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From McDonald's (MCD) Q2 2006 earnings conference call transcript:

James A. Skinner - Vice Chairman of the Board, Chief Executive Officer

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 a strategic partnership with Sinopec, China's largest petroleum retailer.

The agreement gives McDonald's first right of refusal of co-developed drive-thru restaurants at existing and new Sinopec outlets, which number more than 30,000. It is great having a choice and our initial plan, of course, is to identify and prioritize the best locations across China.

Question-and-Answer Session

John Glass - CIBC World Markets

Thank you. I actually wanted to follow up on the Sinopec agreement with a couple of details. Who operates the restaurants? Who puts in the capital? Most importantly, 30,000 locations is a significant number, but what would be a good near 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?

James A. Skinner - Vice Chairman of the Board, Chief Executive Officer

The details of the arrangement, it is a 20-year agreement and we have the first right of refusal, as I mentioned. The arrangement relative to capital invested, et cetera, the details are not public at the moment. It is a matter of working that on a deal-by-deal basis.

In terms of numbers, they do have 30,000 locations, but that is 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 you can imagine why.

As a retailer and the biggest petroleum company in the country, I am sure they have terrific sites among those 30,000, but they probably also have some that may not be as good. It is very important for us to get off to a good start with them in the selection of the original sites. We are pretty good at this, and I think we will do a careful job and we will get off to a good start. But we cannot really predict what the total number would be and I do not think we have looked at it that way. We just know there is a huge opportunity there.

Matthew Paull - Chief Financial Officer and Corporate Senior Executive Vice President

John, we will operate the restaurants in all situations. It is possible that in some cases, Sinopec would be our landlord, but in a lot of other cases they will not be. We are still working that out, as Jim said.

We want to emphasize that we have said that one of our issues in the past in China was we did not 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 will build more. There is no cost to us and in terms of option value, the option value is unlimited to us because we have a choice.

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  • Source: McDonald's Discusses China Development Strategy, Sinopec Deal