REAL TIME NOTES FROM MCD PRESENTATION

Management commentary on business performance and prospect

 

MCD has advantages in its scale, brand, and family fun elements.

 

In 2010, three areas to focus on

  • Menu
  • Service
  • Reimaging

Service

  • Expanding demand in beverages and desserts
  • Value at all price tiers
  • Extended hours and better service
  • Service times are better since rolling out McCafe, aided by POS

Global up-to-date brand on the move

  • Updating interiors and exteriors of the restaurants
  • Of 2.4bn capex plan, 50% is reimaging (reimaging 2,000 restaurants in 2010)
  • New restaurants  - 1,000 in 2010

U.S.

 

U.S. was 45% of consolidated sales in 2009

  • 2009 comp sales up 2.6%
  • Operating income increased 6%
  • QSR market share of 14.5%
  • In January launched McSnack wrap – snack version of Big Mac. Fits well into growing snack daypart.
  • Breakfast dollar menu, voted in by franchisees, gives MCD a national voice on breakfast

McCafe coffee has worked well

  • Coffee sales increased 25% in 2009
  • 3m cups per day
    • More than 5% of total U.S. restaurant sales
  • Rolling out frappes and fruit smoothies
  • Frappes rolling out nationwide this spring
  • Smoothies nationwide in the summer

Tech

  • Free WiFi makes MCD the largest venue for free WiFi in the country
  • POS cash registers
  • Drive thru displays

Reimaging is key

  • 50% of U.S. base have interior remodeled image
  • Even fewer have exteriors that are enhanced
  • 2010, more than 400-500 reimages in the U.S., 150 new sites
  • Sales increases for remodels in U.S. have been 6-7% higher than for those that were not remodeled

Europe

 

Europe was 38% of consolidated operating income in 2009

  • 5.2% comp store sales
  • 8% operating income
  • 4.3% in Jan, 5.4% in Feb
  • 2009 informal eating out category market share grew
    • 3 tier menu platform
    • Low price
    • Core
    • Premium
    • Value at every level
  • Enhancing fourth tier
  • Expanded “p’tit plaisirs” in France and fourth tier in UK
  • Snack Deluxe lineup in Germany
  • In Germany, expanded breakfast lineup and it is yielding solid results
  • Media support in UK helped highest breakfast sales ever
  • Espressos are very important in European markets
    • All 1,600 restaurants in Europe have premium coffee available
    • Either via counter or McCafe
    • McCafe has been expanded across Europe
    • 1300 McCafe’s in Europe by end 2010
  • 260 new restaurant openings in Europe in 2010

Reimaging program is critical

  • By end of 2011, more than 85% of European interiors will be reimaged
  • Major remodels increase sales 6%

APMEA


APMEA was 14% of 2009 consolidated operating income

  • Comparable store sales up 3.4%
  • Operating income up 23%
  • Given economic climate, working to make sure menu and value initiatives are compelling
  • Australia seeing much success with Angus burger
    • Jan comp sales +4.3%, Feb 10.5% in Australia
  • MCD breakfast available in 19 countries in APMEA
    • 13% of sales in restaurants where breakfast is offered
    • Breakfast is 25% of restaurant sales in U.S.
  • Closing 430 lower performing restaurants in Japan
  • Australia has reimaged nearly all free standing restaurants

Conclusion:

 

MCD continues to keep the brand compelling to customers.  Companies combined operating margin grew 900 bps since 2005. U.S. and Europe grew by 500 bps over the same period.

  • Goal is to continue to improve operating margin
  • Track record of comp sales growth (82 consecutive quarters)
  • G&A control, disciplined operations, supply chain efficiencies
  • Strong owner operator and franchisee base
    • Locally relevant brand
  • Last few years saw more than 1,000 refranchised
  • Worldwide system is 81% franchised

2009 consolidated Return on Invested Capital stood at 20.9%

  • U.S. 24.6%
  • Europe 20.7%
  • APMEA 21.3%

Predictable cash flow and strong balance sheet allow a strong return of cash to shareholders

 

16.6bn returned to shareholders from 2007-2009 through repurchases and dividends.

  • $2.20 per share annualized dividend is more than triple the 2005 amount
  • First priority is to reinvest in the business. Above that, MCD will continue to repurchase and pay dividends

Important Q&A points:

 

Q: Average Check?

A: Average check for 2010 YTD has been stable compared to prior year.  Dollar menu hit a little but then we expect that average check comes back

 

Q: Can you explain the discrepancy between operating margins in developed markets – U.S. vs Europe?

A: Operating costs in Europe are higher. Rent, occupancy, labor are the main differences

 

Q: U.S. Comps ex weather have picked up? change in consumer behavior in US?

A: not really, more breakfast activity but nothing significant in terms of rate of growth

 

Q: How much of beverage guidance is smoothies and frappes?

A: Haven’t broken down the guidance of 125 by product. Expect them both to be big drivers. Dollar menu breakfast was about regaining traction and bringing customers in (TC’s).

 

Q: How important is couponing?

A: In some markets customers are conditioned to use coupons but we find that every day predictable value is a more successful tactic but in markets where it is prevalent we will do it

 

Q: What % of total revenue is drive thru?

A: 66% of sales in US. Only 66% of restaurants in Europe have drive through, and of those that have it, 45% of those restaurants’ sales are drive-thru. There is an opportunity to expand drive through in Europe and APMEA.

 

Q: Where do you expect an upturn in consumer spending?

A: Hoping it’s everywhere. Asia is where we’re seeing consumer confidence at lower levels (China and Japan). In Europe, Germany is the most price sensitive consumer, confidence levels really affect traffic.

 

Q: Competitive environment, race to bottom, in 2010?

A: We put the dollar menu up back in 2003. Didn’t have to react to deteriorating economy because we had an every-day affordability strategy. Did evolve it to bring breakfast in. Virtually all of the restaurants had breakfast value strategies in place but we needed a unified voice at breakfast.

Don’t see dollar menu dramatically expanding or shrinking.

 

Q: Taking price in 2010?

A: commodity costs in 2010 are going to be pretty benign. Consumer prices are holding fairly well. Don’t see a tremendous opportunity to take price. Typical year of 2/3%, this year will be something less than that. In this cost environment that won’t hurt us. We’ll be ready to take price when the opportunity arises.

 

 

Howard Penney

Managing Director


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