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McDonald's Corporation (NYSE:MCD)

Sanford C. Bernstein Thirtieth Annual Strategic Decisions Conference 2014

May 28, 2014 9:00 AM ET

Executives

Don Thompson – President and Chief Executive Officer

Peter Bensen – Executive Vice President and Chief Financial Officer

Analysts

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

We’re going to get started. So thank you all for joining us today and you can see we have the setup as a fire side chat. So I want to encourage everybody to be participants. We are very pleased to welcome McDonald’s back to the SCC and it’s my pleasure to have with me here, Don Thompson, President and CEO and Pete Bensen, CFO and Corporate Executive VP. We also have several members of the IR team here in the front row so you can cross them afterwards.

Let me say a few words about each of our very impressive guests and then I will hand it over to them for a brief presentation. Since 2012, Don served has McDonald's President and CEO. He began his career with McDonald's in 1990 as an electrical engineer, prior to that and very subsequently Don held numerous positions including EVP, Regional Vice President, President of McDonald's USA and most recently Chief Operating Officer.

Next, I’m going to Pete. Pete has been EVP and CFO since 2008. He joined McDonald's in 1996 as the Director of Financial Accounting and Reporting and has served as Assistant Controller, most recently Senior Vice President and Corporate Controller. Prior to McDonald's, Pete was a Senior Manager at Ernst & Young. So between the two of them obviously a great deal of history with McDonald's, very impressive background and experience.

As the largest global quick service restaurant, McDonald's is a global household name and in 2013 the Company had more than 35,000 system-wide restaurants and system-wide sales of over $89 billion.

So I think as I was telling them earlier this was one of our very most in-demand meetings and presentations. I know we have a lot of questions between us. As I said, Don and Pete will each give – Don will give a few prepared remarks. As he does that, please do enter your questions on the cards on your seat, we want to have a robust conversation. I know there is a lot to talk about.

So with that let me turn it over. Thank you very much.

Don Thompson

Thanks Sara. Good morning, everyone. Wow, it must be early, you guys seem a little bit flat there so, well Sara thanks so much for the invitation. It’s a pleasure to be here and be here with the team and with Pete. The McDonald's system is focused on delivering great tasting and high quality affordable food and beverages to the approximately 70 million customers that we serve each day around the world. Our unique business model which combines the power of a global brand with the local entrepreneurial spirit of outstanding franchisees provides a strong foundation that positions us very well for a future growth.

Our long-term opportunities are significant. So we continue to invest to build demand and future returns. Our near-term aim is to optimize the current initiative that we have for greater relevance, optimize those for broader reach and for better execution. Our culture is one of continuous improvement. So we are diligently focused on specific areas that have the greatest potential to drive our future results.

We are the largest player in the $1.2 trillion global and formal eating out market and we operate as Sara mentioned over 35,000 restaurants in 120 countries around the world. And yet we have less than 10% market share. So opportunity for growth clearly remains for McDonald's.

Our growth is fueled by our hard earned competitive advantages, which include our size and our scale. Our geographically diversified restaurant portfolio, our well known iconic brand, our global infrastructure including our outstanding real-estate locations, supply chain capabilities and outlined and talented system of franchisees and most significantly our strong financial foundation, which allows us the flexibility to pursue our global growth priorities and return a significant amount of our cash to our shareholders each year.

Today, I look forward to sharing with you, how we are building on these competitive advantages. I’ll briefly outline the strategic long-term growth drivers that we are pursuing to move our business forward. I’ll also touch on the current environment and the work that we’ve done to identify specific areas and specific markets where we have opportunities to grow. And I’ll provide an update on the work streams that we commented on in March to actively consider additional opportunities to enhance shareholder value.

Now our plan to win has been our strategic framework since it was first created. Today the plan to win has evolved and is reenergizing the McDonald's system by intensifying our commitment to place the customer at the center of everything that we do. We aspired to be our customer’s first choice, and we’re emphasizing this commitment by applying an even more customer centered lens to our thinking, to our planning and our actions.

To do this we have to remain grounded in our customers realities and focused on the opportunities that those realities present for our business today and into the future. Now this translates directly into our strategic growth priorities. These four global growth priorities focused on those areas that are most important to our customers and our business. We’re optimizing our menus so that we offer our customers more of their favorite food and drinks.

We’re modernizing the customer experience, so our customer’s interactions with our brand are more memorable. We’re broadening accessibility to deliver unparallel convenience to our customers and we are striving to become an even more trusted brand in their eyes. Our first strategic priority is about what we served? And that’s great-tasting, high-quality food and beverages that we want our customers to feel good about eating.

In today’s environment we are continuing to raise customer’s awareness about the quality of our products, by being even more transparent about the sourcing of our ingredients and how our food is prepared. And we are using a variety of tools to communicate these quality messages to consumers.

We also know that our core menu which includes items like our Big Mac and Egg McMuffin, World-Famous Fries those products account for roughly 40% of our sales is about five total products for 40% of our sales.

Marketing our core products drive sales, so we are reinvigorating our emphasis and communication around these customer favorites. To complement our emphasis on our core menu, we are sequencing new menu items and also our limited time offers in the four categories where we believe growth will outpace the overall industry. Those categories are premium beef, chicken, breakfast, a category where we are the industry leader and beverages particularly coffee and blended-ice drinks.

Our menu teams are creating and testing new product ideas and sharing local innovations with each other around the world to build even stronger menu pipelines for every market. We’ve remain focused on satisfying our customer’s changing taste and their preferences because our customers also have an increase desire to customize their meal. So personalization and customization represent an important opportunities for our business.

We are exploring these in many other enhancements including both our flavors and emphasizing fresh ingredients as we develop future menu innovations. Our next global growth priority revolves around creating memorable customer experiences. This is about delivering the best overall experience at each and every point that our customers interact with the McDonald's brand.

It begins by delivering exceptional service. Our ability to serve customers quickly and accurately especially during peak hours is the key to building customer visits. Around the world, our restaurants are increasing their emphasis on properly staffing, scheduling and positioning restaurant employees.

In addition, we’re more fully leveraging the investments that we’ve already made in technology such as our global point of sales system and our free in-store wireless access. This helps us create an even easier customer experience today and it provides the infrastructure to engage customers in new ways in the future. Our global digital strategies being designed to differentiate the McDonald's experience, both within and beyond our restaurants.

Our vision is focused on two primary areas; experience and engagement. On the experience side, it’s about simplifying our customers order, pay and benefit from using the power of mobile technologies. From the engagement standpoint, interacting with our customers through digital is about how we tell our story using digital channels from digital marketing campaign to social media content to enter into a dialog with our consumers. Digital is reshaping consumer’s definition of convenience and we want to fully deliver on these new expectations.

Finally, as part of our ongoing efforts to keep our brand modern and contemporary, we’re re-imaging more than 1,000 restaurants worldwide this year. Our third global growth priority is unparalleled convenience and it’s about broadening accessibility, so that we’re always within reach.

We want our customers to know that we’re always there for them. So we’re strategically increasing our global footprint. This year we plan to open between 1,500 and 1,600 new restaurants in both established and emerging markets. We also continue to scale popular brand extensions such as McCafé beverages and McDonald’s delivery service as well as McDonald’s drive-thrus to better serve our customers when and where they want McDonald's.

And because affordability is a cornerstone of the McDonald’s brand we’re emphasizing strategic menu pricing to further strengthen our value platforms and provide consistent, affordable options across our entire menu throughout the day.

Our fourth global priority is about being a trusted brand and that really refers to knowing what's important to our customers and understanding how their priorities align with those things that are important to us. We understand that our business and our brand are inextricably linked and we know that making a positive difference in the world contributes to our overall success. So we’re continually working to earn the trust and respect of our customers.

Just last year, we announced the powerful global partnership with the Clinton Foundation, the Alliance for a Healthier Generation to increase customers access to fruits and vegetables in 20 of our top markets, which represent more than 85% of our sales. Combining forces with the Clinton Foundation, it means that we can make an even more substantial and positive impact on families and children.

And last month, we launched our latest social responsibility and sustainability report, which includes our first ever global framework and targets. The framework is organized around five key pillars; and those are food, sourcing, people, planet and community, and these five pillars reflect the areas that matter again most to our customers and to our business. Our growth is directly tied to consumer’s wants and needs and our ability to execute at a level that sets McDonald's apart from all others.

Markets that are winning today are delivering against our global growth priorities by driving their business what we call five P execution, which is satisfying our customers and that means that every initiative must deliver on all five Ps, whether that’s people, product, place, price or promotion. They are no short, quick cuts, you can’t skip a P. This has to be a holistic solution.

The real power is in combined solutions, is the fuel for our growth and we’ve seen this first hand as our leadership team recently spend time in our foremost challenge, what I call priority markets; the U.S., Germany, Japan, and Australia. Because these markets contribute nearly 60% of our consolidated operating income improving their performance will clearly benefit our near-term results.

What’s even more important is that the learnings coming out of our deep dive into these markets are applicable to all of our 120 markets around the world. To improve the performance in our four priority markets, we are strengthening our planning with deeper customer insights, bolder marketing, the cuts through the clutter, consistency in our affordability platforms and greater focus on our core menu.

While we are addressing these areas of opportunity, it’s important to note that there is no sliver bullet or single solution. It is about combined solutions. But rather it’s about optimally sequencing elements of our existing global customer focused initiatives, based on local market dynamics, and executing them at even higher levels than we do today. While it’s important to underscore that it would take time for consumers to notice the changes and reward us with increased visits, we are confident in our ability to improve over time.

Before I turn it back to Sara for your questions, I would like to update you regarding the additional opportunities that we recently commented on to enhance shareholder value by optimizing our capital structure, optimizing our ownership structure and scrutinizing G&A spending.

Between 2014 and 2016, we expect to return a total of $18 billion to $20 billion to shareholders through a combination of dividends and share repurchases. This represents a 10% to 20% increase compared to the three year period between 2011 and 2013. This cash return target is based on several activities including the use of cash proceeds from our debt additions as well as the refranchising of at least 1,500 restaurants, an increase in our refranchising activity of more than 50% when compared with the level of activity over the prior three years.

Today more of an 80% of our global restaurants are owned and operated by local business men and women. They are fantastic. Our U.S. business is 89% franchised and in Europe and APMEA about 70% of our restaurants are franchised. As such the primary focus of our refranchising will be in APMEA and Europe, where we can shift to a more heavily franchised structure in certain high growth markets as well as in established markets where we have room to expand our base of franchised restaurants.

Regarding G&A based on our preliminary work we expect the largest opportunity to be a reallocation of resources to some of our higher returning initiatives and or growth areas such as digital. As you can see from this chart this discipline is not new. It has and will continue to be an ongoing area of focus for us as we continuously strive to operate more efficiently.

In closing, McDonald's is an iconic brand with competitive strengths that set us apart and the global and formal eating out industry. We are continuing to leverage our strengths as we pursue targeted growth opportunities for our customers, providing their favorite food and drink, creating memorable experiences, offering unparallel convenience and being a trusted brand to deliver the most meaningful impact for our business.

Across the McDonald’s System, we are committed to continuous improvement in everything we do, from the food that we serve to how we engage with our customers, to how we manage our financial resources. And we remain committed to making strategic investments today to create long-term value for our customers, for our shareholders and for the entire McDonald’s System.

Thanks again everyone for your patience. Now, I’ll turn it over to Sara, and Pete and I will be happy to entertain any questions.

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

Thank you, Don. Thank you for that overview and update. Very helpful. While we’re collecting questions from the audience, I think I’ll start with my own and I’ll talk about the last topic first. So, just on the SG&A that you mentioned, the reallocation of resources to initiatives, can you talk a little bit about or just give a little bit more detail. So it sounds like the goal isn’t necessarily to cut a lot of G&A, but more to spend more effectively, more efficiently, all the while trying to keep that G&A ratio to revenue kind of steadily trending down. Is that the range interpretation?

Don Thompson

It is Sara. And in fact, I’ll ask Pete to speak a little more specifically. He is really leading the initiative across the global system. I will say I mentioned one thing and that was I mentioned reallocation and I mentioned digital resources. We realized that there are certain shifts that we’ll be making relative to resource allocation. So this is less about us trying to go in and just cut resources for the sake of trimming. We want to maintain the efficiency that we have around the world, but for a little bit more perspective on it maybe Pete, you could give some comments.

Peter Bensen

Yes, I think just adding to that there are significant growth opportunities that we see ahead of us, digital being one of them and to move at the speed we like to move and the scale, that’s not an insignificant investment. So looking for ways, as Don said, to be more efficient with our existing resources to relocate and to fund some of these growth initiatives is really the priority there.

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

Understood. And when we talk about digital are we talking about things like mobile ordering and mobile marketing, or are there other things that we should be thinking about that are more transformative? Obviously those are pretty important.

Don Thompson

I think on the digital front. So we talk about two different aspects of digital, both the experience and the engagement side. E-commerce is almost a green tree. So the ordering, the fulfillment, the pay that aspect of it clearly has to be a part. I would also go that if you want to enhance the overall digital experience there are other aspects of that. Some of those are in the marketplace today.

We believe that with the strength that we have at McDonald’s and some strategic partnerships we have, there are other areas that we can bring our customers that no one can do in the same way, whether those be some of the things around music, entertainment, whether it be access to other venues, whether it be different things that we can do from a broader loyalty perspective, we realize to Pete’s point these things are going to take investments and take time, but they’re also be based upon our ability to set up the kind of partnerships that we know, some we already have and others that we’re cultivating at this point.

So it will be a broader strategy and it will probably be some things that are also value-added, that are non-product related, some things that maybe non McDonald's related at all, but may add value to our customers. So those are the areas that we are looking into.

Sara H. Senatore - Sanford C. Bernstein & Co. LLC

Very intriguing. Okay, and I guess the final question on this front, people will look at your G&A line and I know sometimes do I trained me is that big system is your G&A could it be smaller as a percentage, I always think about as a percentage of your system-wide sales. Can you just talk about why that’s the right way to think about it bigger system needs more G&A even if you are for example refranchised further just give us little insight?

Peter Bensen

I mean the refranchising Sara, it does kind of per restaurant basis. It’s less G&A intensive to support franchise restaurants than it is company operated. So the re-franchising activity will have a positive benefit there. In virtually all of our markets, we have industry leading average unit volumes. We are the landlord and the franchisors so our business model is a little different than most other franchisors, so there is an element of G&A around the asset management and the investment activity that is important to that.

What we are just trying to acknowledge with the comment is certainly in a global organization as large as ours, there are opportunities to look for additional efficiencies. So on the same token with that level of spend we are not going to cut our way to prosperity and provide meaningful value through a one-time kind of G&A effort. It’s about being smarter with those resources, focusing on those growth areas that Don mentioned that are going to be drivers of value frankly a more significant degree than just a cut.

Sara H. Senatore - Sanford C. Bernstein & Co. LLC

Right, understood. All right very good. And then just a shift to the sort of capital structure, you talked about 10% to 20% increase in return. Could you give us a sense of what that would require in terms of any kind of additional leverage?

Don Thompson

We are not specifying what the debt target is going to be. The flexibility we think is what’s important there. System is large as ours. There is lots of capital needs as we move throughout the year and we look at what we are going to invest in and certainly operating performance, market conditions will to some degree get takes the timing and levels of the leverage.

Sara H. Senatore - Sanford C. Bernstein & Co. LLC

Understood, great thank you. I have few more questions from the audience now. Just a related question. You have talked a lot about maintaining a single A credit rating. Are you still committed to that and can you talk about why that maybe important to your system.

Peter Bensen

Yes. We have talked about the importance of committing to that. So these, the numbers that Don mentioned still support our single A rating, and really it’s about the not the rating per se but the financial strength, the balance sheet strength, the capital strength that we have and the flexibility that provides us. That's been a cornerstone of our business model for several years. We think it led us to kind of superior dividend return and cash return profile. It’s allowed us to continue to invest in the business through whatever cycle, business cycle or economics cycle.

If you’d think back to those of you that have followed us for a while, in 2007 through 2009, the height of the economic crisis, we rolled out our combined beverage sell in all of our restaurants in the U.S. So between ourselves and our franchisees we were investing over $100,000 per restaurant and we were able to blow through that implementation getting debt financing and access to capital quite easily, and I think that's an example of one of the benefits that financial strength provides us so we believe that's an asset and something as we think to the future, we would like to continue to preserve.

So I think one of the interesting points about the dialogue that we’ve had internally, and sometimes some of the many things that we have asked about relative to our capital allocation, is that there is a point that kind of gets missed in amidst of it.

We are in a unique position and financially strong enough to be able to do what Pete just mentioned which is yes, provide ample and viable and growing returns to our shareholders and at the same time invest in the business because if you really look at the longer-term, we have to grow top line and bottom line in this business to satisfy the constituents whether they be the franchisees, the shareholders of the company itself. So we’ve got to make sure we are investing into growth opportunities and initiatives.

And so when we talk about digital, it’s not just to get into the digital game, it’s about a growth initiative. When we talk about customization and customers that’s a growth initiative, if we talk about blended ice of beverages in a broader sense, these are growth initiatives. They do require investments and the franchisees need access to capital markets. And the financial strength that we have and a reason for maintaining the credit rating we have, is also provide that access for the franchisees. And they have invested in this business throughout these years and they continue to invest in the business. And so we believe that, that appropriate balance is very important for the long-term growth of the brand and the business.

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

Understood, thank you very much. Let me switch over then and let’s talk about the business which obviously we care so much about that is – can you tell about some of the competition that we are seeing in particular, Don you mentioned breakfast is an area of focus, it’s growing faster certainly we know when we look at the industry data. It’s the only day part, that’s really going traffic at this point. What are you seeing there? Can you talk about kind of the coffee competition and some of the new entrants in breakfast? Are you seeing any impact on your business therefore in general term?

Don Thompson

Breakfast is a dynamic area, everyone wants to get into breakfast. It is the last year or so there has been much more “energy” around breakfast. But I would tell you in all the years I’ve been in McDonald's. There is always been someone entering breakfast every year. Several of the players have done it multiple times and that will continue. We actually view that as a good thing. The more energy that there is in the immediate relative to breakfast, we feel like we’ll win because breakfast is a growing day part for us. We have our strongest equity scores from a consumer perspective around the quality of the freshness and the wholesomeness of our breakfast. It has the highest quality score.

So the other thing is we are a restaurant business, we cook and I made this comment several times. We actually crack eggs in the restaurant and cook sausage and bacon and toast muffins and we place cheese on muffins. This is a not pre-prepared deal that’s come in and it’s microwave. I think that's very important. We haven’t spoken enough about it. So we as McDonald's need to do more of telling that quality story.

The produce and the products that we have at breakfast and across them are fresh and now this respective tender where most of you have in your refrigerators. And so it’s because of the volume in the scale and leverage of our supply chain and our base of suppliers. And so in McDonald's we’ve got talk more about that the breakfast category itself is highly competitive at this point. We have not seen – and in the U.S. I think so you’ve probably talking about a couple of the new entrants.

We have not seen a big impact from that latest new entrants that came in. It’s early to tell our customers, we always go try, so we read it down the road but unless focused on reading the competitive impact and more interested in how many Egg McMuffins, Egg White Delights, how many steak biscuits and bagels, how many parfaits that we sell at McDonald's, how many smoothies are being sold at breakfast. Where is the McCafe percentage which has grown from 2% back in the 2000, 7% of coffee and beverages at over 7%.

I’m more interested in that growth and we’ve got to make sure that our marketing is energetic and the awareness is strong enough to continue to move our breakfast in that way and we’ve got to execute. Breakfast is also the day part that customers have the highest demand for execution because they are on the go. 77% of our breakfast is drive-thru and so we understand breakfast quite well, but nonetheless we’ve got to earn the respect of customers every single day.

So that will be competitive in the marketplace and you know what competitors will make us stronger. If we are not doing what we need to do customers will choose to go some place out. Our challenge is to do what we know we need to do. Breakfast is a growing day part and we expect it to continue to grow.

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

All right, okay. And then on top of that, in terms of coffee we’re also seeing some coffee competition free coffee, lots of bounce back that kind of things, you mentioned coffee McCafe has gone from 2% to 7% plus, I think that 7% number was sort of one that we are hearing even a few years ago. So has it stabilized? Is there still growth? What can you do? Is there something that you can do to reaccelerate it or am I misreading?

Don Thompson

I think well sales have grown, from when we talked about it about four years ago, I think sales have grown. So I think the McCafe aspects, what we can do better around McCafe beverages is going back to really some of the implementation strategies when we began this is in 2007, 2008, 2009 which was focus on that base coffee and you are seeing that in the U.S. businesses, you have big focus around coffee quality, base quality, reintroducing customers to our McDonald's coffee. We have and sell the most drip coffee in the U.S. We have to reintroduce customers to that. And I think that's very important so we focused on that this year in the U.S.

From there it is about the McCafe Espresso based beverages and again the awareness the customers have. And it’s also about what’s led us into our blended ice platform and continuing to speak about and talk about that blended ice. We have probably one of the highest quality blended ice drinks out there, so yogurt based beverage with fruit puree is not syrup, its fruit puree. And we know that that is extremely high quality beverage.

Now I don’t know if all the customers are as aware of our smoothies as we are. And so we’ve got to do a better job of going back to a more balanced approach in our marketing teams to speak about beverages, to speak about core menu, to speak about breakfast. As much as and give that even a bit more priority if you would than value alone. Value has to be in the mix but our business is based upon all of these tiers and levers not just the value component.

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

Right, okay understood. Question is also about just a broader demand environment; one I had was you mentioned premium beef that I know you took the Angus burgers off, could you talk a little bit about premiumisation and how that's playing out for you and if there is challenge given I think you talked about the bifurcation of the U.S. consumer. So that's one question and then just broadly questions here about health and wellness. How do you point to that?

Don Thompson

So you had about three of them in this there.

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

Yes.

Don Thompson

So relative to – let’s start with bifurcation because that will lead into why the menu profile has to be what it is. There is a bifurcation in the U.S. and if you look at the lower income levels. Some of the lower income levels have not prospered as much clearly in recent years and primarily since the recession started. It is important that McDonald’s remain affordable for consumers. And so the value component is important. Having said that, we also see that there is this category of premium burgers, and the category has been out there a while. But the premium is also defined differently by consumers. Real and fresh are two really large aspects of premium.

The other aspect of premium is its ability to customize based upon what I will consider to be the most trending and modern taste profile. So, it’s sometimes just a little bit less about the prescripted sandwich and as much about also the opportunities we have and McDonald’s with the Made for You system customers can order a number of different things on a burger. Most customers don’t avail themselves of that opportunity and frankly we haven’t marketed as strongly.

Our operating systems are setup to be able to accommodate that and do it at the speed of McDonald’s. So when we look at the category of premium beef, we believe that condiments, artisan breads, some of the things you see in some markets, some of the things you see in some of our McDonald’s markets are even strong, particularly in Europe; some of the things you’ve seen in the U.S. relative to, yes, Angus came off, you had the Quarter Pounder lie that went in, that had three different flavors. You also have, that came in, was a Clubhouse Burger this year which is on an artisan based role and it has some different condiments. So it has grilled onions and some other sauces that are very different than some of the McDonald’s products; some cases different, some cases same. Big Mac sauce is an example. Still has a really, really high favorability.

And so, our notion is to be able to move into that space by being able to provide those condiments, being able to provide the artisan bread and our Made for You system. And the changes in the high density kitchen has helped us, enabled us to be able to do that more effectively.

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

Very good. Thank you. And then just, I guess, the health and wellness. Is that something that is – I mean you mentioned you’ve blended beverages that are real food, other things out. So is that something that is a challenge? Is it just a U.S. issue or is it…?

Don Thompson

Yes, I would say that customers will decide. Ray Kroc had a statement. He made the statement years ago. He said he didn’t know what we’d be selling in the year 2000, but we’d be selling more than anyone else, but the statement was focused around we will what customers are asking of us relative to what our menu should look like. And so as we look at – Smoothies as an example, blended ice based beverages, fragmented type marketplaces, the reason you see more interest in the marketplace.

We believe we have a great product, a very wholesome product, a very nutritionally based product in there, the product phase that we have. I will tell you there are other areas that we move forward as a simple thing, the reps, large platform in the U.S., large platform around the globe, even stronger in European countries. But it’s a great product. The lettuce, the tomatoes, the cucumbers, the salad mixes that we have within reps are phenomenal. It’s basically a salad in a portable version.

Having said that, it's a product that's done fairly well, but we need to increase the awareness related to reps at McDonald's. And so we’ll continue to make moves like the reps, continue to make – and we’ll have seasonal variety salads, but as I've mentioned before, we have to do that commensurate what customers desire from McDonald's. And so we think reps are probably a better positioning for us, but then I’ll go into the content as they come along with customization. So now we get the tomatoes, the lettuces, the alopinos, the various things that customers like to see in a burger format or in a chicken sandwich format, because those things will help us move the business forward.

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

Okay. And I’m going to go back to the sort of bifurcation question at the consumer end and look at it maybe take a different perspective because there are some questions here on minimum wage. Can you talk about whether or not what the impact would be, maybe, I mean certainly on the cost side but I think potentially even on the demand side that we’ve seen or thought talks about that angle? So just broadly on that topic.

Don Thompson

I like the way you’ve kind of woven bifurcation and minimum wage together Sara, but it’s actually a great way to think about it. Overtime minimum wage is changed. Minimum wage will continue to change overtime. So at McDonald's every time there has been a minimum wage change and believe me right now there is probably about 14 states that have a very minimum or just increase minimum wage just this year. That happens all the time and what we’ve always done in McDonald's is we would do what we need to do relative to being able to clearly will comply, but at the same time we will ensure that we are doing the right things by our employees.

So, it’s not about minimumness, it’s about fair competitive wages in different market places, you can hire individuals if you’re not paying enough in a local market. This is supply and demand kind of a feature. Having said that, today there is a couple of different debates out there. One is around $10.10 at a federal level and another one as you all know there has been a little bit of press relative to McDonald’s in $15 an hour. Yes, I’ll speak to the $10.10 piece and then I’ll speak to broader McDonald’s on the $10.10 piece.

If by chance the notion is to move forward $10.10 and if that happens to be sequentially layered in, so that when you layer on the cost of a minimum wage increase for small business and you put that cost on top of healthcare reform and you put that cost on top of whatever needs to be done to make sure you’re in great compliance with these verified relative to immigration reform when you layer the cost together.

If we can come out with the scenario of doing that in a way that allows business to also be able to, while they are seeking efficiencies also there is going to be price increases. Some of that is going to be put into the cost of product. If that can be worked out, so that you’re not minimizing the overall ability for businesses to continue to hire and they can continue to be profitable, there is nothing that we at McDonald’s would say negative to that matter of fact, I’ll view it as positive.

Minimum wage again will increase overtime. I think the sequential nature in what those steps are is a very important topic and a very important debate today and McDonald’s voices a part of that debate. Relative to going beyond that I think that it is interesting that in the McDonald’s world 36% of our employees are age of 16 to 19. 70% of our workforce is part time, 60% of our workforce are 24 years of age or younger.

We are the first job for many people entering the workforce and we’re very proud of that. The training that we provide that first job nature those experiences, a lot of people have worked at McDonald’s and they will tell us that I’ve got my start at McDonald’s and it was great. That’s a role that we play. And it’s a role that we at McDonald’s want to continue to play and will continue to play. McDonald’s has always been – that nature of the part time aspect has always been something that customers or our employees looked at and say I can go to McDonald’s and get a job and get 15 hours or 20 hours whether it’s students or their parents looking for something on a part time.

It’s been recently that, that has shifted to the part time nature of McDonald’s basically should be full time and that’s part of the ongoing debate. But we are focused on opportunity and focused on – our folks that come in McDonald’s have a great training, having a great job and being able to move up within the organization. 60% of our franchisees started as hourly employees. Today they own five restaurants and some of you know the average cash flows are appropriate relative to the work that they put into to it.

50% of our general managers, whose salary ranges are net $60,000, you look at total compensation 60 to 80 odd grand. Those are our individuals who started as hourly employees about 50% of us. It’s wonderful to see people get a chance to progress like that, and our company most people know Tim Fenton, the Chief Operating Officer who is retiring started as an hourly employee, Jeff Stratton, President of U.S. started as an hourly employee.

At McDonald's we want to make sure that happens and at the same time we will be mindful of what needs to take place with minimum and we’ll be supportive when it is a solid and strategic sequence business plan that has that takes into account all of the cost that will hit business.

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

Understood. Let me than shift to some of the other geographies that we could talk about some questions about Germany in particular, can you talk about the bakery the competition among bakeries and this idea that I think the value proposition has improved from some of your bakeries and how you plan to compete against that and does your scale give you an advantage?

Peter Bensen

I’d say, Germany is a interesting market relative to the competitor set and it’s interesting in two ways; one and I’ll bucket these two different categories; one is consistency of the value message, and two is going to be the cafés and I’ll call it smaller bundles.

On the consistency of the value message Germany although it has one of the most robust economies across Europe. Consumers in Germany tend to be a bit more frugal relative to how they spend. So they save more from a broader European perspective. They look more ideal, is a deal based culture relative to coupon based offers and many other things that will take place in the broader environment.

What we must do at McDonald's is to make sure that the value that we have in the restaurants is consistent. Customers understand that what I have today whether it’s eyes on the lines or one plus one or SMS whatever that value is that it would be there tomorrow, it will their next year. So that format has to be consistent that’s one area where we had opportunities and we are looking at those right now that franchisee bodies looking at that aggressively because we fell off a bit on that.

The second area is with the 44,000 plus cafés and bakeries in Germany, our restaurant counts somewhere around 1,400 restaurants roughly. With the 44,000 that are there, the value component is apples and oranges, they provide sandwich beverage, two item bundle we provide value meals three item bundle.

When you look at the price differential and you’re customer you just see the price. The bundle is very different. In France we address this, with what we call Casse-Croute. Casse-Croute is a sandwich, smaller is a sandwich on a artisan bread, and we have a beverage there is a two item bundle and that we implemented to address the similar situation. In Germany we have to address a similar situation with the bakeries, cafés.

The other thing, that we have as a strength in Germany, we have to just utilize even further Germany has the most McCafes in restaurant, McCafes in the McDonald's system as a country. We have a lot of our portfolio that has McCafes embedded in the restaurant a separate seating area. And we also have to be able to leverage that as we go at this opportunity market relative to beverages and café, our cafés and bakeries.

It is our big market and they are formidable competitors.

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

Very good. Let me ask you about – we’ll jump across a continent there and ask about a couple of questions on APMEA, one is what is the value of having the Japan JV, is there a reason to maintain that ownership structure could you sell it, because it seems obviously we’ve seen some struggle, but you could talk about that and then also just what is happening in Japan in terms of the competitive set of the operations.

Don Thompson

Pete is so glad that you too asked this question Sara.

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

I can see it on his face…

Peter Bensen

A little bit about Japan and Don can talk a little bit more about some of the strategies, but it’s our largest market outside the U.S. It has over 3,000 restaurants, so roughly 10% of our restaurant count is in Japan, our footprint as far as there, we have a new management team. The fact our equity ownership allows us to exhibit influence over strategy and operations there that we feel is important and that’s a reason to keep our equity ownership there now.

So there has to remain at the current 49%. That’s something we could think about, but certainly having that equity ownership we feel it’s important to driving the strategies and helping support Sara and the team there as they look for the strategies to drive the business forward.

There is a lot of similarities with Germany from the standpoint that we had a value program there that we kind of got off of, and so the consumer wasn’t comfortable with what was our everyday value offer there in Japan. We compete by the end of this year, there will be 50,000 convenience stores in Japan and they have become a part of the Japanese consumer’s life offering everything from beverages to meals to conveniences that you can go there and pay your bills and buy your train ticket and other things.

So generally, we compete very well on convenience. That’s a market where the convenience stores have an edge on us quite frankly. So part of our strategy going forward is how do we develop and further exploit if you will, the competitive advantages that we do have as McDonald’s. The fact that we are restaurant and cook the food, is a competitive advantage.

Despite the demographics in a place like Japan, we have a very strong family business. How do we do more to strengthen our family business and grow there? We’re only about 25% re-imaged in Japan. So re-imaging our facilities and upgrading the customer experience will also be a key part of our strategy as we move forward.

Sara H. Senatore - Sanford C. Bernstein & Co. LLC

Okay. And then, one of the few more questions is that the last kind of pressing topic I think we can cover. Several questions about royalty, and let’s go back with maybe closer discussion in digital and royalty because it’s something that you’ve clearly said is a focus and very on that thing. So is this is an opportunity and can you talk about emerging market, the opportunity there in terms of – in utilizing these kinds of platforms because cellphones and everything obviously much broader and frequently the only, a major part there. So, if you could just talk about those?

Don Thompson

A huge opportunity McDonald’s is a late entrant in the U.S. We are further ahead in a couple of other markets. We have some pilot markets i.e., the France, the Sweden of the world, that Japan slightly from a CRM perspective but only, I’d say, at a very entry level offer. But if you look across the various markets, the relationship management is a big, big opportunity we believe. The aspects of it, I think that would be most important to McDonald’s are going to be yes. We have the full products that we have, but as I mentioned earlier, I think Sara, is going to be the value-add.

What else can be part of a loyalty base program that really is differentiated in the broader segments? And one of the things we do have as a later entrant is the fact that as McDonald’s we got a chance to learn from some of the other things that are there and we believe that through those learnings and through listening to customers about what it is they want that we’ll be in a great position to move markets like the U.S. as aggressively as we’ve moved markets like France.

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

And in the emerging markets, is this something that is of real advantage or real focus and maybe just talk about that?

Don Thompson

It is a global focus for us and that’s the reason we’re having a global lead in Atif Rafiq, we brought in clearly from Amazon. The opportunity we have around the globe is to be able to leverage exactly the same things we just talked about in those other markets. In fact some of the penetration from a mobile usage perspective is even stronger in many of those markets across Asia particularly, across Asia and the Nordics even higher. And so, in those markets we will move to make sure that we have a good global platform.

Sara H. Senatore – Sanford C. Bernstein & Co. LLC

Okay. Thank you very much for joining us Don and Pete, as always incredibly helpful. So we really appreciate your time. Thank you all. Thank you.

Don Thompson

Thank you. Thanks Sara.

Question-and-Answer Session

[No Q&A session for this event]

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Source: McDonald's CEO Presents at Sanford C. Bernstein Thirtieth Annual Strategic Decisions 2014 Conference (Transcript)
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