麥當勞 (MCD) 2014 Q1 法說會逐字稿

Hello and welcome to the McDonald's April 22, 2014 investor conference call.

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

(Operator Instructions).

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

Ms. Martin, you may begin.

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

With me on the call are President and Chief Executive Officer, Don Thompson, and our Chief Financial Officer, Pete Bensen.

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

And 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 applies to our comments.

And these documents are both available on our website at www.investor.mcdonalds.com, as are any reconciliations of any non-GAAP financial measures mentioned on today's call with our corresponding GAAP measures.

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

Thank you, Kathy, and good morning, everyone.

We began 2014 with our strategies and our business model sound and intact.

From a financial standpoint our system's number one goal remains enduring profitable growth which starts with continuing to grow customer visits and comparable sales.

From our diversified geographic portfolio that leverages the entrepreneurial power of local ownership, to the breadth of our menu across dayparts and meal occasions, our strategies, infrastructure and investments support this goal.

And while we expect the market dynamics to remain similar to 2013, we do have experience, effectively competing in challenging operating environments and I remain confident in our ability to be successful at McDonald's.

Our global growth priorities are focused on ensuring that we remain relevant and appealing, so that more customers will visit us more often.

We are focused on optimizing our menu so that we offer our customers food and drink that have strong appeal; on modernizing the customer experience in our restaurants so that that experience for each customer is more memorable; and on broadening accessibility so that we deliver unparalleled convenience.

The key to our growth lies in our ability to place the customer at the center of everything that we do.

Over the past few months, I have had the opportunity to visit our priority markets -- the US, Germany, Japan, and Australia -- with [Steve Reese], Pete Bensen and Tim Fenton.

We focused on more deeply understanding how each of those markets are adjusting their plans to address current challenges and adapt to the environment and to our customer's expectations.

There were four opportunities that were common to these markets and are being fortified in many other countries in which we operate.

First, we are strengthening our planning process to more effectively bridge consumer insights into the right customer-centric plans and actions while striking the right balance against our internal financial objectives.

Second, we are strengthening our marketing messaging to better resonate with customers and create stronger awareness.

Third, we are enhancing our affordability platforms to ensure our value offers are consistent and clearly messaged.

We want our customers to feel good about the value that they get when they visit us at McDonald's.

And finally, we are more effectively balancing our focus on the core menu including the Big Mac, Egg McMuffin and our world-famous fries.

Our core products are familiar favorites for our customers.

They truly represent McDonald's to all of our customers and, at about 40% of total sales, they are an incredible business asset for us that requires a constant drumbeat of communication in our area of the world, and local market teams are translating these learnings along with specific market findings into comprehensive action plans to improve the customer experience.

A good example is the recent changes made in US marketing to more directly align our marketing efforts with targeted consumer segments.

I will talk more about this change and actions being taken in the other priority markets a little bit later.

It is important to underscore that it will take time for consumers to notice the changes and reward us with increased visits.

This is not about a silver bullet.

Rather, it is about optimally sequencing multiple customer-focused initiatives and executing them very well.

While we expect results in these four markets to remain volatile in the near term, we are confident in our ability to improve over time.

Now beyond our priority markets, we continue to pursue targeted growth initiatives that drive systemwide performance.

In addition to our ongoing emphasis on menu, these include brand extensions like McCafe beverages, dessert kiosks, and delivery.

They include increasing our mobile footprint through new restaurant openings in both established and emerging markets and by continuing to modernize our restaurants through reimaging and also by leveraging the investment that we have already made in restaurants, particularly relative to restaurant technology like our global point of sale platform and in-store wireless access to support our digital efforts focused on engaging more deeply with our customers and differentiating the McDonald's experience.

Finally, in addition to market level activities, we are also evaluating opportunities to enhance shareholder value while maintaining long-term financial strength.

Now Pete will speak more about this area of focus in his comments.

Let me switch gears now and discuss global results.

Year to date in March our global comparable sales increased 50 basis points with positive performance in all segments except the US.

Operating income was up 1% in constant currencies and earnings per share was $1.21, a 2% decrease in constant currencies.

Comparable guest counts for the quarter continue to be negative.

Our priority markets of the US, Germany, Japan, and Australia drove that decline.

Comparable guest counts would have been positive excluding those markets.

While recent signs indicate economies may be stabilizing in several of our major markets, the projections from the informal eating out industry call for flat to modest growth in 2014.

With this as a backdrop, April global comparable sales are expected to be modestly positive.

Let's now move to performance by area of the world and address our priorities going forward.

In the US, comparable sales for the quarter were down 1.7% and operating income declined 3%, driven by negative guest counts due in part to severe winter weather.

The US is focused on strengthening the customer experience through better operations and service execution, balanced focus between our core and new products and enhancing marketing effectiveness while maximizing our opportunities to grow our breakfasts.

Because service is such a foundational element of the customer experience, we recognize the need to elevate our service levels to ultimately build visits.

During the first six months this year, our franchise and Company-owned restaurants are engaged in what we call a reset which emphasizes the importance of proper staffing, scheduling and positioning of crew to build restaurant capacity, particularly during peak hours.

Earlier I mentioned changes that have been made within our US marketing group.

We've adjusted our marketing calendar so that we are introducing the appropriate number of new and promotional products.

And we are better sequencing them to maximize restaurant execution and the contribution of comparable sales.

We are also looking to harness the power of our marketing strength, especially in support of our core menu.

We are focused on creating a greater emotional connection between customers and our core products through our advertising and media spend.

Those things, combined with the fresh perspective of our new US Chief Marketing Officer, these balanced menu changes and focused media strategies will allow us to strengthen our appeal to customers by offering them what they truly want -- great food and great service at an affordable price.

Finally, as the leader of the important and growing breakfast daypart, we will continue to build on the strength of our morning business.

Today, customers choose McDonald's because of our great products cooked in our restaurants and our kitchens.

We crack fresh eggs, we grill sausage and bacon, we bake biscuits and we toast muffins, all to serve up a delicious breakfast that is accompanied by our outstanding McCafe coffee.

These things truly set us apart and position us to continue growing this daypart into the future.

Now moving over to Europe, comparable sales were up 1.4% for the quarter and operating income was up 4% in constant currency.

Positive comparable sales performance in the UK, France, and Russia was partially offset by Germany's negative results.

While we are encouraged by positive comparable sales trends and recent economic indicators that appear to be stabilizing in many markets across Europe, we remain cautious in the near term, given a tenuous operating environment.

Both the UK and Russia have successfully focused on growing breakfast while balancing the core menu with strong promotional activity that is resonating with local customers.

In France, successful marketing support for premium products and limited time offers, along with a stronger affordability platform, have contributed to the eighth consecutive month of positive comparable sales growth amid a declining [IEO] industry.

Germany is one of the priority markets with persistent negative sales and guest count momentum.

The new management team is working to rebuild consumer trust through a more relevant and consistent affordability platform.

We have also adjusted our menu and marketing calendar to do a better job of connecting with customers, by reducing and better balancing our core menu favors with new food and beverage offers.

Now let's shift to Asia-Pacific, Middle East, and Africa where comparable sales were up 80 basis points for the quarter and operating income decreased 2% in constant currency.

Solid comparable sales performance in China and many other markets were somewhat offset by weakness in Japan and, to a lesser extent, Australia.

In China, comparable sales increased 6.6% for the quarter, partly reflecting the lap of residual effects of consumer sensitivity related to last year's supply chain issue in the chicken industry.

China's ongoing focus on brand extensions like delivery and dessert kiosks is strengthening our appeal as a convenient brand.

Sales from our delivery business continue to grow at a double-digit pace.

And while about 30% of the total restaurants in China offer delivery, these restaurants are concentrated in our key cities and offer additional customer benefits such as minimum delivery times and 24-hour service.

We continue to see significant growth potential throughout APMEA.

In China we plan to open about 300 new restaurants this year.

We also continue to accelerate our franchising efforts.

About 15% of restaurants in China are franchised as of the end of the quarter and we are on track to achieve our near-term target of 20% to 25% franchise restaurants.

In Australia, recent comparable sales are negative due in part to the shift and timing of the Monopoly promotion this year.

The market is enhancing its affordability platform by adding new meal bundles to the Loose Change menu to strengthen our value offer and remind customers that we have something for everyone.

Japan continues to experience negative comparable sales in guest count trends amid a highly competitive environment.

Looking ahead, Japan is focused on offering more relevant food and beverage choices, increasing the focus on the family business, and repositioning the affordability platform to rebuild our customer connection and stabilize our performance.

As we look forward, the market is also monitoring consumer reaction to the 3% consumption tax increase that occurred on April 1. Around the world, we are working hard to ensure our actions are driven by what our customers want and need from us today and tomorrow.

As our business continues to generate significant levels of cash, our philosophy regarding the use of cash remains unchanged.

Our first priority is to reinvest in the business to capitalize on the sizable long-term growth opportunities that exist.

And after reinvesting in the business, we are committed to returning all of our free cash flow to shareholders through dividends and share repurchases.

In the first quarter, we returned $1.2 billion to shareholders through dividends and share repurchases combined.

I want to close by reemphasizing my confidence in McDonald's future.

Approximately 70 million customers per day across a geographically diverse portfolio of over 35,000 restaurants is a very strong foundation from which we operate.

Our infrastructure and our fundamentals are sound.

We are leveraging the power of our proven business model, our investments in restaurant capabilities and modernization and our hard earned competitive advantages to pursue the sizable opportunities that are before us.

At the same time we are thoughtfully evolving our approach to remain relevant, making appropriate adjustments and navigating near-term challenges while driving enduring profitable growth for our systems and for our shareholders over the long term.

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

Thanks, Don, and hello, everyone.

The McDonald's system entered the year with a realistic view of our near-term opportunities.

We had a firm focus on our path to long-term success.

We are diligently managing those things within our control while continuing to position the McDonald's system for future growth.

The battle for market share is expected to persist, given projections for flat to modest category growth in our major markets this year.

But over the long term, the $1.2 trillion global informal eating out category should grow more significantly and I expect McDonald's to fully participate in that growth.

One of the reasons I am confident in McDonald's future is the strong base off of which we operate.

First-quarter results were in line with our expectations and highlighted the resiliency of our system and financial model.

Though topline growth was challenged, McDonald's generated $1.9 billion of operating income.

This is an impressive number, but I am even more encouraged by the significant long-term opportunities we see to drive future growth.

Turning to first-quarter performance, we are primarily a franchisor with 81% of our global restaurants franchised.

As such, our profitability is driven primarily by topline performance.

Modest comparable sales growth, combined with higher expenses and lower gains from sales of restaurants, contributed to a 60 basis point decline in our combined operating margins to 28.9% through March.

The largest component of operating income is our franchise margins, representing approximately 70% of total restaurant margin dollars.

Franchise margins, which are driven by a relatively steady and predictable stream of rent and royalties, grew to approximately $1.8 billion in the first quarter, a 3% constant currency increase driven primarily by expansion.

The consolidated franchise margin percent decreased 60 basis points to 81.1%, highlighting the need for stronger comparable sales gains to offset increased expenses and maintain this margin percent.

Global Company operating margin dollars grew to $723 million while the margin percent decreased 10 basis points to 16.1% due to higher labor, commodity and occupancy costs which were offset by positive comparable sales.

In the US, Company-operated margins decreased 10 basis points to 17.3% as the positive impact from higher average checks, primarily driven by pricing, was offset by negative guest counts and higher commodity at crew labor costs.

First-quarter commodity cost in the US rose nearly 3%, driven primarily by higher protein costs.

We expect similar pressure in second quarter then easing throughout the second half of the year.

The full-year outlook for the US grocery basket remains a 1% to 2% increase.

At the end of March, the price increase in the US was about 3% higher versus a year ago.

While the food away from home inflation index is 2.3% through March, it is projected to be up 2.5% to 3.5% for the full year.

In addition, we have seen more significant increases over the past two months in food at home inflation, which is also projected to increase 2.5% to 3.5% for the full year.

We watch these indices closely, yet are also mindful of cost pressures, not only in 2014 but next year as well, when making our pricing decisions.

Turning to Europe, Company operating margins increased 30 basis points to 17% as strong performance in France and the UK was partially offset by higher commodity costs in Russia, due to the impact of the weaker Russian ruble on import costs.

Europe's grocery bill was relatively flat in the first quarter and we expect more pressure in the second half of the year with a full year increase still projected at 1% to 2%.

And across Europe, the average menu price increase excluding Russia is about 2%.

In Asia-Pacific, Middle East, and Africa, Company-operated margins declined 60 basis points to 14% as positive comparable sales were offset by higher labor, occupancy, and other costs.

While the margin percent grew in several markets, including China and Australia, re-franchising in Australia and the weaker Australian dollar negatively impacted the segment's overall margin percentage.

In addition, the new restaurant openings primarily in China contributed to the lower margin percent, though to a lesser extent than in 2013.

G&A for the quarter increased 4% in constant currencies.

Over half of this increase was due to our sponsorship of the Winter Olympic and Paralympic Games in Sochi.

We expect to experience a more significant G&A increase next quarter due to our worldwide convention and costs related to other initiatives such as restaurant growth, capacity enhancements, and our digital capabilities.

First-quarter effective tax rate was 32.4% and represented a significant increase versus the prior year rate of 30.1%, which was aided by a tax benefit of nearly $50 million.

We continue to project the 2014 full-year rate to be between 31% and 33%.

We remain committed to investing in our business to drive future growth in returns.

We allocate capital in a disciplined, measured way, opening new units across a diversified portfolio of markets while making prudent investments in existing restaurants.

We are on track to open 1500 to 1600 new restaurants this year, including about 500 in affiliated and developmental licensee markets.

We also expect to re-image over 1000 existing restaurants.

The rollout of the new kitchen equipment in the US is progressing nicely and we are on track to have it installed in all restaurants by midyear.

As I discussed at a couple of investor conferences last month, we are moving with more urgency to address recent financial performance in our priority markets.

In addition to these efforts, which Don covered, we are actively looking at ways to improve shareholder returns by optimizing our capital structure while maintaining our long-term financial strength; optimizing our ownership structure, including certain refranchising activities, especially in markets outside of the US; and scrutinizing ongoing G&A while appropriately supporting our franchisees and our growth initiatives.

As I said at the conferences, these additional areas of focus do not represent a change of strategy or financial philosophy.

They fit squarely within our business model.

We are not beginning with a given target in any of these areas but instead are evaluating them with the ultimate screen of creating value by doing what is right for the business over the long term.

Financial discipline has been a cornerstone of the plan to win and that certainly will continue, because I believe a strong financial foundation is a critical component to building enduring profitable growth.

It is premature to comment on any specifics, but we expect to provide an update on our progress over the next couple of months.

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

At current rates, including the stronger euro, we expect second-quarter EPS to be minimally impacted with a full-year negative impact of about $0.03 to $0.04.

As usual, this is directional guidance only because I know rates will change as we move throughout the year.

In closing, I am confident in our fundamental business model and our competitive position.

We are the global leader in a $1.2 trillion industry, yet have less than 8% market share, providing significant opportunity for future growth.

Our geographically diversified portfolio and various ownership structures allow us to optimize our investments within our market.

We are aligned with our outstanding owner-operators and suppliers to leverage our distinct competitive advantages and we are making strategic investments today to seize those opportunities to create long-term value for our customers, shareholders, and the entire McDonald's system.

Thanks.

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

Thanks, Pete.

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

(Operator Instructions).

We are going to, again, try to give as many people as possible the chance to ask questions, so if you can limit yourself to one, that would be appreciated and we will come back to you for follow-up as time allows.

Joe Buckley, Bank of America Merrill Lynch.

Could you give us a little bit more color on the US kitchen assembly prep tables?

Maybe how many stores have them currently and I know you said you expected the rollout to be complete by midyear.

But also, in addition to the number, just what you have learned so far in terms of speed of service or greater product assortment or variety?

Just a little bit on the prep table.

The high-density prep tables, and I think that is what you are talking about relative to the kitchen changes in the US, are really, they are a key enabler for the future menu.

And the reason that they are, is that they give us a few things we don't have today, one of those being room to add new ingredients, another being the chill rail which enables us to include fresh ingredients.

They also -- it also helps us relative to the way that the kitchens are structured so that we have a mirror image of condiments on both sides of the preparation table.

And we won't have to -- ergonomically you won't have to reach across the table to be able -- for our crew to be able to prepare some of our food, our sandwiches and our products.

These things together really help support our future vision of the menu.

And that doesn't necessarily mean that we are going to add a lot of things, but what it does mean is it gives us the capability to optimize some of the products we have and it gives us the flexibility to have some new toppings that will help us be able to customize some of the food products that we have.

The US is on track to meet its completion goal by midyear and it is going quite well.

In addition to that, Joe, the other thing that the US is doing now, and I've mentioned it in my comments is what we call reset, which is focusing back on staffing and scheduling and positioning.

This is really, really critical because at this point in time and with the volumes that we have in the restaurant, we want to make sure that we can handle the peak hour capacities that hit the restaurants.

And so a combination of those things with the way that we are rationalizing the menu to make sure we are not implementing too many new products, with a better balance of focusing on the core and the new products, those things altogether are really what this major focus in the US is right now.

And it is kind of a back to the basics with some enhancements in terms of our productivity and capabilities in the restaurants.

Brian Bittner, Oppenheimer.

It feels like the biggest opportunity here in the near term is Europe.

It is 40% of profit contribution, very similar to the US.

And operating profit did decline in the US and APMEA, but it was positive 6% in Europe and I think this was despite your largest European market, Germany, being negative.

And so just focus on Germany for a second.

Tell us really what you think is going on that can help turn around some of those self-inflicted wounds in that country and, really, I just feel as though if Germany gets turned, you can really accelerate from here and therefore the profits of the Company can really accelerate from here.

So if you could just focus on Germany for a moment, that would be helpful.

Absolutely, Brian.

And so a couple of things in a broader set.

As we talked about the key priority markets -- and I mentioned some of the things that we saw relative to commonality -- and those things really are what I would consider to be a translation of consumer insights into the action plans very strong and making sure that we are not trying to merely drive profitability on the end, but we are focused on customers and the insights around customers.

There are several things relative to Germany and these things are being addressed now by the leadership team that is there.

One is Germany is a very price-sensitive market.

And if we look at our performance, we have a couple of main issues, one being our core EBM movement and from a competitive perspective, actually the bakeries in Germany are doing quite well.

What customers have mentioned to us is that there are several things that we need to focus on.

One is to reestablish our relevance because our menu boards have gotten a little bit out of whack.

What I mean by that, we have implemented a lot of new products similar to some of the implementations in the US system and it really has confused customers to a certain extent.

The other thing has to do with our pricing and our strategic relationship on the menu board.

And this basically is the relationship between the value-based components and the rest of the limited time offers and the core EVMs.

And we have got to make sure that that is a much more rational and strategic pricing structure.

Our teams are working on that.

And lastly it is the balancing of marketing.

And that is the balance between our core menu that I talked about with Big Macs, Royals or Quarters, fries, how we leverage and talk about those things along with value, along with limited time offers like the [Hootengauty] products in Germany.

And so the combination of having a consistent balance there, with having a consistent messaging around affordability and also making sure that we reestablish the relevance, particularly with the offers we convey via our menu boards and marketing, are the things that market is focused on.

As we were having our session in Germany, it is clear that the new leadership team that we have in place there is focused on these things.

We also had a chance to meet with the franchisees in Germany.

They are very understanding of the situation that we are in there.

And frankly one of the things that galvanizes the McDonald's system is when you have poor performance and it impacts cash flow.

And I know that our franchisees along with our Company team there, and it is a new team, are all focused on improving the situation there and improving our aggressiveness in the marketplace.

John Glass, Morgan Stanley.

Pete, when you talked about optimizing the business model a little more, can you -- of the three big buckets you have outlined, which do you think is going to have the biggest impact or potentially the biggest impact to shareholder returns?

Can you talk about how you plan to convey this information?

Is it next quarter or is it inter-quarter and is this the whole plan or is it just an update and we will get a lot of these updates along the way?

Good question, John.

I think you have to take the three levers that I mentioned, you really have to take those in combination with what Don said in his comments about the focus on the four priority markets.

So taking all of that together is really -- the combination of all of that is what is going to drive the value over the long term for shareholders and the system, not any one of those items in isolation.

And as Don mentioned, to turn the sales trend lines in those big markets is going to take a little bit of time.

And so, as we look at what else is there within our business model that in the meantime we could do to be accretive to value, looking at opportunities on the balance sheet as we have said though, we want to maintain that single A rating that has been a cornerstone of our business model over the last 50 plus years and is an important piece of our financial strength and flexibility.

Refranchising at 81% franchise, obviously, that is our primary method of doing business.

While we have done refranchising over the last couple of years, we think there is opportunities to accelerate that.

And so of the financial levers that is probably the one that has the most opportunity to drive value.

And that, by its nature, is going to be a multi-year plan, when we talk about the details, it is going to be a multi-year and it is really primarily focused outside the US.

And but it is also prudent for us to take a look at our G&A spend, especially as we know there are growth opportunities in areas like digital where we want to allocate more funds and rather than have all of that be incremental, we are looking for ways to, reallocate so that we can finance those and live within a certain G&A envelope.

So you can expect to hear from us by the end of the second quarter and I think what you would expect to hear is something broadly that covers all of those areas and not just one or two of the specifics.

Jeff Farmer, Wells Fargo.

Good morning.

What are the opportunities you see at breakfast?

Have you increasingly focused on that daypart as a potential same-store sales driver?

Seems like it has been -- the attention there has been upped a little bit here recently.

Thanks, Jeff.

First of all, relative to breakfast, I mentioned in my comments customers choose breakfast at McDonald's because our breakfast tastes great.

It has very, very high consumer scores, freshly prepared products.

Every morning, as I mentioned, we actually crack eggs.

We cook in our restaurants.

It is not a microwave deal.

We actually cook.

We have grills and fryers and ovens and so that is the reason that we are able to prepare breakfast.

The other thing is our breakfast model is also focused on how we serve up that breakfast quickly to customers that are on the go.

And so, we continue to focus on those areas of strength that we have.

We have been serving breakfast now for over 30 years.

And it is our strongest -- one of our strongest dayparts clearly.

Clearly, one of the strongest from a profitability perspective, the strongest.

And so we will continue to focus on our breakfast opportunities.

The US is focused today primarily on breakfast via coffee and then our handheld sandwiches that we have at breakfast and, also, on some of the quality and freshness cues that I have just talked about.

And so those things will continue to focus on, continue to focus on the operational opportunities we have there in the staffing and the scheduling and positioning of breakfast as well.

David Tarantino, Baird.

Good morning.

One quick clarification on the last question and then a separate question.

First, on the breakfast for initiative or focus there, is that being done in response to this competitive activity?

For example, the Taco Bell launch, and maybe could you comment on whether that is having an impact on your business or not?

And then the second question comes back to the focus on the reset initiative in the US and it sounds like maybe some of the initiative there is focused on better handling the complexity.

But one of the things that you haven't talked about is whether you would be interested in reducing some of the menu complexity to fine-tune the operations and whether or not that is an opportunity.

So perhaps could you comment on that as well?

Thanks.

Just a couple of points.

One is, there has been breakfast competition for a number of years in the US market.

We have had some of our major competitors that have made runs at breakfast and it seems every year there is someone new that is making a run and none of them have really stopped their focus on breakfast.

Whether that be the closer in competitors or if they are sandwich shops or the taco shops or anything else.

Everyone has an opportunity and they wanted to look at breakfast.

We have not seen an impact relative to the most recent competitors that entered the space.

One of the things that happens at breakfast if anyone enters, customers will try the breakfast, that it is new, it will be something that they have not seen in the marketplace, so we expect customers to try it.

But what we are also confident in is our ability to execute our breakfast with again the things that I mentioned relative to being a restaurant that cooks and we have a delivery service that is capable of satisfying the time needs, if you would, of consumers.

I think that new entrants into the market always bring a different level of attention to breakfast which, in many cases, supports us.

Our breakfast continues to be a positive driver in our business in the US and actually sometimes when these entrants come in, it causes us -- it forces us to focus even more on being aggressive relative to breakfast.

I know you have just recently seen the coffee execution in the US and our free coffee offers, which really are about supporting our breakfast and supporting our breakfast foods as much as they are about reintroducing Americans to a delicious cup of McCafe coffee.

So those are the things we do there.

On the reset end, I did mention in my comments a bit about reducing -- potentially this reduces the complexity.

When you have a number of builds in our restaurant, basically what you are doing is you are leveraging the various condiments and products in the restaurant to build those sandwiches.

If you can go to a more streamlined menu board approach and then still have those condiments so that customers can customize a bit, it will help in terms of reducing, if you would, complexity.

Having said that, though, customers want their tastes and so we need to be able to deliver that.

They also want familiar favorites like the Big Macs and Quarter Pounders, Filet of Fish and nuggets, fries.

And we need to be able to deliver on that.

And we will be able to do both of those things.

The system that the US is putting in place on reset just calls us back to a basic operations focus on our restaurant and it helps us to enable better productivity with some of the things such as the high density prep table and high density kitchen setups we have.

David Palmer, RBC.

Good morning.

In your prepared remarks, you mentioned that you are strengthening your planning process to effectively bridge consumer insights with the right customer-centric plans and marketing.

I am curious about what that means.

Have we already seen the fruits of these changes in your marketing?

Are big changes coming soon?

Perhaps you can give us a sense of what you think is the marketing opportunity after some self-diagnosis.

Thanks.

There are several different points.

Thanks, David, for the question.

Several points that I mentioned.

On the consumer insights, we have tremendous amounts of data within the McDonald's system.

The question is whether the data is then being translated directly to the specific action plans that we see being executed in the marketplace.

And that is a combined effort between the franchisees and the market, our leadership teams, and our supply chain and our supply chain leaders.

So we have got to make sure that we are translating those consumer insights.

The whole notion here is that you can't be driven, based upon optimizing profitability even in the face of external pressures relative to the P&L.

We have still got to remain grounded in the consumers.

And that is what we saw as some slight gaps in some of the priority markets.

So we have got to get back to that consumer focus while mindful of some of these additional cost pressures, but make sure that the plans are robust enough.

But that is combined with several other things that I mentioned.

One is the marketing messages.

So, if we are more streamlined and focused, relative to these consumer insights to action plan, then the marketing focus and the messages won't be so disparate.

And what we will be able to do is focus that strength and highlight that strength a little bit more solidly.

The other thing that we saw was the affordability is one of those things that tends to get a little bit of less focus in tougher times.

And so, in many of the markets we fell off of our affordability messaging a bit.

In some of the markets, they are coming back on that.

And then the core menu balance, we were chasing a few too many limited time offers.

So, for these primary focal markets, this is going to take time.

I mean, our planning process, you know us well.

We plan with the franchisees and we plan not just two or three months ahead, we plan six months, nine months, and usually a year ahead of time.

So it is going to take a while to see some of these things layered in.

But it is about a series of multiple initiatives.

This is not a silver bullet.

And these things will take a bit of time, but I feel confident that our markets now are focused on leveraging the right processes, incorporating the right discussion points with the franchisees and moving the business for the long term in the appropriate manner.

Jason West, Deutsche Bank.

One around the overall portfolio review.

Is part of that also looking at CapEx and the unit growth rate that has been picking up a little bit and the last few years?

And I know you guys -- taking a harder look at whether that is the right growth rate for the business and the right CapEx spend for the business?

Jason, an outcome -- so the refranchising plans are being built up market by market.

So as we said, we didn't start this with a particular target in mind, but we want the markets to come back to us based on their knowledge of the franchisees, their local business environment, their growth potential, et cetera, and come back to us with a more aggressive finance -- refranchising plan than they have today.

And certainly one of the outcomes of that will be as we get more franchised, that is less capital-intensive.

So it will allow us to grow at the same pace at this pace we have been growing at, that 2.5% to 3.5% new units, with less capital.

And so it is definitely an outcome.

It is not the primary objective of looking at the refranchising, but it is certainly an outcome.

It makes us a little less capital-intensive.

But it also makes -- it converts that Company-operated earnings stream into the more stable and predictable rented royalty refranchising income stream which we think is the most valuable piece of all of it.

Will Slabaugh, Stephens.

Regarding the US, can you talk about how you would gauge the customer reaction so far to the dollar menu and more and how you think your position there versus your peers at the lower end?

And at the same time could you talk about that in the context of the necessity there for a dramatic innovation to premium as a big lever or is it as pressing in the near term at least as driving value and getting people in the door through your value proposition there?

I want to make sure I catch the last part of that again possibly, Will, but I will give this a shot.

Relative to Dollar Menu & More.

Again, stepping back relative to value menu in the US, during roughly the last 10- , 12-year history, the US has evolved a dollar menu to ensure the menu offers are in line with customer preferences several times.

Those changes have been made over this 10-year period to make sure we stay relevant.

But we are also mindful of the profitability aspects and the execution aspects of these menus within the restaurant.

And we want to make sure that we provide the right things for our customers and we can do that over a sustained period of time.

So when we look at Dollar Menu & More, it is another of those evolutions.

Dollar Menu & More is a percent of total day sales, seems to be relatively in line with our historical averages.

And we are not seeing any dramatic change to the usage of Dollar Menu & More.

So right at this point in time, Dollar Menu & More has performed to the expectations that we have had.

I think the last part, Will, that you mentioned was relative to was it relative to premium products and the role that premium products play.

I would say that there is a balance between what we just talked about with affordability Dollar Menu & More, our core menu offerings and our premium-based products.

So when you see Clubhouse Burger in one of the local windows -- or one of the national windows, you will probably see coming up in a local window, maybe some mentions of breakfast, maybe some mentions of affordability or mentions of a limited time offer product.

So Clubhouse Burger worked great actually, but you will also have to marry that along with some of the value messaging.

You will also hear some beverage messaging and breakfast messaging.

So that marketing calendar has to accommodate all of those.

There's definitely a place for new food and innovation, new beverages and innovation.

We just want to be mindful of the core offerings we have, giving them the appropriate leverage in the marketing calendar as well as dayparts like breakfast.

Matt DiFrisco, Buckingham Research.

My question is with respect to the price and I wanted to know how that might look with obviously a lot of states having some minimum wage and California going up to increasing their minimum wage over a couple of years here.

In your planning process, is that 3% price that you mentioned domestically being held?

Is that what we will see carried out and already assumes to absorb some of that minimum wage?

Or is there an ongoing dialogue with franchisees as far as what type of minimum wage response they might have?

Yes, Matt, there are actually 13 states at the beginning of the year that raised their minimum wage anywhere from $0.10 to $1.00.

And that is before any Federal -- potential Federal minimum wage impact.

So, as I mentioned in my remarks, we look at the traditional indices that tend to guide our pricing decisions.

So food away from home projected to be up 2.5% to 3.5% this year.

I think inherent in that is you do see franchisees generally around the industry, not just McDonald's, anticipating some of these higher input costs.

So, they have got what the states have already enacted today.

They have got the discussion about a potential at the Federal level.

For a lot of them the healthcare mandate kicks in in 2015.

So, they have to be mindful of that.

So, these cost pressures are definitely on everyone's mind as you think about pricing, yet as Don mentioned, you have got to strike that right balance between everyday affordability and providing them premium products that will drive them into the restaurant as well.

But as we get too focused on individual profitability and less focused on the customer, that is when we start to run into some of these challenges.

Jeff Bernstein, Barclays.

Focus on the US business and the competitive environment perhaps obviously ex the weather and I think you talk about the QSR promotional activity ramping up.

I know you mentioned the free coffee promotion you guys are doing.

I know more locally perhaps we have seen buy one get one Big Mac type products.

I am just wondering whether you could talk first and foremost just about the competitive environment, especially with you guys having lost some share to some of your competitors over the past couple of quarters?

And as it relates to that breakfast which it seems like so far so good that it is fairly steady at, I believe you said roughly, 25% of sales.

I am wondering if you can give us some insight that we don't perhaps have on the broader category and maybe have the categories grow and relative to how your 25% has grown or contracted over the past year or so?

Thanks.

I will try to answer.

I think you have got about four or five different questions in there, buddy.

But the first one, relative to the US.

US comparable sales trends stabilized during the first quarter of 2014 and we saw sequential improvement in our reported results, comp results as well as a narrowing of the gap to the QSR sandwich competitor set.

And excluding the impact of this year's severe winter weather, our US comparable sales for the first quarter would have been relatively flat.

We had about a 1.4%, a little over 1.4% impact due to weather.

Which, we don't often talk about weather because next year when it is much better, we probably won't talk about it either.

But truth of the matter is it did have some level of impact to us, but you all will put that in the appropriate perspective.

We don't plan around weather at McDonald's.

We plan around customers.

A couple of other things.

We continue to see some -- the [IEO] industry in the US is still relatively flat so we know that there is going to be a marketshare battle.

So we have got to focus on those things that our customers are focused on and desire.

So in the US there is a focus around breakfast and coffee, as I mentioned.

There is a focus on balancing our core menu, along with some of the limited time offers like you just saw with the Clubhouse Burger and Chicken Sandwich.

And we have got this basic focus on operations to ensure that we can satisfy the needs of customers particularly during the peak hours.

So, that gives you a pretty overall perspective, I would say, of our US business and the state of that.

From a breakfast perspective, I mentioned it a little bit earlier, our breakfast is strong.

And it continues to be a solid performer, relative to our overall daypart segments.

And what we want to make sure is that we just continue to focus on the strengths that we have.

And actually, we have not talked as much about the quality aspects of our breakfast.

We haven't talked as much about the fact that we are a restaurant business that cooks.

There are entrants into the marketplace that don't have the same capabilities we have.

And so we are going to leverage the strength that we have and leverage the capabilities we have to inform customers of the fact of why we have been in the breakfast business for over 30 years and why we have become America's favorite place to eat breakfast.

And we don't plan on giving that up.

Sara Senatore, Sanford Bernstein.

I wanted to follow up on the US business and in particular in the context of some of the commentary about maybe focusing on profitability, maybe at the expense of resonating with customers.

So can you just talk a little bit about the margin structure there?

First is it still the case that you need a 3% comp to lever expenses?

Should it be higher because it sounds like you are looking more for traffic driven comp?

And then I guess what is the right margin, Company-operated, over the long-term question if I look back 20, 25 years is the average something close to 18% in the US and Europe?

Do you see anything that suggests it should go up or down from here or structurally just there's (inaudible) change with your margins?

Thanks.

I just want to make a quick comment and then I will turn this over to Pete on margins.

First of all we have a fantastic group of franchisees in the US business.

Matter of fact, next week we have our worldwide convention where our franchisees from around the world will be there and we are looking forward to the dialogue and discussions we will have.

So when we talk about profitability, what we are talking about is very viable astute businessmen and women who look at the overall environment and are looking at some of the implications of commodities along with legislative pressures, and then they will make decisions relative to their businesses.

So if we talk about a focus.

losing a bit of a focus on the customer, it is not because we don't have solid business people or we have people that are trying to squeeze the business.

They are looking at the overall perspective of profitability which they should do.

What we have got to make sure is that our focus, relative to profitability, starts and ends with the customer focus and those visits to the restaurant and that is why we talk about the balance plan.

So, I just wanted to reiterate that fact.

I don't think we could have better franchisees.

But just like us, within a company, we have got to make sure that we all stay focused on the customers.

And in terms of the Company-operated margins, we have historically said in a normal environment and we have defined that as being kind of a 2% to 3% inflationary environment, in that kind of normal environment, we need a 2% to 3% comp to maintain margins.

And our assumption in that is that half of that comp is coming from check and half of that comp is coming from traffic.

And so what you saw this quarter is we got a disproportionate share.

The comp was negative while we had a over 3% price increase.

So you had a disproportionate impact of the price increase this quarter is why you saw margins down only 10 basis points.

So we, as Don mentioned in those four priority markets, getting the sales and guest count trendline stabilized and going back positive is what is going to have the most significant impact on our margins.

We have always said it is a topline game and we really need that comparable sales growth and the traffic growth to be able to benefit and leverage that profitability.

So that is our focus.

And really there has been no structural change that would cause us to believe that, over time, we can't continue to grow those margins as long as we are generating those positive comps.

Karen Holthouse, Credit Suisse.

In your prepared comments you mentioned there is going to be some increased investments on the digital side in G&A.

And how does that relate to some of the things we have seen in the press about testing for a mobile app or what sort of formed some of the medium or longer term digital initiatives might -- what sort of form they might take?

Thanks for the question, Karen.

Relative to our overall digital strategy, this is something that we have been looking at in many of our markets around the world for some time.

However, it has not been what I would say a systemic strategy where we have leveraged the overall strength of McDonald's.

So our digital vision is to bring an entirely new level of convenience and fun to the McDonald's experience.

And what we have done to be able to move that forward is identify a couple of areas of opportunity, relative to that digital strategy.

One is a field really around experience and the fact that technology can enable us to enhance the customer interactions with our brand.

And many people will know of that by payment, ordering, redemption type opportunities as well as customer relationship management.

The second area is an area of engagement.

It is really how we engage customers both with us telling the story of some of the things we've mentioned, the quality, messages around McDonald's, the opportunities within the McDonald's system as well as our marketing campaigns and engaging social media to a stronger level.

So we are going to continue to do that.

And from a global strategy perspective, it is really a framework that then allows the local markets to be able to move forward more effectively.

We will also leverage the strength of McDonald's system globally, relative to our strategic partners, as we move forward.

So we have got several markets that are test markets around the world and we are leveraging from the things that they have already done and we are really looking to be able to scale the best ideas we have while those things are then combined with some of the global strategies and strategic partners that we have that are much larger in terms of their scope to help us along on our digital journey.

John Ivankoe, JPMorgan.

I think, at this point, I wanted to tie a couple of things up.

Don, I don't think anyone within McDonald's or outside of McDonald's would have said that you are an organization that was not run without consumer insights over the last two years.

In other words, you have always been a consumer insight-driven company.

So I just wanted to get a sense from your perspective, what really will change quantitative, qualitative, what have you over the next couple of years?

And maybe with that you mentioned -- you answered a question in terms of how you plan with franchisees over a six- or 12-month period in terms of products and promotions, what have you.

So not necessarily in terms of the cost of G&A, but maybe how that G&A is being spent.

Is there a possibility of changing the way that decisions are made and the speed of which various decisions are implemented at a market?

In other words do you need to change your entire decision-making process and how things get implemented at the store level as we are clearly in a market that is moving much faster than it was over the past decade or so?

Thanks for the question, John.

We will always remain focused on being locally relevant and that is the reason we have, as you know, John, some of the market teams out there in the field.

And they do a great job.

And that is also to help us move quicker.

So when it comes to many things at a local level, those are -- that is the way we will continue to operate by leveraging those local teams and the local insights on consumers.

You asked the question about whether or not things have changed relative to consumer insights and data.

We have always had data.

We have always attempted to leverage those insights as we put forth the plans.

The only thing that is different and we have been through this in cycles is that when you have external pressures a number of them sometimes our focus can shift a little bit more to how we ultimately will drive profitability at a restaurant level to handle some of those cost structures.

And we lose a little bit at the front end of those insights.

And as a result we focus more on the margin side of the business than we do on the guest count side of the business.

And we know guest counts correlate to our overall results of profitability.

So all we are saying that is happening in the market now is a refocusing on that front end of the insights and a refocusing on how those insights need to translate to plans that are customer-focused first.

We always will have the profitability aspects in mind as we plan, but it has got to be customer-focused first.

And all of the markets and our franchisees are well aware of this.

But it can happen in cycles and when it does we just have to make sure we call that out and we go back to the drawing board around how we move this business based on customers.

Andy Barish, Jefferies.

It is Alex on for Andy.

I want to go back to the European business and ask you a little bit more about Russia.

Whether or not you saw any impact from the political unrest in the region and how that business is trending?

And if anything has changed there in terms of the strategy with respect to value and premium products?

Thanks, Pete and I will double-team this one a little bit.

First part relative to Russia, one of the things at McDonald's and we have done this in all of the markets around the world, first and foremost will always be the safety of our employees and our guests.

That is of the highest level of importance to us.

There has been no major incidents related to their safety in these current markets whether it be Russia, Ukraine or Crimea or anything that has happened in the current situation.

Our restaurants generally are operating as normal.

Some are temporarily adjusting their evening hours based on customer traffic.

And we had three restaurants in Crimea that have been closed due to suspension of necessary financial and banking services.

So that kind of gives you a state of relative to Russia.

There are some financial impacts and currency impacts and I'll ask Pete to speak to those.

Yes.

During the quarter the ruble was down about 14% and it was down a little bit more subsequent to the quarter end.

And why that is relevant is Russia imports almost 50% of their food that they use in their restaurants.

And those imports are denominated both in euro and US dollars.

So when the local currency devalues like that, they have a financial impact.

So locally they had a 200 basis point impact to their margins in Russia from that devaluation that translated into about a 55 basis point impact on total Europe company-operated margin solely from the devaluation.

So if you assume the ruble is going to stay at this depressed level the rest of the year, that is something we are going to be battling with for the rest of the year in our European margins.

That said, Russia has some of our most profitable restaurants around the system.

So they are about 10% of our consolidated margins, but they are less than 5% of our overall operating income.

So in the grand scheme of things to the overall profitability, they are less than 5%, but they do impact the margin line somewhat disproportionately because of those imports and because of the high volumes and the high margins they do run.

Okay.

That is all for Q&A and I am going to turn it over to Don for a final closing thoughts.

Thanks everyone, again.

And as we wrap up this morning's call, I just want to make a couple of comments about where we are positioned as McDonald's and where I see us.

We remain committed to our strategy as we make thoughtful decisions to mitigate some of the short-term pressures and grow this business over the long term.

This has been consistent in terms of our approach.

I have even more energy and passion around it today than I did 23 years ago when I joined the Company, because I know that this is a solid leadership team and we are well aware of what it is we need to accomplish.

I am confident about our future.

We have defensible competitive advantages, some of those we have talked about, a resilient business model and the alignment across our owner-operators, our suppliers and our Company teams to drive enduring profitable growth for our shareholders and our system.

So, I thank all of you for your participation and for your thoughts about McDonald's and we hope that you have a great day.

Thanks again.