McDonald's CEO Discusses Q4 2012 Results - Earnings Call Transcript

 |  About: McDonald's Corporation (MCD)
by: SA Transcripts


Hello and welcome to McDonald’s January 23, 2013 Investor Conference Call. At the request of McDonald’s Corporation, this conference is being recorded. Following today’s presentation, there will be a question-and-answer session for investors. (Operator Instructions)

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

Kathy Martin

Hello, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Don Thompson; Chief Financial Officer, Pete Bensen; and we have our Chief Operating Officer, Tim Fenton on the call for Q&A. Today's conference call is being webcast live and recorded for replay via the 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 filings also apply to our comments. Both documents are available at our website, as with reconciliations of non-GAAP financial measures mentioned on today's call with the corresponding GAAP measures.

Now I'd like to turn it over to Don. Don?

Don Thompson

Thank you, Kathy, and good morning, everyone. Every day, McDonald's is a destination for 69 million customers worldwide and our number one priority is to satisfy their needs by serving great tasting high quality foods in contemporary restaurants.

Now that focus on our customers is particularly critical in this uncertain environment where ongoing volatility continues to dampen consumer sentiment and spending. More specifically, growth in the informal eating out industry has been relatively flat to declining around the world and we expect that to continue.

While 2012 was a challenging year for a number of reasons both within and outside of our control, we remain focused on stabilizing and growing market share in the near term, while continuing to lay the foundation for sustainable and profitable long-term growth.

For the full year, we continued to grow market share in Europe, APMEA and the U.S. amid a more competitive global environment and a slight decline in our fourth quarter comparable traffic.

Now as I share our results for the quarter and the full year, I also want to provide a perspective on how we've adapted our plans as we strive to become our customers' favorite place and way to eat and drink.

System-wide sales grew 5% in constant currencies in 2012 where total comparable sales up 3.1% for the year. Comparable sales for the quarter and the month of December were essentially flat. As we begin 2013, we face persistent top and bottom line pressures and significant prior year results. As a result, we expect January sales to be negative.

In constant currencies, operating income grew 4% for both the quarter and the year while earnings per share increased 5% for both periods. Even though our 2012 performance was softer than recent years, we've adapted our plans to be more aggressive and continue to build on the gains that we have made. This will ensure that we drive long-term value for our system and our shareholders, despite the pressures of the short-term environment.

We have a resilient business model and aligned system and experience in every type of operating environment around the world. Our long-term average annual financial targets in constant currencies remain intact and are appropriate for a company of our size and maturity. They keep us focused on making the best decisions for the long-term benefit of our shareholders.

This past year, we met our long-term system-wide sales growth target of 3% to 5%. Full-year operating income growth came in below our target of 6% to 7%. Our performance was impacted by heightened global operating challenges along with planned G&A investments that pressured the bottom line. And while our one-year return on incrementally invested capital is not yet final, we expect it to be in the mid to high teens.

As we begin 2013, we're placing an even greater emphasis on those drivers that excite consumers and generate the greatest growth for our business. We still have plenty of room to grow within the framework of our plan to win and our three global growth priorities to optimize our menu, modernize the customer experience and broaden the accessibility to brand McDonald's around the world.

For example, our menu strategy provides exceptional value at every price tier by offering an affordable entry point and leveraging mid tier and premium products to encourage trade up and a higher average check. We've also intensified our focus on the fundamentals in areas that are hallmarks of our brand including operations, service, leadership marketing and merchandizing. And we're placing an even greater emphasis on scaling successes even more quickly around the globe.

The answers are definitely in our system and are driving our plans in every area of the world. From compelling menu offerings like McWraps, to winning value and convenience initiatives, to our beverage business, extended hours and new restaurant developments in both established and emerging markets.

So I’ll start with the U.S. where comparable sales increased 0.3% for the quarter and 3.3% for the year. For the same periods operating income was relatively flat and up 2% respectively. Because we experienced softer performance in the second half of the year, we adjusted our plans to reenergize our menu and value offerings. We focused on entrees with the introduction of the new premium Cheddar Bacon Onion Sandwich in late October and the return of the popular McRib sandwich in December.

We also leveraged the news of our new NFL and Pro Bowl partnerships to remind customers about a classic favorite, it’s our juicy and tender all white meat chicken McNuggets, by featuring the 20 piece McNuggets for $4.99. And we brought excitement and variety to the dollar menu, adding the new Grilled Onion Cheddar Burger at the end of December.

Now our menu pipeline is more balanced in 2013. We will be introducing Fish McBites soon and later in the year, will debut new beef sandwiches, chicken entrees, breakfast and beverage offers that are demonstrating strong customer appeal in the test markets.

We also refocused our advertising to enhance support for value in the fourth quarter and we’ll continue these efforts into 2013. The marketing calendar will balance large scale food events, compelling value, ongoing on-trade news and strong local activities.

In addition to the menu and marketing efforts to play a big role in our 2013 plans, we’re staying focused on meaningful service enhancements that improve customer satisfaction and our service levels. We are also expanding our peak hour performance to capture even more visits and broaden our accessibility.

Now let’s turn over to Europe, where comparable sales were down 60 basis points for the quarter and up 2.4% for the year. In constant currencies, operating income grew 7% for the quarter and 6% for the year. Europe was a solid contributor to bottom-line results even with the effects of the debt crisis and our sturdy measures impacting consumers. While low consumer confidence continues to negatively affect retail sales and the IEO visits, we outperformed the market and grew market share by 10 basis points to 9.2% year-to-date November. Our performance can be attributed to three drivers, enhanced value messaging, trading customers up to premium products that they know and love and new product news.

Our base value initiatives are essential maintaining and attracting new customers, that’s why many markets have reintroduced value either with new news or by evolving existing value platforms to be even more appealing. In France for example, we’re advertising the new Casse Croute sandwich and drink combo for €4.50 nationally. And in Germany we’ve enhanced our McDeal value bundle to include two new entrée choices. Meanwhile the U.K. continues to be a bright spot in the region and this is a great example of how we’re executing premium office to resonate with our customers. Its strong run of premium food promotions included the Bacon, Chicken & Onion food event which began in the fourth quarter and will be featured in France this year.

Across Europe we also continue to build the capacity of our existing restaurants through extended hours and by leveraging technology such as the new power system, self order kiosk and handheld order takers. Europe is a region that is right with opportunity and we’re well positioned to capitalize on this region’s long-term potential.

Now let’s shift over to Asia/Pacific, Middle East and Africa where comparable sales were down 1.7% for the quarter and up 1.4% for the full-year. IEO visits have declined across most markets and we’ve seen a slowdown in eating out behaviors overall across APMEA. In constant currencies operating income declined 1% in the fourth quarter, but grew 3% for the year.

Now like the rest of the world, APMEA experienced a challenging year of economic pressures. Consumer confidence remains low, partly due to Japan’s uneven recovery and China’s slower economic growth. As markets review their menu offerings for the final months of the year and into 2013, they focused on leveraging seasonality, local relevance and favorite limited time offers to both mitigate the softness and balance their value and premium platforms.

In Australia, the start of the summer campaign featuring new Smoothie flavors and compelling limited time offers including lamb sandwiches and wraps drove sales and traffic. And to further reinforce its value messaging, Australia is re-launching its Loose Change menu this month with a new national program designed to drive guest counts and average check.

Now while Japan's results were the primary factor in APMEA's negative comp for the quarter, the 100, 250 and 500 yen value offerings drove guest count increases and market share gains within a contracting IEO marketplace. As we begin 2013, Japan is focused on building average check in two ways; through trade-up opportunities with promotional products and through its focus on breakfast.

In China, comparable sales decreased 0.9% for the quarter and increased 3.2% for the full year. While the recent chicken supply industry issue minimally impacted our fourth quarter results, the heightened consumer sensitivity around this matter is negatively impacting our sales into 2013. We are committed to ensuring the highest foods safety and quality standards are met around the world.

We remain focused on growth check in the market by building on China's value position through a blend of menu news and convenience initiatives. In addition, a new web ordering system that enhances the customer experience lowers the cost of operations and drives new demand as being scaled across China. Already in more than 500 hubs this system is helping broaden accessibility across China through delivery.

We also opened 256 restaurants in China last year making significant progress toward our goal of 2,000 restaurants in China by the end of 2013. Around the world, we have a strong foundation on which we continue to grow. Our business, our brand and our financials remain strong and we will keep building upon them.

As our business grows and continues to generate significant levels of cash, our first priority is to reinvest in opportunities to grow the business for the future. Our second use of cash is our dividend. Last September, the Board announced a 10% increase in our quarterly cash dividend to $0.77 per share in the fourth quarter. Our third and final use of cash is share repurchases. In 2012, we returned a total of $5.5 billion to shareholders through dividends and share repurchases.

As we begin the new year, I'd like to reiterate my confidence in McDonald's. Our system alignment is strong. We're determined to leverage our strengths to attract more customers, to gain even more market share and fortify our financial strength. Our plan to win is strong and we continue to aggressively pursue the growth opportunities within our three global priorities to optimize the menu, modernize the customer experience and broaden accessibility to brand McDonald's.

We have made the tactical adjustments that are necessary to navigate through the current environment while continuing to deliver value for the benefit of our system and our shareholders over the long term.

Thanks and with that, I'll turn it over to Pete.

Peter Bensen

Thanks, Don, and hello everyone. The McDonald's system remains focused on executing the proven strategies behind the three global priorities of our plan to win. In both fourth quarter 2012 and for the full year, this translated into growth in revenues and earnings per share despite challenging market conditions.

We've continued to manage our business for the long term and are confident in our business model and hard earned competitive advantages. McDonald's has a long history of profitable growth in a variety of economic and competitive cycles. In the near term, we do not expect significant changes in the macroeconomic or competitive environment though we remain focused on those things within our control. This includes a 2013 plan designed to maintain and grow market share along with investments that solidify our foundation to drive future growth and returns.

In 2012, combined operating margin declined 40 basis points to 31.2% and continues to compare favorably to other large global consumer companies. Restaurant margins are the main driver of our combined operating margin. With about 80% of our restaurants franchise, the largest component of our overall profitability continues to be franchise margins.

In constant currencies consolidated franchise margins increased 3% to $1.9 billion for the quarter and 6% to $7.4 billion for the full-year, with every area of the world contributing. The consolidated franchise margin percent declined 20 basis points for the quarter and was flat for the year at 83% and sales performance was offset primarily by higher occupancy costs including depreciation.

Consolidated company operated margins representing about 30% of total restaurant margin dollars declined 90 basis points to 17.8% for the year – for the quarter and fell 70 basis points to 82 to 18.2% for the year. Sales performance was offset primarily by higher labor and commodity costs in both periods.

Moving on to segment performance. In the U.S., we [led] [ph] steep comparable sales increases in fourth quarter and faced higher costs across most expense categories, resulting in a 150 basis point decline in Company operated margins to 19.5%. For the full-year margins declined 110 basis points to 19.5%, as 4% higher commodity costs as well as increased labor and occupancy expenses more than offset sales gains.

Price increases are used to mitigate inflationary pressures. It is critical to maintain our value proposition by keeping price increases at or below key inflation indices. At year-end, our U.S. price increase was about 2%, which is slightly less than the food-away-from-home increased for the year of 2.5%. A conscious decision was made not to replace 75 basis points of pricing that rolled off in November in light of this slight decline projected in 2013 IEO traffic. And with projected 2013 food-away-from-home inflation of 2.5% to 3.5%, we want to maintain pricing flexibility as we balance future price increases with our desire to continue to grow traffic and market share. We expect the U.S. commodity cost to increase 1.5% to 2.5% in 2013. In addition labor and depreciation are expected to continue to pressure margins.

Turning to Europe, for both fourth quarter and full-year 2012, sales performance was offset primarily by higher labor and commodities. Company operated margins declined 10 basis points for the quarter and 20 basis points for the year to 19.1%. Commodity increases of 2% in fourth quarter and 3% for the full-year negatively impacted margins. Europe’s margins once again benefited from solid performance in Russia and the U.K. which together represents nearly 45% of Company operated margin dollars in Europe.

Europe’s full-year comparable sales gain was driven entirely by pricing and product mix. At year end, Europe’s price increase excluding Russia was about 2.5%. On the expense side we expect commodities to increase 3% to 4% in 2013 along with continued pressure from higher labor expenses. Despite these near term challenges, including an IEO market projected to be relatively flat to declining in 2013 our business in Europe remains solid, as this is our fundamental operating model. We remain focused and reigniting traffic growth through a balanced approach of enhanced value offerings and compelling premium products. Menu innovation including premium products remains an area of focus. With nearly all of our interiors and over half of our exteriors re-imaged premium products often merchandized around promotional food events have proven to be appealing to European consumers.

In Asia Pacific, Middle East and Africa several key markets including Japan, Australia and China enhanced their value platforms in 2012. This resonated with consumers as we served over 1.2 million more customers per day versus the prior year. Looking to 2013 we will strive to build on our traffic gains while encouraging trade-up and add-on purchases to boost average check and overall comparable sales.

In addition to compelling value, many of our markets offer key conveniences including delivery and drive-through. Convenience also means being available to customers when they need us. Nearly two-thirds of our restaurants in APMEA offer some form of extended hours and over half are open 24 hours.

Relative to profitability, APMEA's company-operated margins declined 190 basis points for the quarter to 14.4% as negative comparable sales along with higher labor and occupancy costs pressured margins. For the year, company-operated margins declined 140 basis points to 15.9%. The acceleration of new store openings in China continued to negatively impact APMEA's margins in both periods.

The final component of combined operating margin is G&A. In constant currency, G&A increased 4% for the year less than previously forecasted due in part to lower incentive-based compensation and lower than planned spending on IT acceleration. The overall increase for the year was primarily driven by about $90 million of spending on our Olympic sponsorship, technology enhancements and the biennial Worldwide Owner/Operator Convention.

As a percent of sales and revenue, G&A was flat versus the prior year. As we look to 2013, we expect G&A to increase about 2% to 3% in constant currencies. I want to briefly comment on the increase in other operating income. As part of our overall refranchising efforts in Europe, Canada and China, we've recognized higher gains from sales of restaurants in both fourth quarter and the full year. We continue to seek strong, committed local franchises using both conventional and developmental licensees' structures.

McDonald's continues to generate significant cash from operations. Our first use of that cash is to reinvest in our business to continue growing and generating strong returns. This is accomplished through a balanced measured approach of adding new restaurants and growing sales at existing locations. In 2012, we further modernized our brand through opening 1,439 new restaurants and reimaging about 2,400 others.

Full year 2012 capital expenditures are not yet final but we expect them to total between $3 billion and $3.1 billion. This increase from our $2.9 billion estimate is a result of several factors including an increased number and scope of some of our U.S. reimaging projects, timing of projects and cash payments and overall increase in the number of new openings in all areas of the world.

In 2013, we expect to invest about $3.2 billion over half of which will be used to open 1,500 to 1,600 new restaurants. The breakdown for openings in our largest geographic segments is as follows. 220 openings in the US, 290 in Europe and 850 in APMEA including about 300 new restaurants in China. The remainder of our CapEx will be invested in our existing locations, including reimaging more than 1,600 restaurants globally.

Lastly, let me touch on foreign currency translation which negatively impacted fourth quarter results by $0.01 and full year EPS by $0.17. At current exchange rates, we expect first quarter 2013 EPS to be minimally impacted between zero and negative $0.01 and expect full year positive impact of $0.04 to $0.05. As always, please take this as directional only because I know rates will change as we move throughout the year.

As we begin 2013, we are mindful of the challenging comparisons we have in the first quarter as well as the ongoing pressures on both our top and bottom lines. I'm confident in the adjustments we have made to fortify our near-term performance while remaining focused on the larger opportunities over the longer term.

McDonald's has earned significant long-term competitive advantages in size and scale. We are uniquely well positioned to capitalize on future growth opportunities within the $1 trillion global informal eating out industry where our market share today is less than 9%. McDonald's has a strong history of creating significant value for shareholders over time and we remain committed to continuing to do so in the years to come. Thank you.

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

Question-and-Answer Session

Kathy Martin

Great. Thanks, Pete. We are going to now open the call for Analysts and Investor questions. (Operator Instructions) So we’ll start with Brian Bittner from Oppenheimer.

Brian Bittner - Oppenheimer & Co. Inc., Research Division

Great. Thank you very much. I have a question about just your guidance for 2013 for that the 6% to 7% operating income growth. It clearly assumes that your sales do recover nicely, but we’d also assume, I guess, is that you can better leverage the sales growth than you have recently and really increase the margins here. And I just – it seems as though they could be somewhat of a challenge, there is still margin headwinds and even on kind of low single-digit same-store sales growth, it could be tough for the franchising company margins to really improve. So, if you could just give us a little more color on the confidence in that 6% to 7% operating income growth, given what seems to be some margin headwinds, how are you going to be able to better leverage sales growth, if it does recover?

Don Thompson

Hi, Brian. Thanks much for the question. I will comment on this first one and Pete may have something to add. What I would say Brian is we absolutely believe that our 6% to 7% operating income guidance is the right target for our growth over the long-term. And as we say throughout 2012, we firmly believe that what we’ve to do is appeal to more customers, we got to appeal relative to top line growth, we got to have a variety or stronger variety and a stronger pipeline that’s executed in the various markets. We believe we definitely have that going into 2013 and feel better about the robustness, if you would, with that food pipeline.

We know also that these are – 2013 is still going to be a tough economic environment around the world. We know this in Europe, we know it in APMEA, in the U.S. we’re seeing some signs of maybe a slight recovery, however, having said that we also know that we have commodity pressures and some labor pressures. So by no means do we intend to state that 2013 is going to be an easy year. However, we believe our target 6% to 7% are the appropriate targets. We believe our plan to continue to focus on food, in the menu, to modernize the customer experience, to continue our re-images, to continue to grow relative to the opportunities in new markets around the world. We believe those things would help us to be effective in continuing to build the business.

Kathy Martin

Our next question is from Keith Siegner, Credit Suisse.

Keith Siegner - Credit Suisse

Thanks. The question I want to ask is about December, by all means on a two year trade day adjusted basis was a very strong month, one of the best of the year despite Japan’s weakness. When looking at the January guidance for a slight negative while still very strong, was a slight slowdown and I know you don’t usually like to get into regional breakdowns, but even at a qualitative basis is, if there’s anything you think you could offer is this, is some of that coming from the U.S. is the payroll tax maybe playing some role in this, any regional kind of qualitative data you could give us on January it would be very helpful. Thanks.

Don Thompson

Hey, Keith. As you know Keith, based upon last year we had a very strong first quarter. In that first quarter we were – we experienced sales that were up 7.3%. We had success across markets. The U.S. was particularly strong clearly. Europe was very strong. But as we move into 2013, we also know that we’re comping against those success factors. We rarely talk about things like weather and the fact that where Chinese New Year shifts around. So as long as we continue to talk about the entire first quarter we know we’ll see some shifts from a January into a February relative to the Chinese New Year, but it won’t affect the overall quarter. So we believe that as we move into, as we talk about our first quarter sales, that the first quarter sales will mute out many of the things that were – that shifted around during last year.

Having said that, it was a 7.5% -- as I mentioned it was a 7.5% or 7.3% comp in the first quarter of last year, and so we know we’re going up against that, it’s going to be fairly tough. In the first quarter of the year we do see a shift from a Chinese New Year perspective out of January into February, so we know that that’s going to be a part of that. We believe the plans that we’ve seen are solid plans, but nonetheless we still face some economic challenges around the world.

Kathy Martin

The next question is from David Palmer from UBS.

David Palmer - UBS Investment Bank

Hey, guys. If I can throw in a little one on China. Is the consumer reaction there to that chicken supply issue diminishing or is it still as bad as it has been? My major question though is on reimaging. When you factor in the reimaging, the new build for relocation and reimages, what percent of the system is now done and where do you think that percentage will be in a year, what lifts are you seeing and do you think that that outperformance continues into year two after reimage such that we might see accumulative increasing benefit? Thanks.

Don Thompson

Thanks, David. Why don't we have Tim Fenton give a perspective relative to the chicken supply issue and then I'll ask Pete to talk a little bit about reimaging.

Tim Fenton

Hi, David. First of all, safety of our food is always top of mind for our customers, it's one of our priorities. We have strong procedures in place McDonald's China for testing all of our products. We test all batches of all of our raw products that come through our doors. So a very little impact in December as a whole, maybe seeing a little bit more, but it's really an industry-wide situation or broad based country-wide chicken industry issue that we're experiencing in China right now.

Peter Bensen

And David, as far as reimaging, in the U.S. we closed the year at about 35% complete on both interiors and exteriors. Europe was a little over 90% done on the interiors. As you know, they started sooner and over 50% on the exteriors. And APMEA is about 60% done on the interiors and close to 50% on the exteriors. You saw in our guidance that we're actually reducing the number of reimages in 2013 relative to 2012. Part of that is because of the substantial progress we've made in a lot of these countries including Canada which we typically don't break out separately as well as the conscious decision I certain markets China being one to redirect some of the capital toward new store openings. As far as the sales performance, it continues to be strong and within our expectations and as we get more and more history, especially in the U.S. it's the data I'm most familiar with, we're actually seeing the second year incremental comp sales stronger than the first, so that benefit continues to grow. I think as the trade area and customers get used to the new environment and the more modern and relevance surrounding in addition to some of the more investments we do to improve the efficiency like the dual drive-through, sales just continue to build over time. So it's going to continue to be a part of our strategy and we're really happy with the results.

Kathy Martin

Next question is from Michael Kelter, Goldman Sachs.

Michael Kelter – Goldman Sachs

So U.S. restaurant margins have declined for two consecutive years now and the pace of declines has accelerated and it's about 100 basis points or more in each of the last two quarters. My question is, is the recent increased focus on value exacerbating the issue at all? And separately, are there any initiatives that you're looking to put in place for 2013 to help stop the slide?

Don Thompson

Hey, Michael. Just a couple of things relative to the value piece because we get asked this question quite often. The first thing I'd say is that in the US, keep in mind, we always had the Dollar Menu. What we did towards the fourth quarter of – in the fourth quarter of last year was really go back to advertising the dollar menu more because we had shifted our media weight over to the Extra Value Menu. So we took it away from Extra Value, put it back over the Dollar Menu. If you look at it from a percent of sales perspective, the Dollar Menu is still in the 10% to 15% range. Typically, we say 13 to 15 is still in that range, so it has not gone up by some substantial amount, as a result of us going ahead and advertising the Dollar Menu more so in our media. I will also say that the way that we're advertising Dollar Menu now is more consistent with how we had done it in the past and we got away from that in the second and the third quarters of 2012. So that really is the difference relative to the Dollar Menu piece.

Peter Bensen

And one of the things we're doing, Michael, to – you asked about enhancing it, one of the things we're doing in late December we added the Grilled Onion Cheddar Burger which was another reason to visit the Dollar Menu adding some excitement and some new news as well as putting a product on there that actually is better from a food cost perspective.

Kathy Martin

Our next question is from Mitch Speiser, Buckingham Research.

Mitch Speiser - Buckingham Research Group, Inc.

Great. Thanks very much and you’ve answered a lot of my questions in the prepared comments. Just on the cash flow, which there isn’t a lot of data on – in the press release. The share buyback was a bit lower in the fourth quarter, your dividend payments, I think, are now exceeding share repurchase. As we look at 2013 and given the increased CapEx budget, should we expect any change in trend in share repurchase activity?

Peter J. Bensen

Hey Mitch, you know regarding the quarter, typically the fourth quarter is our lowest share repurchase as we tend to have our dividend increase in the quarter and we spend a significant portion of our CapEx in the fourth quarter. So you typically see our share repurchase less. As you point out, the dividend continues to increase, that continues to be a greater portion of our free cash flow, but we remain committed to our strategy of returning all free cash flow to shareholders over time.

Kathy Martin

Our next question is David Tarantino from Baird.

David Tarantino - Robert W. Baird & Co., Inc.

Hi. Good morning. I wanted to come back to the 6% to 7% long-term operating income guidance and my question centers around 2013, you’re coming off the year in 2012 where you didn’t had that guidance for the first time in recent memory. So, I wanted to ask what your thoughts are and your ability to hit that in 2013 and specifically maybe talk about the degree of difficulty this year relative to the degree of difficulty last year? Thanks.

Don Thompson

Thanks, David. Let me just reiterate something that I mentioned in the formal comments and that was in 2012 we did meet our long-term system wide sales growth target of 3% to 5% in constant currencies. And so from a top line perspective, we did have growth that was in line with what our expectations were. Also keep in mind, in 2012, that we had some additional G&A investments that were made, incremental G&A investments that we made around several things. One was the Olympics another was an incremental investment in technology, we wanted to really establish a NewPOS technology system, which will help us operationally around the world in a stronger fashion. And then clearly we also had our owner operator’s convention. We had several things that came into play. So, I wanted to make sure that we also put that in perspective. If you were to net those things out we would have still came in at about – we would had about a 5% growth in constant currencies, and so first is just the level set, that’s very important.

The long-term targets that we've established are exactly that, they are the long-term average targets that we believe are viable for our business; so the 6% to 7% is that long-term target. We also know that one year doesn’t change our strategy. One year will not change our results. We don’t think that there’s been a fundamentally enough shift for us to change our targets as we move forward, and we think that the plans that we have around the world are strong enough and viable enough for us to again move toward and achieve those targets.

Kathy Martin

The next question is John Glass from Morgan Stanley.

John Glass - Morgan Stanley

Thanks. First if I could just ask you to clarify the commentary around January. Was this – is this a global I mean, every region phenomenon’s negative or is this specifically driven, you highlighted Chinese New Year and some other issues. Is it really just APMEA and maybe you’ll see other regions as being better or slightly positive, because in the U.S. you would – really saw a trend change in December, I guess -- we’re all trying to figure out if that’s an anomaly, that’s just a clarification. And then the margin question, in the U.S. food inflation is going to be half the rate it was in the last two years and it sounds like you’re going to price a bottom line with inflation. So why wouldn’t that be a relatively positive sign, if you could maybe just hold margin in ’13? I understand sales depending to some degree, the sales cooperate you could hold margin for the first time in a couple of years?

Peter J. Bensen

Hey, John its Pete. On January it’s not our practice to get into the regional breakout of that. So, we need to get the month behind us and I’ll give you all the texture and commentary when we release in early February. As far as the U.S. margin goes, you hit on it – it’s really a top-line game. So well yes we’re going to experience some relief in the commodity side. We’re still going to have a shrinking eating out market based on the most recent projections anywhere from 20 to 50 basis points are the forecast I’ve seen. So in that environment it makes it even more challenging from a pricing perspective to recover all of those input costs. So once we get passed the first quarter, which is our toughest comparison, I want to believe that the comparisons and the margin performance will be less pressured than it was in 2012. But until we really see an expansion in the consumer environment and the eating out market, the margins will continue to be challenged.

Kathy Martin

Our next question is from Jeff Bernstein from Barclays.

Jeffrey Bernstein – Barclays Capital, Inc.

Great. Thank you very much. Just kind of moving more towards Europe, seems like the value focus has been in place now over the past few quarters. Just wondering whether in your view it's reasonable to assume that the goal to stabilize traffic kind of at the expense of average chicken margin was a success and as we look to '13, maybe should we see benefit from some trade backup to whether it be core or premium menu as you guys have alluded to in the past, therefore a return to perhaps positive comps and margin expansion in Europe. It seems like Germany and France are the areas where color would be helpful? And then just as an aside, you mentioned extended hours in each region in your prepared remarks. I'm just wondering if you can give us an update on where we stand on extended and 24 hours in each market? Thanks.

Don Thompson

Hi, Jeff. I'll touch base on the frontend and then I'm going to ask Tim Fenton to talk a little bit about what he's seeing relative to some of the plans from – some of the markets across Europe. If we go back to 2012, one of the things that we mentioned is that we needed to really institute a stronger value messaging in France and in Germany. We had one that we felt fairly strong about in Spain. We needed to really initiate a stronger value platform in Italy. And so that was kind of the way we entered into 2012. We do feel much better relative to having had France make many steps forward which Tim can talk a little bit about relative to their value enhancements. In Germany, Germany is a tough environment from a consumer perspective. It is, as we've always mentioned, the most cost sensitive from a promotional perspective. We have some things that we've been doing there with the 3.79 meal deal, but there's some other pieces that have come about that Tim and the team have looked at relative to France and Germany. So do we feel like we've established value platforms across Europe? Yes, much more so than when we were in 2012 so it won't demand the same level of trying to implement value. But now what we've got to do is make sure we're reinforcing some of the other parts of the plan. And so Tim has been meeting with the folks and going over plans recently, so Tim…

Tim Fenton

Sure. Well, there's some headwinds obviously in Europe. Decreasing consumer confidence I think it's been at the all-time low since they've been tracking it. IEO continues to contract, however, Europe gained market share for 2012. France, base back in the second quarter put much more emphasis on some of their value initiatives that they had with petite pleasures, just started and Don alluded to the Casse Croute, in France about 10 days ago which is basically a baguette and a drink for €4.50, just started 10 days ago with advertising, so we really don't have a lot of input on that. And as far as Germany, the McDeal started back in June which is two EVM's for €3.79 and just been the most price sensitive country we have as well as shifting some of our focus, our GRPs on our SMS which is equivalent to like a Dollar Menu that we have here in the US. So tough nut, we're working at it. The good thing is we're coming from a position of strength as far as market share, as far as sheer voice, physical plants, operations, so it's a strong case for us moving forward.

Peter Bensen

And Jeff, a quick update on the 24 hours. APMEA leads the system with 60% of their restaurants at 24 hours. The U.S. is at 44% and Europe is at 26%. And all of those, it continues to be a focus as we talk about broadening acceptability being one of our three global priorities operating more hours continues to be a focus in all of the markets around the world.

Kathy Martin

Your next question is from Jason West from Deutsche Bank.

Jason West – Deutsche Bank Securities

Yeah, thanks. Just one quick one on Japan if you could talk a bit more about what you're doing to turn that around. Is that really just a broader market issue or is it something you can do there to change the trend and when that might happen? And just bigger picture on the CapEx and the growth outlook, Don, you guys are kind of pushing a little bit harder on unit growth again and you're not changing your long-term EBIT growth number, so it does suggest the returns could be under some pressure, could you just talk about the decision to ramp up growth when you’re seeing some issues with margins? Thanks.

Don Thompson

Tim, you want to talk about Japan?

Tim Fenton

Yeah, Jason its Tim. First of all, I think Japan is probably where the most competitive markets we’ve right now with – in the IEO, and it is a declining IEO market. In spite of that, again Japan is gaining market share in 2012. They’re also strategically working – moving away from some of the tactical promotions or discounts they would had and if you look in 2012 – 2011 was right on the 40th anniversary, so that moving away from the tactical to more of a strategic value, it revamp some of their dollar maneuver or 100 Yen man use to go with 100 to 250 and 500 and to really try to address the erosion that we’ve had in average check. We had good guest counts growth. We’ve just lost an average check with some of the new premium products that we’re bringing into.

Don Thompson

And Jason relative to CapEx, I know you referenced ramping up. It’s not really a ramp up. What we have established is a long-term development strategy. It is a part of the overall plan to win in one of the three global priorities and to broadening accessibility. Our goal is to be able to grow to the real opportunity that McDonald’s has out there, and we think that we do clearly have some opportunities there. What we don’t want to do Jason is getting to an old habit that we had, which was we start developing and maybe the economic environment will get slightly more difficult, so we slow down, we ramp up the teams and the resources and ramp them down. We were inconsistent in growth. We changed that in China. We’re now looking at markets that are higher opportunity markets around the world to be able to ensure that we have a steady consistent plan, strategic growth as we move forward.

And on the CapEx, be specifically I ask Pete to make a couple of comments there.

Peter J. Bensen

Yeah, I mean, Jason the increase in unit, we just take the mid-point of our 2013 guidance. It’s a little over a 100 increase in units. More than half of those are coming out of China and we talked about the opportunity there and the strategic importance to growth there. Europe’s another 30 of those roughly. In places like Russia, Italy, Spain where again as Don mentioned, the opportunity continues to be large, and over the last couple of years we’ve worked on building our pipeline of sites and we have a very strong pipeline and feel very confident that this is absolutely the right thing to do for the long-term future.

Kathy Martin

All right. We have about 12 people left in the queue, so I’m going to ask you to try to stick to that one question. So our next question comes from Joe Buckley, Bank of America Merrill Lynch.

Joseph Buckley - Bank of America Merrill Lynch

Thank you. Pete, I want to stay on the CapEx side for a moment. You referenced in the G&A in the fourth quarter the acceleration in the IT slowing a little bit, and it sounds like you’re shifting resources away from re-models towards new units, and I am not sure where the IT plans fit in, in that. Has that been slowed a little bit as well, and maybe just talk about the pros and cons of moving to new unit development over remodels if that’s the choice you’re making?

Peter J. Bensen

Joe, the slowdown in the IT acceleration really was more impactful to G&A than it was to the CapEx. And the slowdown really was just a shift. So we had identified the plans that we have and just as things softened a little bit at the end of 2012 we made a conscious decision to slow down a little bit on that, and so we’re continuing to focus and that’s primarily as you know rolling out our new POS system and doing some things around our financial and HR systems around the world. Those continue to be a focus. We’re just pacing that slightly differently.

In terms of the CapEx, as Don mentioned this is growing to market opportunity. So it's not – we’re going to get 2.5% of our sales growth in 2013 from unit expansion and that’s half of our 5% kind of top-end target. So this is not really a dramatic change or shift. And again if you think about more than half of that increase coming from China where we know the long-term opportunity is huge and again that comment it's very important that Don made, it's very hard to start and stop new restaurant development, and you can't use one year’s results or one year’s pressure on margin to make a quick and short-term decision that has a negative impact to the long term. So we worked hard these last couple of years to build the pipeline, to improve our tools, to improve the unit economics such that when we open these restaurants, they're opening at good volumes around the world. So we continue to think that's absolutely the right thing to do and will be beneficial over the long term.

Don Thompson

Joe, also the need does shift a little bit. If you look at Europe, we're over 90% complete with the interiors. Australia is fully reimaged. And so when those markets don't need the level of reimaging capital, then we are able to be able to deploy and strategically deploy some of our capital to the new opening opportunities as long as those opportunities are within the plan and we view those opportunities as viable growth opportunities for the future.

Kathy Martin

Our next question comes from Howard Penney from Hedgeye.

Howard Penney – Hedgeye Risk Management

Thanks very much. I wanted to address the U.S. business if you don't mind and I know all the data is not in for the fourth quarter and I can't see the informal eating out market, but if I benchmark yourself against some of the other competitors that we can see the data for, it doesn't look like you're actually gaining market share. And I know a lot of these concepts are nipping at your butt in terms of copying your menu and narrowing the gap in terms of look and feel of the restaurants with yours. I'm just wondering how you are responding and I say that, I know you're not going to respond to certain competitors actions but it certainly feels like the industry is coming closer to where you are and there haven't been there in the past. So I'm just wondering how you look at things from a competitive standpoint and what you do to maybe widen that bar between you and the competition again? Thanks very much.

Don Thompson

Hi, Howard. I'll take the first part and I'll ask Tim to speak a little bit about some of the things he's seen relative to the U.S. as they just went through again plant reviews. But overall, here's what I would say to you. Clearly from the year of 2012, we grew market share in the U.S. and so we feel good about that. Howard, clearly as we came to the latter part of the year or in the third or fourth quarters, we felt some softening and some slowing ourselves and make some adjustments in the plan a couple of things we needed to do stronger. We need to have and execute, we had it but execute them more robust menu pipeline for our consumers and that's across the board in beverages and beef offerings and chicken offerings and I feel good about that and Tim will expand on that a bit. We needed to be able to reestablish value. We were kind of in the middle of a place that was not good. We were between Extra Value Menu and Dollar Menu. We have an iconic property in terms of Dollar Menu to be able to put the advertising and the weight back there and add some creative juice to that is what we wanted to do, and so I think those things were archived in 2012. So, now as we move into 2013, we've got to take those to the next level in menu and being able to make sure that we secure even more customers. So, with that, and knowing that we have to make sure that we don't price ourselves out of consumers' pockets. Tim and the folks from the U.S. with Jeff Stratton now had been focused on that. Tim?

Tim Fenton

Yeah, Howard, actually in December we had a positive 1.1% gap versus our competition after being slightly negative in October and November. I think what we feel really good about coming through the last meeting was our pipeline as Don mentioned in his -- for new products in his new comments is much more robust than it was this time last year. We've got over 180 products. We can pull from our menu globally and we found that a lot of these products, they travel quite well and I guess a good example would be the CBO that we just ran in the fourth quarter which came out of Europe, was very successful for us. Chicken McBites came from Australia. But we have a lot of things in test. Beef chicken, breakfast items, beverages and snacking that was again more robust than we had at this time last year.

Kathy Martin

Our next question comes from Matt DiFrisco from Lazard.

Matthew DiFrisco - Lazard Capital Markets

Thank you. Just looking at the other income line, it looks like that was a big benefit, unexpected benefit and it looks like your -- it was from gain on sales of restaurant businesses in Europe and Canada. Curious is this something that is also going through 2013 as far as maybe more of a contributor, as I think it was basically a third of the contribution to the EBIT expansion year-over-year in dollar terms. And then this sort of goes into the – also it – along with those lines, below the line for your guidance for ’13, I’m just curious have you changed your position Pete, as far as the technology expense it appeared as though, entire costs you were saying ’13 was going to be flat with ’12, that wasn’t going to be a source of leverage and now there are some number shifting. Is technology going to be more of a weight on G&A? I guess, this is just going to help us all understand, I’m trying to figure out is the guidance of 6% to 7% long-term for EBIT or is it actually for ’13 as well? Thank you.

Peter J. Bensen

All right, Matt. A lot wrapped in there. Other operating and – that number is we – its I don’t want to say its hard to predict, but it does depend on transactions and activities around the markets, around the world. The primary source of that as you pointed out was refranchising in Canada, a couple of markets, in Europe and China. And so specifically China that was a combination of about four DL transactions and some conventional franchising. That activity will continue in 2013 as well as some limited refranchising, some of the other markets, but it's hard to give an exact prediction on where that number is going to be.

Regarding technology let me clarify. So, when we first started 2012, we indicated that we expected about a $100 million of incremental spending, about half of which was going to be related to the Olympics in the convention and half of which was related to technology. And that going into 2013, we did not expect the extent of growth in the technology to be the same in 2013 as it was in 2012. And part of what we’re experiencing here Matt is as we scale back some of that spending in 2012; we’re now by default having some additional spending in 2013. On top of a slight acceleration in the pace of NewPOS rollout and some of that spending that we did – that we made in 2012 and prior was capitalized on the balance sheet and results in additional amortization expense. So, it is up slightly in 2013, but because of those two issues and not because of a change in strategy. And as Don mentioned in his remarks regarding the 6% to 7%, we don’t give annual guidance, but those are intended to be long-term annual targets for our business and targets that we feel comfortable are appropriate for a company of our size.

Kathy Martin

Okay. We’re starting to run out of time, but we’ll take Jeff Omohundro from Davenport. You’re next on the queue.

Jeffrey Omohundro - Davenport & Company

Thanks. Just a quick one on the U.S. in the pacing of new products, given the change of leadership. I just wonder if you give some details around plans to speed up pacing across the barbell and if so will there – how soon would that – would we see that during 2013? Thanks.

Peter J. Bensen

Hi, Jeff. Thanks for the question. Relative to pacing of change across the barbell, we've got -- and again I mentioned we need – we have a solid value platform. We just needed to talk about it and make sure that it was top of mind for consumers and I think we’ve begun to do that and reiterated our position there. What we’ve got to do is make sure we have that other side of the barbell and that’s the entrée side of the barbell and ensure that, that is going to be – we have new entrée news in beef and chicken across the year. I will also say that we’ve got to make sure that we’re talking about our beverages. We've done quite a bit on the McCafe line-up to ensure that this is a viable growth vehicle for us into the future. So you will see more news about that. And lastly you’ll see some news about breakfast, and so all of those things are going to be rotated through if you will the calendar in 2013.

Kathy Martin

Okay, we’re going to take four more because I know we’re going to go over a little bit here. Jeff Farmer from Wells Fargo.

Jeffrey Farmer - Wells Fargo Securities

Great, thanks. Just along those lines, is there a way you can quantify your increased media support for the dollar menu in the fourth quarter and I guess into early 2013. More specifically how does that compare to what you saw through the first three quarter. So really just trying to gauge how much more intensity you put behind the dollar menu focus in the most recent quarter?

Peter J. Bensen

Jeff, basically the way that I’d try to explain this to you is that we looked at the overall value expenditures, those that were spend on extra value menu and those spend on dollar menu. If you took the composite of those two and then you look at the fourth quarter – you’re not going to see something that was substantially different in terms of our media expenditures, what we did was we shifted the allocation to Dollar Menu rather than the allocation being an Extra Value Menu. That's the biggest difference there.

Kathy Martin

Our next question is Sara Senatore from Sanford Bernstein.

Sara Senatore - Sanford Bernstein

Thank you. Actually I do want to follow up on the question on the Dollar Menu comment. Basically, you're going more towards value. Obviously, we've seen mixed results in some of your markets. I mean, I think there was a comment about how Japan – the fact that ticket was really under pressure, Australia was obviously more successful with that. Is there -- I guess could you help calibrate why that might be the case and in the US, would you expect to see as you get more innovation on value and more marketing spend, would you expect to see that pressure on average checks like you did in Japan?

Don Thompson

Sara, just to clarify, we don't expect to have a tremendous amount of innovation around bringing a lot of new products into the Dollar Menu unless they're going to be favorable from a profitability or margin perspective. So, when you saw the Grilled Onion Cheddar Burger, that helped us in terms of the overall offset of margin. So, I wouldn't look to see a lot of new Dollar Menu-based products. What we want to see is a stronger balance relative to the entree-based products. So that's what's happening in the US. It is not going to be -- and as I've also heard that we are focusing more on Dollar Menu. Yes, more on Dollar Menu, but not more on the overall value perspective. The expenditures are similar, but we are focusing on a core equity that we have. Relative to Japan, that's a slightly different strategy. I'll let Tim talk a little about what we've done in Japan.

Tim Fenton

In Japan, Sara, coming off some intense promotional activities we had in celebration of the 40th anniversary of going into Japan. We're trying to get away from a lot of the couponing they were doing. It's been flooding the whole marketplace from all of the IEO industry to be more strategic and more of a branded value. So we've got a little growing pains there right now, but we think it's the best for the brand. We're seeing it resonate with our core products and again, we're still gaining in our market share. So, yeah, we have a little tough time going through this next couple of months, but we think long-term it's the way to reset our business.

Kathy Martin

Your next question is from Nicole Miller Regan from Piper Jaffray.

Nicole Miller Regan - Piper Jaffray

Thanks. Good morning. I was wondering if we could shift the conversation over to the human capital angle, because you've talked a lot about the marketing and menu tactics and strategies. With some of the shifts that you have had in the past year or so at the executive level, would you look at this as an inflection point and what changes do you think could be a result of those new dynamics? Thank you.

Don Thompson

Hi, Nicole. I'm going to assume, Nicole, you're talking about the shift that we had in the U.S. in leadership relative to Jeff Stratton and Jan Fields. One of the things I'd say first and foremost is, Jan was a solid leader for us at McDonald's and did an outstanding job in the U.S. business. When we looked at the results and where we wanted to take the business, we made a decision to move forward and make a leadership change. Jeff Stratton is a seasoned veteran with McDonald's. One of the things that Jeff brings is a global exposure relative to markets around the world and some of the things that they have done quite differently to enhance things like our menu pipeline. Jeff also brings a lot of operations experience as he was the head of our Restaurant Solutions Group relative to our capacity and productivity in the restaurants. And so the change that we made was a change that we saw as most appropriate for our business and we needed to be able to continue to move forward. I think his relationships with the franchisees is very solid, as Jeff at one point was one of the divisional presidents in the U.S. and so he set the ground running with collaborating with the operators, our marketing changes and enhancements that we made going into the next year and we feel very good about the prospects of where we're headed in the U.S. business.

Kathy Martin

All right. And our final question will be from John Ivankoe from JPMorgan.

John Ivankoe - JPMorgan

Great. Hi, thanks. I'll make this quick. On the US, the rate of unit development in 2013, where specifically are you seeing that opportunity and I guess the question is, would there be some cannibalization that could happen as you locate close to existing restaurants of is it the fact that you haven't grown in 10 years more or less, but there's a lot of trade areas where you simply haven't touched and there is opportunity for completely new sales generation? And then – and secondly, how much would moving to a developmental licensing structure in China allow unit – or will – introducing more developmental licensees, I should say, allow a China unit development to go up over the next couple of years?

Don Thompson

Thanks, John. Tim will talk about DL opportunities, just on the new development aspect. As we look at opportunities around the U.S. and we do have opportunities around the U.S. and we’re able to cite those through some of the proprietary software that we have and also our field visits. We understand we have opportunities. But also take into account that we’re not going in and establishing a target of X number of restaurants must be built. We’re building to real opportunities. We’re not going back to days when we wanted to just build 400, 500 restaurants regardless. That’s not something that we will ever do again, John. And so when it comes to impact on existing restaurants, we really evaluate the net system sales positive effect of any new site that we’ll open up. We want to make sure it is accretive to overall system cash flow, accretive to franchisee cash flow, so that’s one of the things that we guard against and we look to minimize any kind of same-store impact that we might have.

Relative to DL, I’ll ask Tim to just speak about our DL strategy moving forward.

Tim Fenton

Yeah, John, I know we’ve spoke on this several times before. We will continue to move our portfolio towards a franchising in China. It’s taken us years to build up that inventory. As we’ve stated before, our goal is to be anywhere between 20% and 25% franchised by 2015. We will continue to use the DL concept, its working very well for us. As far as putting a number on how many additional restaurants, it takes them a while to get used to our business as well and as we’ve learned the right way on just developing a real estate, it takes some time for them to be comfortable with their area. So, I don’t have a number on that, but we will continue to move not only with developmental licensee, but conventional licensing in China.

Kathy Martin

Great. Thanks everyone. We’re ready to close this up with Don, who has a few final comments.

Don Thompson

As we bring the call to a close this morning, I really just want to thank all of you for joining us today. I also want to acknowledge the recent passing of our Honorary Chairman and our first grill man, Fred Turner. We as McDonald’s have been so fortunate that Fred Turner chose to dedicate his talents and his foresight to our great brand, and we pay the greatest tribute to Fred as we continue to deliver a consistent QSC experience to our 69 million customers each and every day.

The fundamental strength of our global business remains solid. As we continue to make the right strategic decisions to mitigate short-term pressures in these challenging times. I’m confident that we’ll continue to grow our global market share which is very important while delivering enduring profitable growth for the system and our shareholders.

Our McDonald’s system of franchise, supplier partners and company employees are very well aligned as we execute our plan to win and long-term strategies to drive growth and we’ll do that by optimizing the menu. We’ll modernize the customer experience and broaden accessibility around the world. So, thanks again for joining us today, and have a great day everyone.

Kathy Martin

Thank you.

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