McDonald's Corp. (MCD) Beats Street on Top and Bottom Line; Q409 Conference Call Highlights

McDonald's Corporation (NYSE: MCD) reported a Q4 EPS of $1.03, excluding certain items. The EPS is 1 cent better than the analyst estimate of $1.02. Revenues for the quarter were $5.97 billion, which bests the estimate of $5.94 billion.

Highlights from MCD's Q409 Conferece Call:

• James Skinner, Vice Chairman and CEO:
  • Global comparable sales were up 2.3% for the quarter and 3.8% for the year.
    
    
  • In the U.S., comp sales increased slightly for the quarter and up 2.6 for the year, contributing to an operating income growth of 5% and 6% respectively. We're proud of these results especially given the high unemployment and its impact on consumer spending.
    
    
  • Now turning to Europe, comparable sales were up 4.8% for the quarter and 5.2% for the year. Constant currencies operating income grew 10% for the quarter and 8% for the year. Europe's guiding strategies of upgrading the customer and employee experience, building brand transparency and enhancing local relevance continues to drive results.
    
    
  • For the quarter and year, comp sales were up 1.5% and 3.4% respectively.
    
    
  • Now China, although their economy is improving, and we delivered an increase in comp sales and guest counts in December, we expect it will still be some time before consumers regain confidence and are willing to spend more.
    
    
  • In 2009, we returned $5.1 billion to shareholders through our share repurchases and dividends for three a year total of $16.6 billion in our 15 to $17 billion three year target.
• Peter Bensen, Executive Vice President and CFO:
  • During the fourth quarter, primarily due to the resolution of certain Latin America retained liabilities, we recorded $65 million of pre-tax income, as well as a $22 million benefit in tax expense, mainly related to the release of a tax valuation allowance. In total, this resulted in an $0.08 benefit to earnings per share and a 240 basis point benefit to the effective tax rate for the quarter.
    
    
  • Combined operating margin improved significantly in 2009.
    
    
  • more than 80% of McDonald's restaurants worldwide are franchised. We expect to re-franchise a couple 100 more restaurants in 2010.
    
    
  • Company operated margins were up 160 basis points in the fourth quarter to 18.8% driven by positive comparable sales, lower commodity costs and re-franchising.
    
    
  • In 2009, average restaurant cash flow growth for owner/operators was the strongest in 15 years. We closed the year with average annual pre-debt cash flow approaching $320,000 per restaurant.
    
    
  • In Europe, company operated margins increased 130 basis points in the fourth quarter driven by strong comparable sales, partly offset by higher labor and utility costs.
    
    
  • In Asia Pacific, the Middle East and Africa, company operated margins increased 260 basis points in the fourth quarter, and for the year, company operated margins rose 90 basis points to a very healthy 16.8%.
    
    
  • Turning to G&A, in constant currencies, G&A was up slightly for the quarter and down for the year. 2009 marks the fifth consecutive year that G&A declined as a percent of both sales and revenues. And we expect G&A as a percent of sales and revenues will continue to decline in 2010. While total G&A dollars will be up slightly on a reported basis at today's exchange rates, G&A should be relatively flat in constant currency.
    
    
  • Our first priority is to reinvest in our business...We have the financial capacity and the local talent to invest capital back into our business, when many others cannot. This is a competitive advantage that we intend to leverage to further differentiate the McDonald's experience. In 2010 we will invest about $2.4 billion in capital expenditures.
    
    
  • Approximately half of our capital expenditures will be used to open about 1,000 new restaurants around the world including roughly 500 in Asia Pacific,250 in Europe and 150 in the U.S. The other half of our capital expenditures will be allocated toward reimaging over 2,000 existing locations.
    
    
  • On a final note, as you know for most of 2009, currency translation was a significant head wind. Negatively impacting full year earnings per share by $0.15. However this headwind became a tailwind in the fourth quarter. A benefit we expect will continue for the next couple of quarters.
• Q&A Session
  • (Q) Could you comment on your traffic trends per restaurant and how you're same store sales treads have trended versus the industry? I remember during the Analyst Day, you showed a wider gap at the end of the year versus the competition obviously U.S. specific but perhaps you can comment as whether that gap has remained as wide recently? (A) David, thanks for the question. This is Jim. Our trends have remained the same. And fortunately we had traffic growth or guest count growth in every segment of the business last year. And much of that was because we were capable of, sort of keeping the average check in place. We didn't take as many price increases. We don't have the pricing elasticity and of course, our consumers today around the world deserve a break if you will relative to pricing around food away from home, we've kept the line on that very well. And we have therefore been the recipients of this guest count growth if you will.
    
    
  • (Q) Just a question about comps because you gave us an update in January. First, just generally speaking in the U.S., it got a little better in December, then it looks like you were saying it's sort of flattish in January. Is that calendar shift and overall trends have been pretty stable or, are we seeing something different December to January because I know it's sort of a choppy environment out there. And jumping over the other side of the world with China, you said traffic was up, and it looks to me like deflation is trending down. So, should we expect to see pricing get a little better there, too? Thanks. (A) Well that was two questions. First on the United States and then I'll let Pete talk a little bit about the pricing and the relationship with China. But I think in the U.S., the trends are actually better in January when you factor out weather. Weather had a tremendous impact on our trends here in January. We don't normally like to talk about weather but we can't avoid it when you look at the first 14 or 15 days of the month and the severity of the weather. I think it was impacting us probably around 3% a day in the sales, because whenever we had the weather that was normalized, we saw much better results. And so if anything, I would say that trends are a little bit better than they were in December?
    
    And Sara, regarding China, a couple things. One, yes, we did report positive sales and guest count movement in December. You won't see that in January, though, because we had the shift of the Chinese New Year. So last year that was in January, and this year it will be in February. So by comparison, that will be a little bit choppy. But, we're optimistic in what we're seeing with the trends. We've talked about China in the south, and the central and the north. So we saw all three of those areas improving in December and are kind of cautiously optimistic as the consumer starts to spend a little more money there, that we will then be able to get a little bit more on price and get a little more traffic moving there. So that's a perspective for you.
    
    
  • (Q) And then on the U.S. margin side for the quarter, 20.3% company operated margin; I think that's the best quarterly margin you've put out at least as far back as my model goes. I recognize commodity costs are a big driver of that, but in anticipation of maybe the environment getting worse, did you guys get more aggressive in other - and pull over levers to control the margin side of things? (A) But in terms of the total margin in the U.S., for the fourth quarter, the 20.3%, it was 75% of that was driven by the commodities. And then the rest basically the refranchising. You saw comps were relatively flat. So we really didn't get anything out of the sales line. So it was really the costs and the refranchising benefit. There were no other special levers or anything like that, which gives us confidence in the environment moving forward with the commodity costs remaining benign as we can move that top line a little bit more that we'll be in pretty good shape.
    
    
  • (Q) can you talk about how much share you think you took in 2009 and how much you think the informally eating-out market contracted this past year? (A) Well, it varies by market, John. But we grew our informal eating-out market share really in every segment of the world. So if you look at the U.S., for example, we were up about two or three tenths of 1% to about 11.3%. And when you really look at - that's a pretty big number when you really think about the size of the informal eating-out market. And it varies around the world, but we had increases in every market. And I can't tell you how much informal eating-out declined in every market around the world, because it certainly varies. But it has either been stagnant or shrinking in most markets. And most of our growth in 2009 came from share growth around the world.
    
    
  • (Q) Assuming no real change in the macro in terms of unemployment. You know, how do you see your kind of message going forward over the next quarter or two in terms of, you know, really focusing in on value? Do you see that increasing or about the same? (A) We expect to keep the pedal to the metal, if you will, relative to value everywhere in the world. Because I don't see much changing. More importantly, we've had a fairly steady contribution relative to value messaging over the past few years, in recessionary and non-recessionary times because it's extraordinarily important for our customers to understand everyday affordability at McDonald's exists in the good times and bad times, which why it was fairly easy for us to continue to support the Dollar Menu across the United States and then , of course, our everyday affordability in other segments of the business. Because that's the way we've structured our menu, and the understanding of the consumer expectation.
    
    
  • (Q) On breakfast can you give us a sense of where it stands today as far as mix of sales in the U.S. if it's still at 25%. And then you talked about January, you're going to roll it out, the Dollar Menu, system wide across the U.S. Can you give us a sense at the start of the fourth quarter and end of the fourth quarter, what percent of your system already had the Dollar Menu in place at breakfast? (A) It's small percentage at the end of the fourth quarter, beginning of the end of the fourth quarter on the Dollar Menu breakfast. Breakfast percentage does remain the same as a big piece of our business if you look at it that way. And the Dollar Menu and the around Dollar Menu will certainly help our growth. And by the way, we grew breakfast in '09 not only in the fourth quarter but year-to-date December, which was not an easy feat considering the fact we were faced with unemployment we were. And second of all, we had a very strong '08 with McSkillet and the chicken biscuit introduction. And so we had some numbers to overcome there and we're very proud of our results. And consumers have rewarded us because they know the great value and the breakfast in our restaurants.
    
    
  • (Q) In regards to your future CapEx of $2.2 billion. Should we expect that investment to generate a higher return on existing equity? Or could it be capping out at these levels? (A) Bob, we continue to operate under our targets of getting returns on and incremental invested capital in the high teens. And so our expectation on the increases are that we will continue to see, returns in that level or better as we move forward. So we're not lowering our standard in an effort to increase the CapEx.

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