of which pressure disposable income.

Europe's 2014 commodity costs are also expected to increase about 1% to 2% with more pressure in the second half of the year.

In Asia-Pacific, Middle East and Africa, our three largest markets, experienced negative comparable sales in both fourth quarter and the full year with Japan having the most significant impact.

Though the challenges differ across markets, we believe that emphasizing McDonald's key advantages of value, convenience and service will be critical to long-term growth in this segment.

We tailor these advantages in different ways within each local market from providing affordable entry points through dessert kiosks in China to enhancing everyday value platforms in China and Australia, to expanding our web ordering and delivery service in Japan.

Markets across APMEA have some of our best customer service scores and we are encouraged by their continued progress.

Quite simply, we want more customers to visit McDonald's more often.

We will continue to innovate and invest across a diversified portfolio of markets within this promising area of the world.

Relative to profitability, APMEA's Company-operated margins declined 180 basis points for the quarter to 12.6% and declined 170 basis points to 14.2% for the full year as higher labor, occupancy and other costs pressured margins.

New store openings in China continued to negatively impact APMEA's both periods as well.

Consolidated G&A was flat in fourth quarter and down about 3% for the full year in constant currencies.

The full-year decrease was driven primarily by lower incentive-based compensation.

As discussed at the November investor meeting, we expect 2014 G&A to increase about $200 million or 8% in constant currencies reflecting the impact of below target 2013 incentive pay, expenses associated with our worldwide owner-operator convention in April, and sponsorship of the upcoming Winter Olympic Games in Sochi, and costs to support restaurant growth, capacity enhancements and digital initiatives.

Our full-year 2014 effective tax rate guidance is 31% to 33% although we do expect volatility between quarters given our global business.

As a reminder, first-quarter 2013 results reflected a one-time tax benefit of nearly $50 million related to the retroactive impact of the American Taxpayer Relief Act of 2012.

This contributed $0.05 to EPS in first quarter last year which we will be lapping this quarter.

McDonald's resilient business model continues to generate significant cash from operations.

As Don mentioned, our first use of that cash is to reinvest in our business.

We are the global market leader and we intend to continue leveraging this competitive advantage.

We will accomplish this through a balanced measured approach to investing in new and existing restaurants to drive future growth and returns.

Looking to 2014, over half of our $2.9 billion to $3 billion of capital expenditures will be used to open between 1500 and 1600 new restaurants.

We will grow to the opportunity in both established and emerging markets, further enhancing our diversified portfolio.

The breakdown for openings in our geographic segments is as follows -- 250 in the US, 320 in Europe, and 830 in APMEA, including about 300 new restaurants in China.

We also continued to modernize our brand through reimaging.

We updated 1529 locations in 2013, a little shy of our projection of over 1600.

This shortfall was spread fairly evenly across the segments.

As we make continued progress and some markets reach completion, our pace of reimaging is naturally slowing.

This is reflected in 2014 plans that call for over 1000 total reimages.

This reduction is also the result of planned kitchen investments in the US that are being prioritized in 2014.

These new high-density kitchen prep tables are designed to deliver enhanced service capabilities and menu choice to our customers.

Lastly, let me touch on foreign currency translation which negatively impacted fourth-quarter EPS by $0.01 and the full-year by $0.05.

At current exchange rates, we expect first-quarter EPS to be negatively impacted by $0.02 to $0.03 with a full-year negative impact of $0.05 to $0.06.

As always, take this as directional guidance only because rates will change as we move throughout 2014.

We began 2014 energized by our opportunities yet mindful of the challenges in front of us.

We are the global leader in a $1.2 trillion highly fragmented industry.

We have one of the strongest brands in the world with significant competitive advantages.

Together with our outstanding owner-operators and suppliers whom we believe are the best in the business, we proudly serve 70 million customers every day and we are aligned to drive enduring profitable growth for the McDonald's system and our shareholders in the years to come.

Thanks.

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

Thanks, Pete.

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

(Operator Instructions).

Brian Bittner, Oppenheimer.

Thank you.

Kind of big picture thoughts question here.

I just think back over a decade for the last decade up until 2012, you guys really averaged a same-store sales increase around that 5% range and over time -- and, Don, you are at the heart of this -- but you guys had such compelling bottoms-up drivers in the business, and just we are executing against much lower sales per unit than you sit at today.

But as you said here today, it seems the bottoms-up drivers have just faded a bit from what they used to drive and the bottom line I guess as comps have hit this sluggish cycle and the question here is there anything that you see from a new platform perspective or new business layer perspective that you can go after to get back to those mid single-digit comps across the system?

Or do you really sit here and look at your business today and think about it much more as being reliant on the macro and much less about specific things that you can do to drive it?

Thanks for the question, Brian.

We really believe, Brian, that the strategic areas that we need to focus on to grow this business into the future, those are somewhat consistent and we still have opportunities and those being around our menu and the menu being relevant, really enhancing the customer experience -- and you guys have heard quite a bit about the execution focus and getting back to a stronger customer relationship this year as well as accessibility and affordability.

Those areas are the right strategy.

This affordability aspect is a very, very key component of our growth as we move forward.

So we think we are in the right area with those strategies.

The key is going to really be to reestablish the trust of customers.

When we look across the broader range, that is one of the consistent themes that we see and that means basic execution at a restaurant level, market engagement at a much stronger level and also to make sure that our menu is relevant.

There's some other aspects of that that we've talked about being digital engagement, we have really not played in that arena in a strong way and clearly you all know based upon NIM and some of our conversations, that our intent is to be much stronger with regard to our digital outreach and digital engagement focus.

So we are focused really -- you mention macroeconomics -- we are focused on those things within our control to drive our performance.

This is going to be a marketshare battle and a marketshare battle game in order for us to move the business but we believe we have the right strategies and the right focus at local levels in the markets to achieve the goals that we have.

One of the things we have all discussed is that we have got to really get back to a much stronger focus on what we call 5P execution.

When we talk about the plan to win -- people, product, place, price, promotion -- those five areas, we've got to make sure that we are maxing out our execution strategies for whatever initiative that we implement in any market around the world.

That is going to help us create that relevance again with our customers.

So those focal points along with the priority focus on the key markets that we know we have challenges in and an even stronger fashion which Tim and the teams are doing, I believe will get us the growth that we need not only for the current year but as we move forward, Brian.

Matt DiFrisco, Buckingham Research.

My question is with respect to margins.

I think you alluded when you talked about APMEA specifically about China having a little bit of a drag obviously because it is a Company-owned mix versus franchise mix.

But I wonder if you could comment on China, the Company-owned margins, is there deleverage there as well I would assume with the slower comp?

And then if you could sort of tie that in also how we should think of the direction of the margin in the US when you roll out and we start to see the kitchen equipment being put in there, absent a comp lift, would we be seeing also a margin benefit from that initiative of new equipment coming into the stores?

I will give it a shot.

China, as you mentioned, we saw both.

Our comparable stores did have a decline in margin as well as the impact of the new restaurants coming online although that impact of the new restaurants was less than it was a year ago.

And as I think to the extent you listened or were at our investor conference, you heard Dave Hoffmann talk about some of the initiatives they have underway with their go-to-market strategy to look at bringing cost out of that development, the new development there which will further lessen the impact of the new openings on the margins going forward there.

So that piece of it is moving in the right direction.

But as you mentioned, China as well as all of the markets around the world, margins are a topline game and to the extent that we aren't driving the comp sales that we need there, the margins will continue to be a little bit pressured.

In the US specifically you asked around the kitchen equipment but more broadly one of the positives if you will out of the fourth quarter was we saw some margin benefit from the Dollar Menu and More pricing aspect.

So we did see a little bit of positive impact to the check there.

As we roll this new kitchen equipment out, it is going to have a couple of different impacts.

One obviously, some of what we have talked about is designed to improve our throughput, improve our order accuracy, offer more choice and variety to the consumer.

So from that standpoint obviously that should be a positive for the business.

On the negative side of that so to speak, it will be additional investment and we will have additional depreciation associated with that, some additional training.

So in and of itself, it is not a one single piece that is going to make or break the margins next year.

We will continue to see commodity pressure.

We had about 14 states raise minimum wage here effective January 1, with others making noise about doing the same thing, commodities, healthcare costs.

So costs will continue to be a challenge for us in 2014 as we think about the margins.

John Glass, Morgan Stanley.

Thanks very much.

More broadly, Don or Pete, we are in a tougher operating environment than you have been in in a while.

Your advantage versus the peers seems to have shrunk and these are all things we've known for a while.

Maybe sales get better because you continue to push on these initiatives but it may also be that we are just in a lower sales environment.

With that as a backdrop, what are the other things that you consider in looking at how to enhance the performance?

So for example, many of your peers over the last several years have gone through more significant refranchising rounds.

Is there an opportunity there?

We've talked in the past about looking at your balance sheet.

It doesn't seem like that is something you are inclined to do but maybe willingness to revisit that.

Looking at even corporate cost-cutting, are there opportunities there to create a leaner organization given these leaner economic times or leaner performance times?

Any thoughts there would be helpful.

Thanks much for the question.

Let's go back to how we view and look at performance and some of the data and what we actually see.

If we look in the US particularly, one of the things that we see today is a bit of a bifurcation on a consumer base.

So some of the fast casuals are performing a bit better and customers are skewing that way a little bit more as a result of a bit more discretionary income in that economic class of individuals.

So we also know that those customers that tend to come to us aren't faring quite as well in the current economy in the US.

Having said that, what we have to do, John, in the near term is focus on the value base, focus on some of the things that we know are going to be critical in terms of the execution of our menu.

I'm going to ask Tim in a moment to speak a little bit to the key markets because I don't want to just pass over that too briefly.

There are a lot of opportunities we feel we have in the key markets so Tim will give an update there.

Relative to looking at things like refranchising opportunities, we are constantly looking at that, John, and yes, we do have a longer-term plan relative to where we refranchise and the opportunities there along with optimizing the portfolio in our major markets.

G&A wise, we are continuously looking at that and clearly as a pay for performance culture when we don't perform, as Pete mentioned, the incentive-based compensation in that part of G&A comes down.

There are other areas that we reduce G&A and it is because we are continuing to focus on some strategic changes to our structures and our efficiency and effectiveness.

So we are going to continue to look at those areas but I will tell you, we have to be customer relevant.

The way to drive the business is going to be through the topline in growth which means the execution in the restaurant, it means the product focus that we have and it means the way that we are addressing customers and engaging them.

So with that, Tim, if you wouldn't mind to speak a little bit to some of the key markets that you see in opportunities.

Sure.

Key markets that we are looking at, obviously the US, Germany and Japan, and relatively new leadership in the US, Germany and Japan as well.

And each team is focused on making those adjustments necessary to regain the momentum.

Specifically in the US, energizing consumer messaging and market execution.

We stumbled a little bit last year with too many new products too fast and created a lot of complexity.

As we mentioned in November, reestablishing our breakfast with a lot of emphasis on beverage and coffee.

We know that coffee drives the visits at our breakfast time.

I guess one of the biggest things that we are looking at in the US is focusing on peak hour execution.

That goes hand-in-hand with the enhancements of our prep table.

It gives us more capacity in those peak hours.

And, of course, menu choice.

In Germany we are going to focus on fewer but better tactics built around deeper insights behind what really addresses Germany's needs.

We are responding to the cafe and bakery offers that really kind of impacted McDonald's affordability and relevance, by introducing such products as the Mc Baguette to fill that price point gap.

And, of course, strengthening our value program and focus more on core, and continuing to push breakfast.

Even though it is a low base, it is growing force there.

Japan, taking steps to reframe what the brand represents to our customers and repositioning the market's affordability strategy.

We can't go head to head with the 45,000 convenience stores on price alone, we realize that.

So we really have to put emphasis on our hospitality, our new menu news, both new and core.

Joe Buckley, Merrill Lynch.

Thank you.

I know you mentioned the Dollar Menu & More was meeting your internal expectations so far.

But could you talk about the Extra Value Menu experience in 2012 versus the early dollars and more experience in the latter part of 2013, and how they compare and contrast?

I know you had to back away from the Extra Value Menu and just kind of curious, the reaction to the Dollar Menu and More, why you are encouraged by it and do you think it has staying power and can it move the customer traffic needle as you suggested was the goal?

First of all if you look back at 2012, we had Extra Value Menu, we had Extra Value Meals plus we had Dollar Menu.

Rather confusing not only to our customers but actually kind of confusing to us.

With the Dollar Menu and More, it is meeting our expectations during the test, it was designed to really stretch out our products, our variety and give us flexibility and pricing.

It is simpler, it is easier, it has only been in stores for a couple of months and that couple of months was through the holiday period.

We are seeing slight gains in guest counts and of course as Pete mentioned earlier, it is margin friendly.

So so far so good.

It was a good transition and evolution for where we had to go with our Value Menus and Dollar Menu.

Hey, Joe, if I might.

One thing and I mentioned this in the comments -- to get back to a stronger relationship with customers.

To be very honest, extra Value Menu while a very solid attempt was based in mining out additional profitability, the consumer part of that from a consumer benefit was not as strong as Dollar Menu and More.

Dollar Menu and More is customer focused, customer based, builds off of the core equity and yields that value to customers in that way.

Extra Value Menu was really a reformulation of certain products adding some others just to build profitability.

This is what we mean by getting closer and getting back to a stronger relationship with the customers.

David Tarantino, Robert W Baird.

Good morning.

Actually I have a follow-up to maybe that last comment where you have talked a lot about using consumer insights to drive the business more so than you have done in the past.

And I think Pete mentioned in his remarks that you have identified some areas where you need to improve and I know you have alluded to a lot of it so far.

But maybe it would be helpful if you could give some specific examples especially in the US where it looks like the relative performance has been pretty soft in the recent months.

What have you learned from consumers where McDonald's brand is currently missing the mark and maybe how does that translate to the tactics you are going to use going forward?

I will tell you what, David, I will talk to a part of this and I want Tim to talk a little big to the operations piece of it because that is a big part too.

So again and I know it is going to sound like, Don, you continue to mention the same thing but I'm going to go back to customer relevance.

In the US, one of the challenges we have is we have is we have lost some of our customer relevance and we have lost it across several parts of the day.

So relative to the breakfast part, which Tim just mentioned, this notion on coffee in not just about coffee, it is about our breakfast business.

Coffee tends to be part of the lead for breakfast but we have great tasting food.

If we lose relevance in coffee, then we're going to lose the transaction which yields food purchase.

And so we have got to make sure that the food is relevant and that the awareness around McDonald's as a kitchen and a restaurant that cooks and prepares fresh high-quality food is strong and pronounced in our marketing and our messaging.

So we've got to get back to that on food, we've got to get back to an energy and excitement in our marketing balance and the execution of it.

And that is something that all of us have noted, Jeff Stratton and the team in the US have noted, and you have seen some of the changes which again Tim can update you on relative to even personnel changes in the US.

So that is one of the specifics in the US that I can speak to.

We talked about value but, Tim, maybe on this operations front because that is another big one.

One of the things we did last year, David, we overcomplicated the restaurants.

If you remember, we introduced McWraps, we introduce Egg White Delight, we introduced quarter pounder toppers and really didn't give the restaurants an opportunity to breathe.

We instituted a gatekeeper really with the intent of doing fewer products but better execution.

We mentioned a little bit earlier the capacity on the prep table.

That allows us really to have more capacity during our peak hours where we haven't been able to particularly in some of our drive-through restaurants serve as quickly and fulfill the capacity that we wanted.

So fewer products is better.

One other thing and you talk about insights and I want to mention Germany.

Historically we lost some share based on our insights to nontraditional competitors, cafes and bakeries.

At the same time when we were pulling off some of our value offerings, bakery stepped up with value offerings and some of our trade went to nontraditional QSRs, as I said, bakeries and cafes.

We have learned about that, we are designing our strategies how we can go back to mitigate that but a deeper understanding of consumer insights market by market by market.

David Palmer, RBC Capital.

Thanks.

In the past McDonald's would have operations upgrades like made for you or the beverage station and allow your marketing machine to get cranking over several years oftentimes driving sales layer.

I'm trying to figure out if some of these changes that you are doing with the prep tables could be an enabler from an innovation and marketing standpoint as well as something that helps you with peak hour capacity and execution?

Could you comment on that please?

I will make one comment on the marketing piece and again there is another capacity piece to this.

On the marketing end, David, you are right, one of the things that we have done and actually we didn't do it nearly as strongly as Made for You back in 1998; we implemented Made for You but we really didn't come out with a strong marketing campaign that was correlated to it.

We had individual markets that did and saw a benefit but we didn't hit it as strong.

To that point even today customers don't realize to the greatest extent that at McDonald's we are making that sandwich, preparing that in the back of the house after you place that order.

What does this mean?

It means that there is a notion of again that relationship and the awareness the customers have about who we really are as McDonald's and what we are able to deliver in that kitchen which is a customized sandwich for you.

It is something that we really need to be able to advance in our marketing messages more.

Now the challenge has been there has been a little concern as to whether or not and how hard we could go with that messaging if we didn't think we had more capacity headroom.

With that in mind, we have done some things with the kitchen, and Tim, maybe a little bit on high density?

The high-density [UHC candidates] we have allows us more capacity and the prep table enhancements not only gives us flexibility and customization with other toppings, it gives us the capacity on some of the existing that we had that we had -- not to get really operationally technical but we had a lot of crossover and replenishing during peak hours.

It was the last thing you want to do but with the refrigerated rail that we are adding and we should have this all into the system between the May/June timeframe.

It allows us some flexibility with different varieties of toppings -- jalapenos, avocado, pico de gallo and different spice sauces if you will that allows the flexibility on more customization.

So it is capacity on existing, it gives us flexibility for new products and new toppings as we go forward.

And then we've got to tie those together to your point, we have got to tie the marketing messages and awareness into driving this.

That is one of the things that you all reference quite a bit when you talk about coffee.

We reference PR, marketing and the operational pieces together to drive that category and we will do it again.

Jeff Farmer, Wells Fargo.

Just following up on that, on the throughput side you discuss the high density that the prep tables -- a lot of other plans.

But are you guys planning to add labor to these restaurants?

How should we think about that moving forward?

That is another priority that we have.

In fact our field service teams are right now working with all of our operators on just that -- staffing, positioning and scheduling as far as putting the right people on at the right time, particularly during our peak hours.

We have to have the additional staffing required for some of the complexity that we have.

That was I think one of the stumblings we had last year when all of the new products we brought in all at the same time or within close proximity.

So definitely is a priority for us on beefing up staffing particularly on peak hours and weekends.

Jeff Bernstein, Barclays.

Great.

Thank you very much.

Just a question on broader Europe and I think we have talked about this a few quarters ago but France seems to have joined the UK and Russia perhaps in recent months.

Don, you mentioned a string of positive comps there and I believe I guess Germany is the weak major market.

One, I'm just wondering if that is fair?

And two, I am just wondering how we should think about 2014 whether or not Europe could be the silver lining for the broader company?

It does seem like at least from the macro data that we see that the trends are stabilizing or perhaps improving across broader Europe.

I am wondering if that is the case whether brand McDonald's is seeing that and therefore would be a good way to play the improving European macro?

And if there is anything specific to talk about in Germany.

I know you mentioned new leadership but anything else we should expect to help to send that comp to the positive side?

I think Tim mentioned some of the things that are taking place in Germany right now and I believe that is what is different about the Germany aspect is that we had a refocusing before.

We put some things in place that were customer focused.

We only executed them for a shorter period of time and we pulled them out.

I think there has been a lot of learnings relative to what we should do in Germany along with the fact that whenever you execute a best practice quote unquote, it can't be adopted.

It has to be adapted which is also the difference between McBaguette and Casse-Croute.

So relative to a Germany, that is one of the things that we knew we had to be able to do.

France, I want to echo a comment I made around cautiously optimistic.

I think our French team as are we, we have seen a trend of positive results.

France is still an economy that's got some troubles to it.

There is a VAT increase that I mentioned.

We also have some -- there is some decisions that will be made soon relative to the French government from a social charge and austerity-based perspective we will have to take a look at.

We hope that it will stimulate the economy which will be good for everyone but right now France is still at a point where the 2014 IEO projection is to be down 10 basis points.

So it is not a market that has come out yet but we have seen some positive things and in the face of all of those, our teams have done a fabulous job.

Southern Europe is an area that still has some challenges and those are macroeconomic challenges and we have just got to make sure we maintain relevance in that area.

So Europe as we always say, Europe is not a country and so when you divide it across the various segments we see some positive areas and then we see some areas that are still difficult.

So we are optimistically looking at performance across Europe but there is still some challenges there.

Just to add, Jeff, the IEO projections are really modest going forward.

The UK plus 50 basis points and Germany plus 50 to plus 80 basis points.

Howard Penney, Hedgeye.

Thanks very much.

I have two questions for you if you don't mind.

The first one is on the high density tables and when I hear additional capacity or additional customization, it just occurs to me or I think slower service times more than I do faster service times.

And I apologize for this question because I actually haven't seen those tables in use so I don't really understand how they work.

So how does additional customization not equal slower service time?

Two, can you maybe provide a definition of what net internal expectation means just because you have used it a couple of times relative to initiatives in 2014 that really haven't delivered whether it is wraps or mighty wings and while they may have meant internal expectations, they didn't really drive the business forward and you are also now using that term associated with the new Dollar Menu and More.

Thank you.

Hi, Howard.

I will take the piece on internal expectations and then I will ask Tim to talk more about the high density kitchen and impact on operations.

When we say internal expectations, we have clearly a business case for each and every individual initiative that we implement.

We have certain criteria that we establish whether that be based upon guest count growth, it might be sales growth, profitability aspects.

So we look at those business cases and we have internal expectations set around certain targets.

We also have expectations set around the overall accretive nature of an initiative to the broader business and so as we measure whether or not something was effective and whether or not it was successful, we measure it against those internal criteria.

You guys typically hear us talk about the consolidation of all of the initiatives which then roll up into an incremental benefit in a comp sales or something that might be associated with our operating income at a total level.

On the capacity, anytime during our peak hours if I can keep people in place and not have their feet moving to restock or to get something else or have crossover -- last year we deleted Angus because it was a slow-moving product for us.

So we are working with two proteins of beef in the kitchen.

When I can have the capacity in the prep table where people don't have to move, I'm just putting different toppings on, you have got the (inaudible) coming down the prep table like an assembly line if you will and we are just adding different condiments on.

And again, monitoring the pace and the rate of new products that we bring in giving our crews and management ample time to train and get used to it before we switch it up and change it on them.

Greg Badishkanian, Citigroup.

Across your biggest markets, have you noticed any change in the competitive environment over let's say the last month or two that is kind of a deviation from the trend?

In the US last month in the fourth quarter, we had I guess a higher competition as it pertains to value and discounts and so on.

I would say maybe a little bit more in China in the fourth quarter and maybe specifically in Australia.

But it is a very competitive market out there, a lot of price going on and it is a fight for market share.

It is a street fight and we are getting at it.

Sara Senatore, Sanford Bernstein.

I actually wanted to follow-up on margins because the restaurant -- Company-operated restaurant margins were better broadly speaking than I would have expected given the sluggish topline and what you've said about your leverage point.

So the two questions are, can you just talk a little bit more about where there might be opportunities there on that line item?

Going forward you said costs are going to be a headwind but how well you can that line?

And then a related note, the outlook for food away from home and food at home inflation implies an acceleration but I don't think we are really seeing that in the commodity markets.

Can you talk about what you think of as your sweet spot for inflation where you have the ability to take price but it is not so much that it is a real drag on margin?

Just specifically with the US broadly?

Thanks.

In talking about margins, the fourth quarter actually did exceed our own internal expectations when we started the quarter.

So if you recall I gave some guidance that implied we expected margins to be down a little bit more in the fourth quarter than they really were and if you look -- as we look at the reasons for that, it was really France and Russia outperformed in the fourth quarter relative to their initial expectations and actually Germany didn't decline as much as they had originally expected.

So Europe was a big piece of that but also the US, as I alluded to earlier, some of the check benefit that we got from the Dollar Menu and More in the two months it was in was to the positive side of the ledger and also their costs came in just slightly under where they had expected for the quarter.

So it was a combination of factors and different markets that led to that.

When we think about 2014 food away from home projection of 2.5 to 3.5, the reason I said in my remarks that we expect an update shortly is with the commodity trends and everything else that is going on, that number might come down a little bit.

Now certainly it does also include labor in the restaurants and I mentioned minimum-wage increases in 14 states is a piece of impacting that as well.

But right now we are going to continue to monitor that indice.

We are also going to look at food at home.

Again that only grew 40 basis points this year.

I doubt it will grow 2.5% to 3.5% which is the current forecast based on where commodity trends are.

But at the end of the day, we are going to look at the pricing as we always do to try to balance, growing traffic in the restaurants but also looking at profitability all through that screen that Don mentioned of continuing to improve our relevance with our customers and value is also one area where relevance to customers matters.

Andy Barish, Jefferies.

This is [Alex Chen] for Andy.

I wanted to go back to talking about APMEA.

During 2012, it seemed like check was really down and traffic held up and this past year in 2013 that kind of reversed.

I guess how do you find the balance there and when you look at that how do you think about China and kind of avoiding that same issue?

China specifically, they got -- the industry hit the QSR and IEO with the chicken situation that happened in December of 2012 and then the rehit of the avian influenza and then a downturn in just the macroeconomics, something not unlike what we saw back in 2008 and we bounced back in 2009 and 2010 and 2011.

In China specifically, we stick to our strategy, we feel we've got a sound strategy.

We are being strategic on our openings.

We are being strategic on our menu pricing and our points of distribution.

Will Slabaugh, Stephens.

I had a follow-up question on margins and at the restaurant in particular.

At the Analyst Day, you talked about the three straight years of margin compression and so I wondered if you could speak more specifically to that pass in margin stabilization.

Could that occur this year and maybe more specifics around what that extension might look like and how that might take place from here?

As we have looked at the margins over the last couple of years, actually we just recently looking at kind of a detailed breakdown by quarter by quarter by the line items, one thing that was consistent across the years is the cost pressures kind of in general were in a fairly tight range.

It wasn't a huge spike one way or the other absent commodities which could have more of a significant impact.

But they weren't a significant driver of the margin decline as much as the variation in the topline.

I know we sound a bit like a broken record but the importance of driving comps in our business to margin profitability is so important and it is getting back to that relationship with the customer, improving our relevance is going to lead to that improving topline which then has that margin flow-through benefit and restaurant level cash flow growth.

It is really the key to getting the economic engine moving in the right direction again.

Keith Sienger, UBS.

Strengthening the brand to differentiate it was one of the stated intents.

Another one was the primary focus of the cash flows to reinvest in the business.

I am just wondering given that strength in underlying cash flow generation and a balance sheet that I think clearly provide incremental capital (inaudible), why not accelerating this now -- both and reimaging and kitchen simultaneously?

Is there an operational hurdle to doing so?

It feels like this is a major competitive advantage that McDonald's has.

Could an acceleration of this reinvestment in this environment be one of the ways to rekindle or reignite that relationship (inaudible)?

I'm going to speak to part of this and I will ask Pete to speak to the other part.

The notion of accelerating reinvestment, one of the things that we found across the business and history has dictated to us is that you have to have a balanced focus as we grow the business.

So one of the reasons that you haven't seen us just say we're going to put all of our dollars right into China and let's just go hard because we also have other emerging markets that we also want to grow and we want to grow consistently.

By growing consistently, it allows us to build up the associated infrastructure from a supply chain appointing perspective, the talent that we need to manage the market and build out the real estate development as well as our ability to be able to put dollars into a market and create awareness within those markets to build comparable sales to be able to be a sustaining business model.

So as we look at some of the areas around our capital investment and deployment, we want to be balanced and measured.

If it is something like a kitchen base reinvestment there is a pace that you can go at in the restaurant and at the same time make sure that you are maintaining the penultimate focus which is the focus on customer satisfaction and expectations.

If we change all of the market at one time and went out and got a bunch of general contractors what we would find is that we would lessen our ability to satisfy customers and we wouldn't spread out these activities and execute them to plan.

This is one of the reasons you hear us talk about we will have a moderate and a steady pace but on a base as large as ours, our steady pace is pretty aggressive for other people and so this is the reason we say that.

There are some other implications and Pete could probably talk about a couple of those from a financial perspective.

Yes, Keith, I mean it is much less about the capital because as you know, we have the ability to throw more at it.

But you alluded to operational, it is sequencing and getting these things done in a way -- it takes a lot of planning and resources both internal and external contractors to change out the kitchen equipment in 14,000 restaurants around the US.

So all of the time and energy you need to focus on that to the extent you also try to focus on accelerating reimaging and a lot of the same kind of contractors or internal people are needed for both types of projects, you do start to dilute the effect and not get the desired outcome.

In addition, we have over 2000 franchisees in the US so this has to also be done through them considering their individual capacity and their individual cash flows, their individual organization strengths.

So while I agree with you on paper, it sounds like going faster could be a quicker path to getting some of these relevancy issues dealt with that Don mentioned, the reality and practical nature of a large franchise system with somewhat limited resources in terms of the competencies to work on these kind of projects gets us to kind of the pace that we are at and to Don's point, I think it is a fairly aggressive pace in and of itself.

All right.

We will close out with some final thoughts from Don.

Once again, thanks everyone for joining us on the call today.

We really appreciate that and we appreciate your interest in McDonald's.

Our confidence in our brand and the competitive advantages of our system are truly a reflection of our ability to learn from our past, to be quite purposeful and agile in the present conditions and environments that we operate in and strategically plan and evolve with our customers as we look to the future.

As we mentioned from the onset, we are confident in the McDonald's business and we are confident that we have the right information, data and business acumen to address the key markets and the other opportunities that we have going forward.

Thank you all once again and have a great day.