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McDonald's Corporation (MCD)

Q4 2006 Earnings Call

January 24, 2007 11:30 am ET

Executives

Mary Kay Shaw - Vice President, Investor Relations

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

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

Analysts

David Palmer - UBS

Steven Kron - Goldman Sachs

Glen Petraglia - Citigroup

Andy Barish - Banc of America Securities

Joe Buckley - Bear Stearns

Jeff Bernstein - Lehman Brothers

Jeffrey Omohundro - Wachovia Securities

Carl Sevilchy - Oyster Capital

John Ivankoe - JP Morgan

John Glass - CIBC

Laurie Hahn - Deutsche Bank

Mark Wiltamuth - Morgan Stanley

Rick Lyall - J.W. Bristol

Presentation

Operator

Hello, and welcome to McDonald's January 24, 2007 investor relation 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 investor.

(Operator Instructions)

I would now like to turn the conference over to Ms. Mary Kay Shaw, Vice President of Investor Relations for McDonald's Corporation. Ms. Shaw, you may begin.

Mary Kay Shaw

Thanks. Hello, everyone, and thank you for joining us today. With me on our call, our Chief Executive Officer, Jim Skinner, and Chief Financial Office, Matthew Paull. This conference call is being webcast live and recorded for replay via phone, webcast and podcast. As always, the forward-looking statements that appear in our earnings release and 8-K filings also apply to our comments. Both the earnings release and our 8-K with supplemental financial information are available on investor.mcdonalds.com, as are reconciliations of any non-GAAP financial measures mentioned on today’s call with their corresponding GAAP measures.

With that, I would like to turn it over to Jim Skinner.

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James A. Skinner

Thanks, Mary Kay, and good morning, everyone. I am pleased to report that 2006 was an outstanding year for McDonald's and our shareholders. For the fourth consecutive year, we grew sales and profit. We delivered strong comparable sales increases for the quarter and the year. Our revenues reached a record high for the year at $21.6 billion. We achieved EPS of $2.83 for the full year, including the Chipotle gain, that’s a 39% increase. And we returned $5 billion to shareholders through dividends and shares acquired.

All of this contributed to a total shareholder return of about 35%, putting McDonald's in the top four tile of the Dow. As I said, an outstanding year.

The revitalization plan we launched in 2003 is the foundation for our current and future success. In fact, since we began our revitalization in 2003, we’ve grown system-wide sales by almost 40%, increase revenues by $6 billion, or 40%. We’ve delivered double-digit increases in our average annual earnings per share. Our share price has nearly tripled, and we are serving 6 million additional customers every day.

Our plan is comprised of three components: financial discipline, our Plan to Win, and organizational alignment. I firmly believe these components will continue to propel our business and enable us to optimize the opportunity in the marketplace. Relative to financial discipline, we remain committed to investing our capital in a manner that supports our strategy of growing by being better, not just bigger.

In 2006, new McDonald's restaurants accounted for just 1% of our sales growth, with the remainder driven by growth from existing restaurants. This year, we plan to open 800 new restaurants with a total capital investment of about $700 million. These openings are in markets that deliver high returns as well as those with future growth potential.

We plan to open about 200 new McDonald's restaurants in the United States, about 150 in Europe, mainly in Russia, France, and Italy, and about 375 in Asia-Pacific, with the majority in China and Japan.

We expect to invest another $1 billion in our existing restaurants to support Plan to Win initiatives designed to enhance relevance and capacity. While our international markets will continue to focus on re-imaging in 2007, the U.S. will shift some reinvestment spending to rebuild a higher number of existing restaurants.

Our commitment to financial discipline also allows us to continue returning a significant amount of value to our shareholders. Our commitment remains to return at least $10 billion to shareholders in 2006 through 2008 through share repurchases and dividends.

Our Plan to Win, with its focus on our customers and restaurants, will continue to be our operational roadmap. The global informal eating out market is projected to grow by $32 billion this year alone, and about $170 billion over the next five years. McDonald's is perfectly positioned to capitalize on this opportunity.

As I look ahead to the next one, five and even ten years, I am focused on aligning the global organization and our resources around what we’ve identified as our key sources of future growth. These scalable universal platforms include McDonald's branded food and beverages, drive-thru, day-part expansion, and value.

Each area of the world will execute against these platforms in a way that is relevant to our customers and in line with our operating environment. In the United States, where we have delivered 15 consecutive quarters of positive comparable sales, we will continue to expand our food and beverage offerings, particularly at breakfast and with our chicken menu choices.

In addition, we will strengthen our competitive advantage around convenience by enhancing capacity and the customer experience through technology and physical improvements to our restaurants, particularly the drive-thru.

In Europe, McDonald's has had a record-setting year. We’ve grown our share of the informal eating out market for every quarter of 2006, and we’re entering 2007 with increasing momentum. To drive growth in Europe, we will continue to focus on our three core strategies of upgrading the customer experience, enhancing local relevance, and telling our story in an open and transparent way.

For example, we will continue to evolve our three-tiered menu strategy by putting more emphasis on the premium line of menu offerings. In 2007, several countries will provide new food news with new premium chicken products, including Chicken Selects and Snack-wraps, which will launch in the United Kingdom in the first quarter. In addition, we will implement drive-thru initiatives across the region that combine advertising, operations, and innovation.

Our business at Asia-Pacific, Middle-East, Africa continues to be strong, largely because of our focus on convenience, value, and core menu. In the area of convenience, we expect extended at 24 hours to continue to deliver results this year in Japan, China, Hong Kong, and Australia. And we expect our branded affordability value platform to continue to drive sales and guest counts across the region.

In China, our key growth market, our focus is simple: cementing brand preference for Chinese consumers through key competitive advantages. For instance, we have the most menu choice among our competitive set, so we’re establishing and promoting our core menu with a focus on beef, chicken, and fish.

The drive-thru is absolutely critical to our long-term development plan in China as well, so 50 of our new restaurants will have drive-thru’s, ten of which will be a result of our recent alliance with Sinopec, China’s largest petroleum retailer. In fact, we opened our first Sinopec drive-thru restaurant just last week in Beijing.

We’ll also market breakfast nationally for the first time ever.

The third component of our global revitalization plan is organizational alignment. I believe this has been a critical factor to our success. Our system has never been more aligned, and an important part of this is our relationship with our owner-operators. McDonald's is a system that succeeds because we are a franchising organization. We have the best franchisees who bring our brand to life for our customers all over the world.

We are committed to having the right balance of company-owned and franchise restaurants, and we are working toward a goal of owning and operating less than 30% of the restaurants in each of our major countries.

So that’s our game plan for 2007. It’s a plan that we’ll expect that we will deliver on our average annual targets of 3% to 5% sales, and revenue growth of 6% to 7%, and operating income growth of 6% to 7%, excuse me, and return on incremental invested capital in the high-teens.

As I said at the outset, through a continued committed to financial discipline, outstanding execution of our Plan to Win, continued alignment throughout our system, we delivered great results in 2006.

Going forward, we expect this formula will continue to deliver a superior experience for our customers and increased value for our system and shareholders.

Thank you, and now I will turn it over to Matt.

Matthew Paull

Thank you, Jim, and good morning, everyone. Our better, not just bigger, focus has transformed our business and built momentum over the last four years. Clearly we’ve reached a point where customers and investors agree McDonald's is better. 2006 was another strong year, with every area of the world delivering improved performance. Total margin dollars for McDonald's restaurants reached a record $6.9 billion in 2006, increasing 12% for the year.

At $4.4 billion, franchise margin dollars represents nearly two-thirds of this total, and has the biggest impact on our free cash flow. As a percent of revenues, franchise margins improved in every quarter this year, and rose to 80.7%, their highest level in eight years.

Company-operated margin dollars increased to a record $2.5 billion at 16.2% of sales for the year. This year’s company-operated margin is the highest we’ve achieved since the year 2000.

In every area of the world, margins increased for the quarter and for the year.

I will highlight this improvement for the U.S., Europe, and Asia-Pacific.

Driven by strong sales growth, U.S. company-operated margins were up 30 basis points in the fourth quarter and for the year, matching our 13-year historical high. The U.S.’ fourth quarter margin increase is especially meaningful, considering that the prior year benefited from a significant adjustment, some 100 basis points, to profit sharing and store manager incentives.

In Europe, company-operated margins increased 110 basis points in the fourth quarter, primarily due to strong sales in France and improvement in the U.K. The U.K.’s improvement added about 50 basis points to Europe’s margins, most of which was due to the strategic changes we made to our restaurant portfolio this year.

For the year, Europe’s company-operated margins at 16.3% were its highest since 2001.

Asia-Pacific’s company-operated margins improved 290 basis points in the fourth quarter, and 190 basis points for the year, reaching a six-year high of 12.8%. We expect to continue to improve margins in this segment, as we build sales and optimize our menu and pricing mix, particularly in China.

G&A increased 8% for the year. More than half of this increase was due to higher incentive compensation from the strong results our global business delivered. Currency translation accounted for another percentage point of the increase. I can assure you, G&A control is a high priority for this management team. We are committed to continuing our four-year record of reducing G&A as a percent of revenues.

Our solid worldwide operating performance contributed to strong, fourth quarter EPS of $1.00 per share. This includes $0.61 from continuing operations and $0.39 in discontinued operations, primarily due to a $480 million gain from the Chipotle exchange.

Fourth quarter earnings from continuing operations included a $0.02 benefit from share repurchase, and a $0.01 benefit from currency translation.

In the fourth quarter, we acquired 45 million shares through buy-backs and the Chipotle exchange. This brings total shares acquired in ’06 to more than 98 million. As a result, we achieved the target we set last fall to reduce our year-end share count by about 5%. We got there in spite of nearly $39 million in options exercised and RSUs vested in 2006.

Looking ahead, the headwinds created by our old compensation programs, programs that relied much more heavily on stock options, won’t be nearly as strong. As you may recall, in 2005 we implemented changes to our compensation mix that resulted in just 7 million options and 1 million restricted stock units being granted in both ’05 and ’06, versus an average of 27 million options granted per year in 2000 through 2004. Reduced grant levels, coupled with heavier option exercises these last two years, drove total options outstanding down nearly 40% since 2004.

As a result of these changes, we expect future buy-backs to yield a meaningful decline in our share count.

Turning to 2007, let me update you on our efforts to optimize our restaurant ownership mix, including our developmental license strategy, and our outlook on a few items, including commodity costs in the U.S. and Europe.

First, regarding our restaurant ownership mix. In each of our major markets, as Jim said, in each of our major markets in which the legal environment is conducive to franchising, our long-term goal is to have less than 30% of the restaurants be company operated. While countries like the United States and France are already well below this threshold, we have asked those markets that are not to implement a plan to get there over the next few years.

Our team in the U.K. made progress on their franchising strategy in ’06, having franchised or entered into joint venture agreements for 118 restaurants. As a result, the percent of company-operated restaurants is now 54%, down from 63% at the end of ’05.

We intend to franchise about 50 more restaurants in the U.K. in each of the next couple of years. By the end of ’08, we expect the percent of company-operated restaurants in the U.K. to be about 45%.

In Canada, we strengthened our business in ’06. Comparable sales increased nearly 5% and company-operated margins improved 200 basis points for the year. As a result, we are now in a much better position to franchise some company-operated restaurants, and are executing a plan to do just that.

We continue to pursue our developmental license strategy. Our goal remains to convert markets collectively representing about 2300 restaurants over the next couple of years. In 2006, these restaurants represented nearly $3 billion in sales, but only generated $30 million in operating income after impairment.

To achieve these results, we spent about $180 million in G&A, and invested more than $100 million in cap-ex. Our combined net investment in these 2300 restaurants is about $3 billion, which includes $800 million in accumulated currency translation losses, losses for which we do not expect to be compensated.

When the DL initiative is completed, we expect total sales proceeds to be something less than half of the remaining $2.2 billion investment.

So as mentioned last quarter, the amount of any loss recorded in connection with the conversion of these markets would be significant. Nevertheless, we believe that if we do this right, with carefully selected licensees, the long-term benefit to our brand and global business outweighs the potential one-time losses.

When we complete the DL strategy and conversion of the 2300 mostly McOpCo restaurants, the McDonald's brand will be better positioned from both a customer and a shareholder perspective. The customer will see us growing faster and becoming even more locally relevant. Our shareholders will see about a 100 basis point improvement in our return on assets, a less capital intensive business in the most volatile areas of the world, and a steadily growing stream of royalties.

Finally, I want to update you on a few items. Given our menu variety, there are many different commodities that we monitor, but beef and chicken are clearly the primary cost drivers. In the U.S., our current ’07 outlook is for beef to be down about 2% to 3%, and chicken to be up a little bit more than that. In Europe, our outlook is for both beef and chicken to be up about 3% for the year.

We expect interest expense to be relatively flat to up slightly this year, while interest income will be down more significantly.

On a final note, looking ahead, you’ll see us continue to focus on being better, but with a subtle shift. We are determined to get better at being better in everything we do. As we said, it’s a subtle shift but one we are confident will sustain our global momentum in the years ahead.

Thank you, and now I will turn things back over to Mary Kay.

Question-and-Answer Session

Mary Kay Shaw

Thanks, Matt. I will now open the call up for questions.

(Operator Instructions)

The first question is from David Palmer at UBS.

David Palmer - UBS

Congrats on a great ’06. A question on the U.K. market, and I guess broadly in terms of Europe, if you can comment on the overall industry, but really I am curious most specifically on the U.K. How much has the market, the fast food, kind of informal eating out market accelerated in terms of growth? How much of that is giving you a tailwind?

Then, just layering on top of that, what signs do you have, and I’ve asked this before, but what signs do you have now, months later, that perhaps you’re turning the corner, what things do you think are really giving you traction there to drive share gains in and above the acceleration that may or may not be there in terms of the market? Thank you.

Matthew Paull

David, I’ll take a crack at it. First of all, I don’t think that what we’re seeing broadly in Europe is us riding a tailwind. I would say it’s mostly us gaining market share in markets that aren’t growing at the same pace you see in the United States.

We do see signs, and we won’t use the phrase turning a corner. We don’t like that phrase. We’re afraid that we’ll become complacent if we use that phrase, so we do see positive signs. When we look at our brand trust scores and the other scores that we get from customers, we see very positive signs about the way our brand is being perceived, and all the credit for that goes to our employees and our management teams in Europe.

Mary Kay Shaw

Our next question is from Steven Kron at Goldman Sachs.

Steven Kron - Goldman Sachs

Great, thanks, good morning. A question on the development license agreements. Matt, you said 2300 stores, that’s not new, over the next couple of years, but I guess that’s a lot to do in what seems to be a relatively short period of time. Is there any insight that you could provide as to potential timing or things that might be -- I know you probably won’t get specific, but things that potentially might be in the works.

Is the proceeds that you might get from these included in that $5 billion return to shareholders over the next two years?

Matthew Paull

Steven, we haven’t yet figured out what we would do with the proceeds, so it’s not included in the number that Jim already gave you, that $5 billion that we mentioned.

On the issue of the DL, I’ll say that we are very, very confident that we’ll get this done within the original three-year timeframe, two years remaining. But we want to stay away from specifics. It could affect transactions, could affect employees in the markets, and so consistent with the last 12 months, we’re not going to talk about specifics until we have a deal done.

Mary Kay Shaw

Thanks. The next question is from Glen Petraglia at Citigroup.

Glen Petraglia - Citigroup

Good morning. I was hoping maybe if you have the year-end diluted share count number, and then secondly, looking at Latin America, company units have increased sequentially by about 20 to 30 in each of the last two quarters. Historically you’ve had some challenges, obviously making money there. I’m curious to know why we’re seeing the company operated restaurants trend upwards.

Matthew Paull

Glen, Mary Kay is going to give you the diluted weighted average share count number.

Mary Kay Shaw

It’s 1251.8.

Matthew Paull

On the Latin American issue, it wouldn’t show up recently but in filings that we did in ’04 and ’05, we had some litigation with some of our franchisees. We’re through all of that now, but one of the things we did is we converted, because of the litigation, we converted some franchise stores, probably 60 in total over the last two years, to be company-operated and that’s most of what drove what you’re describing.

We are doing a lot better in Latin America. We’ve had double-digit comps I think four years in a row now in Latin America. Our margins improved dramatically down there. Over the long run, Latin America is no different than every other part of the world. We expect our McOpCo store counts to go down.

Mary Kay Shaw

Thank you. The next question is from Andy Barish at Banc of America.

Andy Barish - Banc of America Securities

Just two things. On the U.S. business, can you give us a sense of your thoughts on menu price increases kind of coming into ’07. Breakfast has been a big driver. There’s obviously some competitive talk. Can you address what you’re doing a little bit differently, whether it’s product or marketing spend on the breakfast day-part right now?

James A. Skinner

I can talk about the breakfast day-part, Andy, and then maybe Matt can talk about the pricing relationship. We have a very effective pricing tool that we use throughout our system in the U.S., and I think it works well for us, but he can talk about that.

Relative to breakfast, of course, you know, we’re the clear leader. We have a lot of equity in that space. We are very, very proud of our breakfast offerings, and we think that we’re unparalleled in our delivery of breakfast, and we continue to work to protect that. There’s some work going on in some markets across the country, in some co-ops, specifically on dollar menu. Our co-ops have an opportunity, as you know, to add four different items to the dollar menu. Some choose to do that through breakfast, although that’s not a national program.

I just think our delivery at breakfast will continue to improve. We’re focused on it and excited about where we find ourselves.

Matthew Paull

Andy, on the issue of menu price increases, I know you know that we only set prices for McOpCo restaurants. Our franchisees determine their own, but if you looked at recent history, we’ve tried to raise prices and we’ve generally succeeded at raising prices at slightly below the food away from home inflation index. That’s been running at about 3% a year the last couple of years. Our price increases in McOpCo have been slightly below that.

If you look at ’07, this is just a guess and I’m talking about the industry here, not McDonald's, the food away from home index I would expect would tick up a little bit, maybe from 3% to 3.5%, because certain restaurant companies and restaurant operators will want to get a head of minimum wage pressures. I would expect food away from home to inflate a little bit more and that we would still try to stay below that number.

James A. Skinner

But it’s also important, Andy, to know how strong our dollar menu is and how important that is to our customers. We do everything we can to continue to maintain that, and will as we go into ’07.

Matthew Paull

One thing that we’re especially proud of, and it has to do with the strength of our brand, prior to the Plan to Win and focusing on being better, not just bigger, when we raised prices in line with the food away from home index, we would lose guest counts. For the last four years, when we’ve raised prices to recover some costs, and we’ve been raising prices at maybe 2.5% to a 3% rate, we’ve seen our guest count numbers increase every year, including this year, which speaks to the power of the brand to overcome whatever it is that the markets throw at us. Thank you.

Mary Kay Shaw

Thanks. The next question is from Joe Buckley at Bear Stearns.

Joe Buckley - Bear Stearns

Thank you. Could I have one follow-up on the breakfast comment? Could you just update on coffee and plans for coffee in 2007? Then, would you talk about the U.S. minimum wage? If it goes up, as it looks like it will, do you anticipate any cost pressures in ’07 or looking ahead to ’08 perhaps, as the $0.70 increments mount up?

James A. Skinner

On the breakfast, Joe, we have a number of things in test that includes specialty coffees, premium burgers, a number of things that are the day-parts in the product pipeline, breakfast burritos, a number of other things that I think can help us in breakfast, but the coffee has done very, very well for us. We’re looking at the potential for some specialty coffee in ’07, but just to test for now. Obviously we will continue to pursue the premium coffee and the great success we had with that in ’06.

Relative to the minimum wage, there’s always going to be some pressure when the minimum wage is increased and yet, of course, across all of our markets in the United States, we’re paying above the minimum wage now in all of our markets. So we don’t really expect to have a huge issue with this. More importantly, it’s universally applied throughout the industry, so we all have to deal with it and we expect that we’ll be able to do that. We expect the momentum that we have in the top-line and our ability to grow the business will certainly compensate for some of that as well.

Mary Kay Shaw

Thank you. The next question is from Jeff Bernstein at Lehman Brothers.

Jeff Bernstein - Lehman Brothers

Thank you very much. A question around certain balance sheet lines, specifically I guess debt and cash. Are there plans to maintain the ’06 year-end debt levels in ’07? Just wondering where debt currently as a percentage of total capital stands, and why is that level deemed appropriate for maintenance.

Then, just on cash, I know you mentioned in the release a 30% to 40% reduction in interest income in ’07, I guess on the lower cash balances. Just wondering, is that all due to the return to pre-repatriation debt levels? Where do we stand on that? Or is that a shift in terms of cash balances? Thanks.

Matthew Paull

Thanks, Jeff. I’m going to start broadly and then I’ll get to your exact questions. We look at our debt-to-capital ratios with our board once a year. We’re not wedded forever to a particular target, but we give you guidance annually on where we’re headed. So we started three or four years ago, we said we want to get to about 35% to 40% simple debt-to-cap ratio. That HIA happened, and for a couple of years there, debt balances went up because of HIA, and then we paid them down. So there was a lot of other activity and we got away from being able to focus on 35% to 40%.

But now that we’re done with that aberration caused by HIA, we’re saying generally, we’re aiming at 35% to 40%. What that means is we’re at about $8.5 billion as of year-end. We expect we’ll roughly stay there for now. What’s going on with the cash balance is it was $4 billion at the end of last year. It’s probably going to be in the neighborhood of $2 billion at the end of this year.

We’re signaling that the average cash balance that was in existence in ’06, it will be a lot smaller in ’07 because we’re going to put the money to work through all the things we described, a big chunk of which is returning funds to shareholders.

Mary Kay Shaw

Thank you. The next question comes from Jeff Omohundro at Wachovia.

Jeffrey Omohundro - Wachovia Securities

Thanks. I wonder if you’d just give us a little update on the POS system efforts, just if there’s been further improvement in order accuracy and the benefits on that on the drive-thru as well. Thanks.

James A. Skinner

Thank you, Jeff. Yes, there has been improvement through most of the markets in ’06, and yet I’m here to tell you that we’re never going to be satisfied with where we are. We still have huge upside potential relative to the delivery at front counter and drive-thru and the overall customer relevance and that experience.

We’ve improved on the accuracy and yet we are not there. We won’t be satisfied until we get to 100%, although that’s a pretty elusive target. When you consider the five, six, seven things that have to happen to have everything be perfect at that order, particularly through the drive-thru.

So we’ve made progress, but we continue to work hard on this. It’s a journey, not a destination. QSC is something that has to be at the forefront, quality, service and cleanliness of everything we do every day.

So progress made, but not certainly satisfied with where we are at the moment.

Matthew Paull

Jeff, just for perspective, the new POS system that Jim described that we’re all very excited about, as of the end of ’06 it was in 7,000 restaurants, but very few of those restaurants are in the United States. So we’re very excited that as we get to the point where the U.S. restaurant base has more of the new POS system, we think we can make a lot of improvement. It’s one of the many reasons we’re excited in ’07 about our QSC opportunities and our ability to harvest some of those opportunities.

Mary Kay Shaw

Thanks. The next question is from Carl [Sevilchy] from Oyster Capital.

Carl Sevilchy - Oyster Capital

Good morning. What’s your current thinking on extended hours operations with respect to leverage and company-operated restaurant expenses and management talent? In particular, are the margins in that day-part expanding? Are you happy with the way managers are spending their time in order to service those patrons?

Matthew Paull

I’ll start, Carl, and Jim will jump in. We’re very happy with extended hours in the U.S., and now it’s spreading to other geographies. For perspective, about 95% of our restaurants are on some version of extended hours. It might be opening earlier or staying open later. About 29% I think were on 24 hours for some part of the week. It might be weekends only, and 31% of the U.S. is on 24 hours every day of the week.

In terms of margins and profitability, we’re very satisfied with the margins we get. Again, we’re running it almost all the time as a drive-thru only, so there’s very few employees in the store, which means you don’t need a lot of sales volume to drive the margin.

When we look at our comp in the U.S., for example, even though we were at a pretty high level of extended hour penetration in ’05, in ’06 it’s still added a little under a point to the comp, which means the business grows as people get used to the idea that McDonald's has a lot of late-night restaurants and 24-hour restaurants.

Now, the strategy -- which is completely voluntary, because our franchisees, if they don’t want to do it, they don’t have to, so we know they’re making money because they’re choosing to stay on in -- the strategy is starting to spread to parts of Asia fairly significantly.

Mary Kay Shaw

Thank you. The next question is from John Ivankoe at JP Morgan.

John Ivankoe - JP Morgan

Thanks. Actually, I had some follow-ups on the DL program, as you guys have talked about it, and just a few very related questions. First, you talked about $30 million of operating income after impairment. How much is that impairment?

Secondly, is the $180 million of G&A spend included or excluded as it relates to that operating income?

The final question is on the eventual sale of these restaurants. I know you have $3 billion net invested, and it sounds like you’re looking to get something less than or around $1 billion in cash back from that. Will there be a tax benefit of that $2 billion, if it’s something like that, book loss that we could look forward to in getting a benefit on the back-end from a cash/tax perspective? Thanks.

Matthew Paull

John, that’s a lot of questions, so we’re going to try to answer them. The easy one, first of all, the impairment that was taken into account in arriving at the $30 million number, that impairment was around $60 million.

The G&A number that we gave you of $180 million was already considered in telling you what the op-income was, so we don’t want you to -- well, I said that fairly clearly. It’s included.

Lastly, on the tax benefit, we don’t have enough time to deal with all the complexity. Every country is in a different situation, and in some cases, we’re going to claim a tax benefit and it’s a matter of whether the IRS will agree with us or not. So I don’t want to give you a general answer because we’re talking about more than 20 different countries with 20 different sets of circumstances.

I would say in general, you should assume that we will not get a tax benefit.

Mary Kay Shaw

The next question is from John Glass at CIBC.

John Glass - CIBC

In the countries that you’re going to refranchise, how many countries are included in that number that have above 30% corporate ownership? If you were to refranchise them all, how many units would that be?

Also, could you just clarify, is that a separate distinct program from the DL program, or is there some overlap between above 30% ownership markets and the DL program?

James A. Skinner

It’s very separate, John. Thanks for your question. It’s very separate from the DL program, so we’re breaking this really into two pieces.

We’ve got the DL program, which was designed for countries that had limited upside relative to risk, and where we decided we had to grow but we didn’t want to use our shareholders capital to grow, and we wanted to take advantage of more local relevance and entrepreneurship. Most of the markets in our DL list have the potential to someday get to 100 or 200 restaurants.

When we talk about the 30% goal, that’s very separate. We’re talking about the major markets in which we have tremendous upside or tremendous numbers of restaurants already, and we’re saying -- we gave two examples. The two primary examples are the U.K. and Canada. There aren’t a lot of other markets that fall to that category of having more than 30% McOpCo, where you can’t franchise.

Now, there are two other markets, China and Russia, that when franchising laws and infrastructure allow us to franchise, we will someday. So five years from now, China and Russia could be on that list but they’re not today because franchising laws in the environment just aren’t where they need to be.

So primarily now, we’re talking about Canada and the U.K., the countries we named.

Mary Kay Shaw

Next question from Laurie Hahn at Deutsche Bank.

Laurie Hahn - Deutsche Bank

Good morning, everyone. Just a quick question on December in the U.S. Could you give us a sense of whether you saw any traffic pick-up in relation to the E-coli scare?

James A. Skinner

Laurie, you know, we did look into that. It’s really hard to identify. We did look at if we have a restaurant within a mile of the brand that had that E-coli issue, were our results different? And in the area of the country where the e-coli issue tended to get more press and more play, did our restaurants do any better? We see no effect at all, so it looks like what happened there had no effect on us.

As we’ve said over and over again, we kind of follow our own game plan and we try not to react to what’s going on with competitors. In this case, we believe it had no effect.

Mary Kay Shaw

Thanks. Next question from Mark Wiltamuth at Morgan Stanley.

Mark Wiltamuth - Morgan Stanley

Good morning. I wanted to ask about gift card activations in the fourth quarter, if maybe you could give us a percentage change versus year-ago, and what your experience has been on redemptions in the following quarter after you get a big wave of activations?

James A. Skinner

We had an up-tick, as you might imagine, because it’s become a more familiar opportunity for our customers. I don’t have the specific numbers in terms of that up-tick, but we did have more sales of gift cards this year. Of course, as you know, we don’t record the sales of that until they are spent at the restaurant, relative to the next transaction. It’s too early to tell what those numbers look like. We expect that they’ll be better this year than they were a year ago, simply because our customers are more experienced with it and we sold more, but don’t know exactly what that number is right now.

Matthew Paull

Just for perspective, the gift card program was up significantly over last December, about 20%, but it’s still a very small number. So the effect you see at some other retailers who have a much more well-established gift card program where you can expect a spike in January sales, you shouldn’t expect that from us because the number is still very small. It was up 20%, but it’s still very small relative to our overall numbers.

Mary Kay Shaw

Thanks. The next question is from Rick Lyall at J.W. Bristol.

Rick Lyall - J.W. Bristol

Could you guys comment on the compensation of comps for the overall year, and then what the trend was within the year between price mix and traffic? Thanks very much.

Matthew Paull

Thanks, Rick. For the overall year, I believe -- and I’m going to ask Mary Kay to correct me if I get it wrong -- that we were right around 50-50, average check versus guest count, which you can never design this, but if we could, that’s exactly what we would want.

Mary Kay Shaw

The next question is from Joe Buckley.

Joe Buckley - Bear Stearns

I wanted to ask a follow-up question. Matt, at the end of your formal comments, you talked about a subtle change on figuring out how to do better being better, or how to get better by being better or some twist of words that I just botched. Could you elaborate a little bit more on that? Are there specific programs that you could discuss?

Matthew Paull

There are specific programs but I’m not going to discuss them, Joe, but I will explain what we meant by it.

We adopted this better, not just bigger, and I know all of you had doubts that we could get there, and we had some doubts ourselves. I remember that one of your community on the sell side said we’re a serial unit opener, was the phrase I think she used, and we’re incapable of growing ourselves this way.

Internally, we had doubts ourselves. So now that we’ve been on it for three or four years, we’re fairly convinced this is right for us. We’ve thought of all kinds of different ways to get better at being better, not just bigger.

The specifics would take a long time to explain, but we’re basically going to be putting our money where our mouth is when it comes to investing our G&A and capital dollars, and we’re going to stick to this plan because we’re excited about all of the ways we can get better at being better, not just bigger. Thanks.

Mary Kay Shaw

Thanks. It looks like we’re out of questions, so I’ll go ahead and turn it over to Jim for a couple of closing remarks.

James A. Skinner

I just want to say thanks to everybody for participating on this call. We appreciate your interest in our business, as always. In closing, I want to reiterate my confidence in our ability to deliver another year of strong business performance. We have the right people in the right place in every area of the world, all of them committed to being better every day on behalf of our customers.

Thank you, and go, Bears!

Mary Kay Shaw

Thank you.

Operator

Thank you for participating in today’s teleconference call. You may now disconnect.

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