Operator: Hello,
and welcome to McDonald’s July 25, 2006 Investor Conference Call. At the request
of McDonald’s Corporation, this conference is being recorded. Following today’s
presentation there will be a question and answer session for investors. At
that
time investors only may ask a question by pressing "star one" on their touchtone
phones. I’d now like to turn the conference over to Ms. Mary Kay Shaw, Vice
President of Investor Relations for McDonald’s Corporation. Ms. Shaw, you may
begin.
Shaw: Hello
everyone, and thank you for joining us today. With me on our call are CEO
Jim
Skinner, and CFO Matthew Paull. This conference call is being Webcast live
and
recorded for replay later today via phone, Webcast, and podcast. As always,
the
forward-looking statements which appear in our earnings release and 8-K filing
also apply to our comments. Both the earnings release and our 8-K with
supplemental financial information are available on investor.mcdonalds.com,
as
are reconciliations of any non-GAAP financial measures mentioned on today’s call
with their corresponding GAAP measures. In addition, in connection with the
proposed disposition of our stock in Chipotle through an exchange offer,
Chipotle will file with the SEC a registration statement and prospectus that
will have important information about the offer. Investors will be able to
obtain a free copy of the prospectus and related documents filed with the
SEC
when available on the SEC’s Website, as well as on our and Chipotle’s websites
as applicable. And now I’ll go ahead and turn it over to Jim
Skinner.
Skinner:
Thanks
Mary Kay, and good morning everyone. We appreciate your interest in McDonald’s,
and certainly your participation in this call. I’m proud to say that this
quarter was the strongest since we announced our revitalization plans. Our
momentum continues around the world with a comparable sales increase of 5.5%
and
operating income growth of 12%. Margin percentages were up around the world
for
the second consecutive quarter, indicating that more is flowing to our bottom
line. Notably, our performance is not being driven by a single country or
region, but is the result of solid contributions from all of our areas in
the
world. The underlying health of our business is strong, and we remain focused
on
delivering long-term sustainable growth. We believe our growth opportunities
are
enormous, and we have created a strong foundation for this growth over the
past
few years. Over the last three years on average we’ve grown top line 6% in
constant currencies, and delivered double-digit EPS growth. By focusing on
being
better not just bigger, we have proven that we can not only capture more
of the
existing market, but also create new opportunities for growth. The key to
success is a simple yet powerful concept.
We’re teaching focus and balance across the five P’s of our Plan to Win. Whether
in the area of people, products, place, price or promotion, we strive for
the
right balance between innovation and disciplined execution. Currently, we’re
focused on three critical strategies to drive performance. First, striking
an
effective balance between consistent promotion of our core product offerings
with the successful introduction of new food news. No matter how familiar
our
core menu is to customers, we know that featuring these products in our
restaurants and marketing them drives sales and guest counts. During the
recent
World Cup for example Germany, France, China and Taiwan were successful with
promotions linked to the Big Mac and Extra Value meals.
On
the new food side, we continue to introduce products that are relevant to
customer’s tastes and lifestyles. The U.S. is strengthening its position in
chicken with the launch of the Chicken Snack Wrap, a premium chicken strip
inside a heated tortilla with lettuce, cheese, and ranch sauce. We’re also
broadening drink offerings, a process which began with our coffee upgrade,
and
continues with testing of grab-and-go drinks in resealable containers, such
as
fruit juices and flavored waters.
Around
the world we’ve been adding new choices to our Happy Meals, from milk and
drinkable yogurt to fruit bags and carrot sticks. And Australia is taking
this
to the next level in August with the introduction of Pasta Zoo, a kid’s Happy
Meal entrée that has strong nutritional profiles. The product has already
received positive reaction from Australia’s food and nutrition community, and we
are confident that moms and kids will feel the same.
Longer
term, we are supporting food innovation with the European Food Studio in
Paris
and now its counterpart, the Food Studio and Quality Assurance Center in
Hong
Kong, which got up in operation in June.
The second strategic focus involves the relationship between every day value
offerings and an appealing mix of premium products. Success here has played
a
key role in driving results around the world, most recently in Europe. Cost
conscious Europeans can rely on value platforms such as the pound saver menu
in
the UK and Ein Mal Eins in Germany. These every day menus are complimented
by
premium sandwiches such as the Big Tasty in Germany and the Chicken
Mythic in France. Longer term, markets such as Japan are working to optimize
pricing on the core menu, while in China we are exploring menu pricing that
is
tiered by both market and restaurants to help address the vast differences
in
purchasing power across that country.
A
third opportunity involves maintaining a relevant dining experience while
expanding our convenience through drive-thru’s, extended hours, and in some
parts of the world, delivery. Reimaging increases the relevance of our
restaurants, and positively impacts customer’s perceptions. By the end of 2006,
we will have reimaged or rebuilt over 8,000 restaurants over a four-year
period,
representing 30% of our traditional restaurant base. In the U.S., this
translates to more than 5,000 of our 13,700 restaurants reimaged and rebuilt
by
the end of the year.
Leveraging
our convenience advantage also remains a significant area of growth opportunity.
Extending our hours of operation continues to drive results in the U.S.,
where
more then 90% of the restaurants participate in some way. We are expanding
this
opportunity as appropriate in Europe, Asia, and Latin America. In
China,
our
development strategy is focused on opening more restaurants with drive-thru’s to
capitalize on the increasingly mobile population there. This strategy received
a
significant boost in June with the signing of the strategic partnership with
Sinopec, China’s largest petroleum retailer. The agreement gives McDonald’s
first right of refusal to co-develop drive-thru restaurants at existing and
new
Sinopec outlets, which number more than 30,000. It’s great having a choice, and
our initial plan of course is to identify and prioritize the best locations
across China.
Balance
is important not only in our restaurant activity, but also in the broader
management of our system. As we mentioned in previous calls, we’ve been working
to find the right balance between company and local ownership in our system.
As
previously announced, we plan to convert 15 to 20 markets to a developmental
license, or DL arrangement. In a DL structure, a local entrepreneur uses
his or
her capital, real estate, and local knowledge to build the brand and optimize
results. McDonald’s collects a royalty, but invests no capital, unlike a
traditional franchise agreement. So far this year we’ve completed DL conversions
for three countries, Nicaragua, Honduras and Bulgaria. And we will soon convert
another market in Asia Pacific, Middle East, Africa.
Similarly,
the United Kingdom is working to shift the balance of its restaurant ownership
so that more restaurants are in the hands of franchisees. This can be
accomplished through converting company owned restaurants to franchises or
through joint ventures in which the company and a partner share a stake in
the
restaurants. Year to date 24 company owned restaurants have been franchised
and
three joint venture partners have been formed, representing 40 stores. In
addition, we plan to franchise or JV another 50 UK stores later this year.
We
at McDonald’s are energized by both the success we are achieving today and the
great opportunity for growth that lies ahead. We recognize, however, that
we
have things to do to realize our potential. We must continue to push the
boundaries placed on our brand, earning our customer’s permission to try more
new things under the golden arches. Our systems, our operating systems, both
at
the counter and in the kitchen, must keep pace with the demands of our customers
and our business. We have incredible variety in our restaurants around the
world, different menus, floor plans, operating hours and traffic patterns.
We
have learned that one size does not fit all. So we’re working on a next
generation operating system that you’ve talked with us about before that will
have flexible components that can be plugged in, depending on the restaurant’s
needs. We’re calling it the flexible operating platform. While the flexible
operating platform is under development, we are implementing the bridge
operating platform in countries that need help with their operations now.
The
bridge operating platform is a customized solution that combines elements
from
our Made For You and traditional grow direct systems, ways that are best
suited
to the needs of a particular restaurant. As the name suggests, it acts as
a
bridge to the flexible operating system of the future. But to me, our most
important challenge is to maintain and build trust of our customers. We must
do
this, and we are. We are driving efforts around the world to tell the facts
about the quality of our food, our great employment opportunities, and our
corporate values. We’re working directly with moms, the gatekeepers of the
family’s trust, through our newly formed Global Mom’s Panel. And we’re
connecting with customers on their terms, whether it’s through Internet blogs,
text messaging, or conventional advertising.
To
close, I want to emphasize how confident I am in the future of McDonald’s. There
is great opportunity ahead, and we are committed to capturing it for the
benefit
of our customers, our system and our shareholders. Thank you, and now I’ll turn
it over to Matthew Paull, our CFO.
Paull:
Thank
you, Jim. And good morning everyone. New products, convenient service and
hours,
clean, comfortable restaurants, and marketing linked to popular properties
and
events have combined to make the McDonald’s experience even more relevant. The
connection we’ve built with our customers, along with our commitment to
discipline in operations and in financial management continues to deliver
solid
results. As Jim just highlighted, sales growth was strong in every area of
the
world driving total brand McDonald’s margin dollars up 12% to a record $1.7
billion in the second quarter. Breaking this down, McDonald’s franchise margins,
which represent about 2/3 of total margin dollars, were $1.1 billion, and
as
percent of revenues rose 80 basis points with every area of the world showing
improvement. McDonald’s company operating margin dollars grew 20% to nearly $620
million in the second quarter. Company operated margins increased 130 basis
points as every segment showed improvement for the second consecutive quarter.
I’ll highlight the drivers behind this margin growth in the U.S., Europe, and
Asia Pacific.
In
the United States, company operating margins improved 60 basis points to
19.8%,
the highest in more than 10 years. The increase was driven by strong sales,
partly offset by higher labor, utility and promotional expenses. In the second
quarter we enjoyed a benign cost environment for beef, chicken, and cheese.
For
the year, in the United States we expect beef and chicken costs to be relatively
flat, and cheese to be down.
In
Europe, company operating margins increased an impressive 170 basis points
to
16%. More than half of the increase was driven by strong comparable sales
growth
in the United Kingdom and Germany. Compared with last year, commodity costs
for
beef and chicken were down in Europe, while cheese was flat. Our outlook
for the
full year is for all three to be basically flat.
Importantly,
our initiatives to improve performance in the UK are beginning to gain traction.
We’ve been working very hard to enhance our brand image by emphasizing the
quality of our food and the opportunities a McDonald’s job provides. Also, we’re
aggressively sharing the facts about McDonald’s in interviews and Internet
blogs. In the second quarter, we promoted flagship core menu sandwiches like
the
Quarter Pounder and Big Mac, and marketed our brand with an innovative text
message to win World Cup ticket game. We are optimistic that the UK’s
refranchising strategy, which contributed slightly to the quarter’s progress,
will help company operating margins going forward. We are encouraged with
the
UK’s progress, but there is much more we can and will do. We are confident our
plan and the focus of our UK team will deliver results.
Asia
Pacific generated a 170 basis point increase in company operating margins,
primarily driven by Australia’s ongoing strong performance and improved results
in China and Hong Kong. The strategic menu price adjustment that Jim mentioned
contributed to China’s improvement. Designed to deliver value to customers,
while encouraging trade up, margins are beginning to benefit from extra value
meals becoming a larger portion of our sales mix in China. In addition, supply
chain and operating efficiencies helped lower costs.
Turning
to G&A, as expected G&A in the second quarter increased at a faster rate
than sales and revenues. This was due to an increased accrual for
incentive-based compensation, and our very successful biannual owner operator
convention which was held in May. We expect the rate of G&A spending to slow
in the second half of the year, and as a percent of revenues to end the year
below 2005 levels.
Consolidated
operating income for the quarter was more than $1.1 billion, up a healthy
12%,
primarily due to the strong margin improvements we delivered. This brings
us to
quarterly earning per share. Last year’s second quarter EPS was 42 cents,
including nine cents of incremental tax expense resulting from our decision
to
bring home earnings under the Homeland Investment Act. Second quarter ’06
earnings per share is 67 cents, this includes a nonoperating gain of 10 cents
from the sale of a portion of our Chipotle stock, a penny of impairment
primarily related to the anticipated sale of a market in Asia Pacific to
a
developmental licensee, and a penny of incremental tax expense from a tax
law
change in Canada.
Turning
briefly to Chipotle, subject to market conditions, we are moving forward
with
plans to completely separate from Chipotle through a tax free exchange. This
will allow us to buy back McDonald’s shares using highly appreciated Chipotle
stock with no tax on the appreciation. And as we previously indicated, the
proceeds from the secondary sale of Chipotle stock, which we completed in
May,
will also be used to buy back stock. All of this is on top of at least $5
to $6
billion we expect to return to shareholders in 2006 and 7 combined. In the
second quarter we bought back $800 million of stock, bringing year-to-date
total
share repurchase to $1.8 billion, or 53 million shares. You should be aware,
however, that until we complete our separation from Chipotle, we cannot be
in
the market buying back our stock. When the exchange transaction is completed
in
the fourth quarter, we expect to be repurchasing stock again. Rest assured,
we
understand and share your focus on reducing our share count. It was part
of the
reason behind the compensation mix changes made last year that resulted in
fewer
options being granted. In fact, as a result of exercises and reduced grant
levels, total options outstanding at year end 2005 were more than 30% lower
than
in 2002. We are absolutely committed to reducing our share count and fully
expect the count to continue to head in the right direction. The count has
declined by about 25 million diluted shares since year end ’05, and should
continue to add to our EPS growth rate.
I’d like to update you on a few other guidance items. Based on current exchange
rates, we expect foreign currency translation to have a slightly positive
impact
for the remainder of the year, and a minimal impact for the full year. Because
of our actions under the Homeland Investment Act, our debt and cash levels
are
higher than they otherwise would have been. Due to this higher debt level,
current interest rates, and foreign currency exchange rates, we now expect
interest expense to be up 11 to 13% for the year, however, offsetting this
is
higher projected interest income.
Since
implementing our Plan to Win in 2003, we’ve delivered the most consistent and
solid operating performance in McDonald’s history. Significantly in the second
quarter, every area of the world contributed to our performance, demonstrating
that Plan to Win’s adaptability and applicability to the unique local
environment in which we operate our restaurants. I am confident that as we
further evolve our Plan to Win and strengthen our connection with customers,
we
will build on this track record of strong, consistent results. Thank you,
and
now I’ll turn the call back over to Mary Kay Shaw.
Shaw:
Thanks,
Matt. I will now open the call up for questions. Please press "star one"
if you
have a question, and "star two" to remove yourself from the queue.
To
give
as many people as possible the opportunity to ask questions, please limit
yourself to one question. We'll come back to you for follow-up questions
as time
allows.
First
question is from John Glass at CIBC.
Glass:
Thanks.
I
actually wanted to follow up on the Sinopec agreement, I mean a couple of
details. Who operates the restaurants? Who puts in the capital? And I guess
most
importantly, 30,000 locations is a significant number, but what would be
a good
near or intermediate term expectation for development under that agreement?
How
many of your units in China, for example, maybe on a percentage basis would
be
in those type of locations?
Skinner:
Well,
the
details of the arrangement, it’s a 20 year agreement and we have a first right
of refusal, as I mentioned John. This is Jim Skinner. And the arrangement
relative to capital invested, etcetera, details are not public at the moment
and
it’s a matter of working that on a deal by deal basis. And in terms of numbers,
they do have 30,000 locations but that’s the beauty of having the first right of
refusal. We would never have an agreement with a company like this where
we had
to do all 30,000 and imagine why. As a retailer and the biggest petroleum
company in the country, I’m sure they have terrific sites among those 30,000 but
they probably also have some that may not be as good. So it’s very important for
us to get off to a good start with them in the selection of the original
sites.
And we’re pretty good at this and I think we’ll do a careful job and we’ll get
off to a good start. But I can’t really predict what the total number will be
and I don’t think we’ve looked at it that way. We just know that there’s a huge
opportunity there.
Paull:
And
John,
we will operate the restaurant in all situations. It’s possible that in some
cases Sinopec would be our landlord, but in a lot of other cases they won’t be.
We’re still working that out, as Jim said. And we want to emphasize that we’ve
said that one of our issues in the past in China was we didn’t get off to the
best start in terms of site selection. We love this deal, for all the reasons
that Jim mentioned, especially the fact that it has, from our point of view,
tremendous option value. There is no minimum or maximum number of restaurants
we
have to build. If things look good to us, we’ll build more. And there’s no cost
to us. And in terms of option value, the option value is unlimited to us
because
we have a choice.
Shaw:
Thank
you. The next question is from David Palmer at UBS.
Palmer:
Congratulations
on the quarter. The bridge -- I have a question on the bridge operating
platform. This is something that I suppose could greatly improve your menu
innovation flexibility in Europe. How will you roll that out? Can you give
us a
timetable on that when you might be done in a certain market? Or I would
imagine
you’re going to be doing company and franchise similar timetables but could you
perhaps give us an idea when you might be able to be kind of switched on
with
the new platforms with the idea that we might see a better innovation pipeline
and kind of come on stream at that point that would catch up to the new
platform? Thanks very much.
Skinner:
Well,
David, the bridge operating platform will simplify our operations and that
combination of Made for You and Grill Direct that we talked about, which
does
enhance the work environment for the crew and it also gives us the opportunity,
as you said, to deliver a variety of experiences for our customers around
food.
It’s currently being tested in a couple of hundred restaurants in the UK, France
and Germany, also in Italy, Spain, Sweden, Russia and Hungary. And over the
next
year or so we will probably convert around 1,500 restaurants. It’s important to
know though that is a bridge operating platform and the end estate vision
I
think for the long term is for us to be able to have the flexible operating
platform. And so that would be step two. Although this is not something that
we’ll be doing in every market but right now it looks like around 1,500
restaurants and obviously that’s company restaurants and franchise restaurants
as well.
Palmer:
Thank
you.
Shaw:
Thank
you. The next question is from Glenn Petraglia at Citigroup.
Petraglia:
Good
morning. If you could perhaps comment on the US and perhaps some of the trends
that you’re seeing, from whether it be a traffic or an average check
perspective. I’m wondering if you’re seeing any sign that consumers are being a
little bit more cautious with how they spend their dollars, i.e., are you
seeing
increases in dollar menu purchases, etcetera?
Skinner:
Well,
we
continue to benefit from the combination of initiatives, Glen, in the United
States. But as you know the big factors in this quarter, as we talked about,
were breakfast, driven by coffee and then certainly the premium chicken
sandwiches, the Asian salad, the Happy Meals and the extended hours. All
of
those things contributing positively. And I’m happy to say that the demand for
the dollar menu continues to support the base of our business. We’re not seeing
a shift in consumer buying habits around the dollar menu, which is very
important. And obviously, we’ve been able to operate above the noise for now
relative to fuel costs, which has been something that we’re very, very pleased
with. And it’s possible that the traffic could start to fall off. We don’t know.
But thus far, we’ve been very fortunate regarding that and the trends are very
positive for us.
Paull:
And
Glen,
on the issue of guest counts, year to date in the US about 40 percent of
the
comp is from guest count increases.
Thank you.
Shaw: The
next
question is from Joe Buckley at Bear Stearns.
Buckley:
Thank
you. I wanted to ask you a question about the UK. It sounds like your plans
to
refranchise or do joint ventures is moving a little bit faster than you first
thought. And I’m curious if the joint venture aspect is something new and if you
could describe that in a little bit more detail, what kind of potential that
might have.
Skinner:
The
first
part is regarding the franchising. We’re refranchising about 125 McCopCo’s and
developing franchising plans as we move to 2007/2008. We’re about halfway
through what we had planned to do this year as I mentioned in my comments.
And
we could argue that maybe we’re a little bit ahead of schedule but I think in
the end we’re right about where we wanted to be and we’ll transition about 125
of those restaurants throughout ’06.
Paull:
The
joint
venture way of operating is something we’re very used to. We use it heavily in
France. We use it in the US. And I’d like to point out that we said our goal at
a minimum is to get to less than 50 percent of the restaurants being
company-owned in the UK over time. When we started we were at 63. Right now
year
to date we’re at 58. We’re making good progress. We’re going to take it below 50
but we didn’t predict exactly how long that would take. Thanks.
Shaw:
The
next
question is from Larry Miller at RBC.
Miller:
Thanks
a
lot. This is a question on marketing. You’ve talked about evolving the "i’m
Lov'in It" campaign and I just had a question. Is it still as effective today
as
when you first rolled it out? And are you -- is that still the plan to evolve
the marketing and can you kind of give us any previews of what direction
that
might take if you have any? Thanks.
Skinner:
Well,
I
think we’ve talked a lot about this, Larry, and that being that we’re looking at
"i’m Lov'in It" next generation. It continues to be relevant with our consumers
in the marketplace and, of course, the messaging and the communication in
the
framework of "i’m Lov'in It" around the world varies. And we’re working very
hard right now to work on the next generation of "i’m Lov'in It", focusing on
the “It,” that being the food and the moments and the feelings that are so
important to our customers in their relationship with McDonald’s. And we’re
tying in with World Cup and Olympic alliance and our popular global events
like
the World Cup and McDonald’s has unparalleled ability in this arena and that’s
sort of the way we’re working on it. And we expect that we’ll be able to move
along positively in this regard.
Shaw:
Thank
you. The next question is from Jeff Bernstein at Lehman Brothers.
Bernstein:
Thanks
very much. Just a question on the strong European margins. I’m wondering if you
could dissect the reported company operating margin number into the three
major
markets for the quarter this year versus last, just so we could see the trends
in each. And then before we give the overall European margin, somewhat of
quarters past if you exclude the UK, which I believe you said was a positive
contributor, still guessing though is the low man on the pole. And then just
lastly what your outlook is for the company operated European margins for
the
back half of the year. Thanks.
Paull:
Jeff,
this is Matt. We don’t make predictions on margins. Sorry about that. But I will
be able to address your other questions. The UK was a significant contributor
to
the overall improvement in Europe through comps, through store mix and
through more favorable commodity costs in the UK. After the UK, Germany was
a
big contributor and that was about comps offset by higher labor costs. Beef
costs and chicken costs in Europe were down about four percent each in the
second quarter. And I would say we like where we’re headed with Europe. We like
that the improvement is coming from the UK and Germany. France continues
strong
but it didn’t improve significantly compared to the other two countries. And I
don’t really have the math in front of me of what we would have looked like
without the UK. So we’ll have somebody in Investor Relations get back to you on
that one.
Shaw:
Okay.
The
next question is from Steven Kron at Goldman.
Kron:
Great,
thanks, good morning. I had a quick question business when we think about
brand
image and sustainability of what seems to be improving trends there. Matt,
I
know you mentioned that it seems as though you’re getting better traction from
messaging. But if I think about a year or two ago, there was a lot of talk
of
like school lunch programs, nutritional content, childhood obesity; it seemed
to
be very front and center in the media. Can you just talk maybe about the
current
environment there, whether those types of media stories have died down a
bit?
And maybe you can share with us a little bit on consumer feedback more recently
in the UK market. Thanks.
Skinner:
Well,
I’ll start, Steve. This is Jim and then Matt can follow up with whatever
comments he wants to make. But I think the environment there has changed
but
it’s changed because of the job that I think we’re doing regarding the
communication around our food. As you know, the UK is an environment in which
the intensity of the tabloid nature of communication probably doesn’t change
much over time. The issues change from time to time but the fact is the issues
around obesity, the issues around lunch programs, the issue around the quality
of food and the issue around choice continues to be there. But I think the
reason we’re improving, and we like the trends right now, including consumer
feedback, which we were fortunate over the last few months to have very good
mystery shop scores and plan to win scores around the attributes and the
consumer perception, and the UK was leading the pack. And so we’re very proud of
that and we think we’ve done a good job there. And so but relative to the
environment, the environment really doesn’t change that much. It’s a matter of
how we respond to it and how we manage our affairs, which I think we’ve done a
very good job with. Thank you.
Shaw:
The
next
question is from Mark Wiltamuth at Morgan Stanley.
Wiltamuth:
Hi,
yes,
I wanted to just explore the European margin power. Clearly you had a big
turnaround here in the margins this quarter. Could that 16 percent margin
turn
into an 18 or 19 percent number over time? And where do you think the big
margin
opportunities lie? Are they really in closing underperformers or refranchising
or is it just improving the average restaurant sales?
Paull:
Mark,
this is Matt. We’ve been very careful over the last three years to say that we
have a global margin goal, which is to get back to year 2000 company accurate
margin levels which were 16.9 percent for the full year but we’re not going to
break it out by country or area of the world. When we look at where the biggest
opportunity lies, it still lies in the UK. Even though we saw improvement,
there’s a long way to go and part of it is about growing sales through extended
hours and offering breakfast more aggressively. Part of it is through the
refranchising that we’ve begun. We still have a long way to go. So we’re not
going to pick a specific goal, but there’s still lots of room for improvement.
Shaw:
Thank
you. The next question is from Jeff Omohundro.
Omohundro:
Yes,
I
was wondering if we can elaborate a little bit more on the new product front,
in
particular the chicken snack wrap test, how that has proceeded and how are
the
consumers using the product? Is it being used as an add-on for
example?
Skinner:
Well...
Go ahead.
Paull:
Yeah,
the
national launch will run from August 1st
through
September 4th.
It’ll
be, the suggested price point will be about $1.29. We love the product for
a
whole variety of reasons, one of which you hinted at which is how people
are
going to use this. It’s sometimes an add-on; it’s sometimes a snack. We also
think it gives us a really wonderful opportunity to make an existing product
better. It’s the same Chicken Select that’s used in our Chicken Select offering.
And that product, which is one of my favorite products, is even better if
we
have enough volume to keep it really fresh. And by using the snack wrap,
based
on the same core products, we can do bigger volumes, keep it fresher and
we
think our customers will like it, our operators will like it and our
profitability will show. And lastly, the food and paper percentage on that
product at $1.29 price point is very attractive. It’s well below double
cheeseburger, well below salads. It’s below our other chicken sandwiches. So
from every way we look at this, it looks like something that’ll make a lot of
sense for us.
Skinner: And
it
did very well in the test markets and we would expect that it’ll be a hit with
our customers. Have you had it yet, Mark?
Omohundro:
Jeff,
yeah.
Skinner:
Yeah,
sorry, Jeff.
Omohundro:
Yes.
Skinner:
Okay.
Operator:
Good.
Okay. Thank you. The next question is from John Ivankoe at JP
Morgan.
Ivankoe:
Hi,
thanks. I actually have some questions on the reimaging of the restaurants
themselves. If I’m right, I think the rate of reimaging in the US will slow at
the end of 2006. Is that still right?
Paull:
Well,
the
original plan that we announced was a three year plan that was scheduled
to
mature at the end of ’06. You’re right about that. But we’ve learned some things
through this plan which is that we can’t ever afford to let the brand grow old
and tired. And so there is the possibility that when we look at the chance
to do
something with the exteriors of our restaurants, we will decide to use a
similar
kind of program to reimage the exteriors. We’re talking with operator leadership
about it. We haven’t made any decisions yet. But you’re right, the original
program expires at the end of ’06. But if we see something that excites us,
we’re certainly willing to co-invest with our franchisees to send the message
that the brand is getting even more contemporary. And if you take a look
at the
restaurants that we’ve externally reimaged in Columbus and Tulsa, you’ll see how
exciting it looks for a very, very small investment. Thank you.
Skinner:
But
the
pace that we’re on for ’06 -- you said we’ve swung out in ’06 -- it does come --
the original understanding comes to an end in ’06, John, but we’re about the
same pace we were in ’04 and ’05 regarding ’06 in the year.
Shaw:
Okay.
The
next question is from Rachael Rothman at Merrill Lynch.
Rothman:
Hi,
good
morning. Just as a follow up to that, would you guys mind recapping your
$1.8
billion in cap ex and maybe giving us an update on reimaging overseas or
how
that cap ex will be spent? Thanks.
Paull:
Rachael,
this is Matt. The rough breakdown is a bit over $900 million is being reinvested
in existing stores. Some of that is maintenance cap ex but the vast majority
of
it is reimaging of various types in various parts of the world. And probably
a
little over $650 million is to build new restaurants, about 800 gross new
restaurants. And that’s up a little bit from prior years. And then -Mary Kay do
you recall the latter part of the question?
Shaw:
Well,
just the total outside the US. Like, for example, about 30 percent of the
total
cap ex will be Europe, about 13 percent Asia, five Canada, four Latin and
then
44 percent US. But that’s total, so that’s new, reinvestment and other.
Paull:
Thank
you.
Shaw:
The
next
question is from David Palmer at UBS.
Palmer:
Hi.
This
kind of builds on one of the other questions. It’s just a broader question of
cash usage heading into ’07 and beyond, thinking about the major buckets such as
cap ex, share repurchase, debt pay down, dividend. How might these change?
For
instance, I can see that maybe debt reduction, net debt reduction might slow
in
’07 and beyond. And we’ve had some increasing clarity on the tax treatment of
dividends and there might even be a shift in the cap ex need. Can you perhaps
go
into some of these? Thanks.
Paull:
David,
we
followed with great interested what happened with the tax law. We’re very happy
that it was extended through 2010. That is one of many factors in what we
do
with our cash. And I’ll kind of review what we’ve always said. And some of this
hasn’t changed. Our first priority has always been and will continue to be to
invest in high return projects inside brand McDonald’s. Obviously, when we
separate from Chipotle that frees up a little bit more capital than we had.
And
then we like to look at share repurchase and dividend. We like dividends.
You’ll
remember three years ago when we began dramatically increasing the dividend,
we
said it’s very consistent with where we want to take the company. If we’re going
to be better, not bigger, we can afford to be paying a higher dividend as
a way
of reminding people of how strong and steady our cash flow generation is.
We do,
however, though like to reserve a little flexibility, which is why we haven’t
been specific about how much of the cash that goes back to shareholders will
be
in the form of dividend versus share repurchase. Frankly, it’s a function of
where our stock is trading and how the other things look to us. So we want
to,
to the extent possible, reserve flexibility. We’ve signaled at least $5 to $6
billion will be returned to shareholders in ’06 and ’07. But we don’t want to be
specific on how much takes the form of dividend versus share repurchase.
And we
don’t want to be specific of how much in ’06 versus ’07.
Shaw:
Thank
you. And now I’ll get back to Jeff Bernstein’s earlier question. I think UK
benefited -- they contributed about 40 basis points to the improvement in
the --
Europe’s margins for the quarter. And it looks like we are out of questions. So
I will go ahead and turn it over to Jim for some closing remarks.
Jim:
Well,
thanks again for your participation. And in closing I want to reinforce our
commitment to providing value for our customers, the McDonald’s system and our
shareholders. We’re proud of the success we’re achieving today and excited about
the opportunity for growth in the future. Our plan to win remains our framework
for success and we will continue achieving the right balance of innovation
and
disciplined execution that will generate growth around the world. In the
end,
I’m confident that our strong performance will continue. Thank you.
Operator:
This
concludes today’s conference. We thank you for your participation.
END