Highlights From MCD's Q4 Conference Call: Closing The Year On A High Note & See Momentum Into '12

This morning, McDonald's Corp. (NYSE: MCD) reported Q4 EPS of $1.33, $0.04 better than the analyst estimate of $1.29. Revenue for the quarter came in at $6.82 billion versus the consensus estimate of $6.8 billion. Shares are trading at $98.70, down $2.25 (-2.23%), but the stock just tapped a new 52-wk high on Jan. 20th.

Highlights From MCD's Q4 Conference Call:

• (James A. Skinner) System wide sales increased 7% in constant currencies with global comparable sales up 5.6%, marking our eighth consecutive year of positive comp sales growth in every area of the world.
  
• We closed the year on a high note with fourth quarter comp sales up 7.5%, the highest quarter in over seven years and December comp sales at 9.6% reflecting positive momentum and a weather benefit in Europe and the U.S.
  
• This momentum continues as we begin 2012 with global comparable sales for January expected to be up 5.5% to 6.5%.
  
• In constant currencies operating income grew 14% for the quarter and 10% for the year while EPS increased 15% for the quarter and 11% for the year.
  
• Over the past year we again exceeded our long-term financial targets of 3% to 5% sales growth, 6% to 7% operating income growth and returns on incremental invested capital in the high teens and while returns are not yet finalized, we will be well above that target.
  
• And with a 35% total return for investors McDonald's was the #1 performing company on the Dow for the one and five year periods ending in 2011.
  
• Looking at the United States, comp sales increased 7.1% for the quarter and 4.8% for the year with operating income up 15% and 6% respectively.
  
• Our performance in the U.S. was driven by a focus on our value, menu relevance and convenience. We continue to benefit from our Dollar Menu at breakfast which has been in place for over two years now and has fortified our leadership position at breakfast as well as our position as a value leader across the entire day.
  
• Our beverage platform is attracting even more customers with line extensions such as our seasonal Peppermint Mocha offering in December which helped increase total McCaf specialty coffee units by nearly 20% over last year and later this year we'll be adding the Cherry Berry chiller to the McCafe blended ice lineup.
  
• The U.S. also built sales by focusing on promotional food events and core menu. With the national promotion of McRib and another highly successful Monopoly promotion as well as the December promotion of Big Mac increasing units by 11% over last year.
  
• In 2012 we will leverage our success with line extensions and new flavors as well as promotional food events to build sales. In addition to the Cherry Berry Chiller, we will roll out Chicken McBites that will expand on last year's successful launch of oatmeal with the addition of blueberry banana nut oatmeal.
  
• We will also continue to feature our flagship core items, Big Mac, hamburger, cheeseburger, Chicken McNuggets and our world famous french fries, all of which account for roughly 30% of our sales.
  
• In 2012 we will continue to build capacity to handle more demand as we know that most of our restaurants can increase throughput with successful labor and operations solutions that are already in the system today and need to be scaled.
  
• Turning to Europe, comparable sales were up 7.3% for the quarter and 5.9% for the year. In constant currencies operating income grew 12% for the quarter and 10% for the year.
  
• Europe was a big contributor to overall results, even as consumers felt the impact of austerity measures, the sovereign debt crisis and an overall volatile economy. Our big three markets of France, the U.K. and Germany along with Russia led the way by delivering stronger operating results for both the quarter and the year.
  
• In 2012, we will further enhance our relevance by adding another 150 McCaf's to Europe's existing base of 1,500 while continuing to leverage popular four tier and premium offerings including a re-hit of the sandwiches Chicken Mythic in French and Chicken Legend in the U.K.
  
• We plan to broaden that reach with 90% of interiors and two-thirds of interiors reimaged by the end of 2012. And over the next three years we will implement our updated POS ordering system which enhances accuracy and service. As we continue our efforts in Europe I'm confident that our strategies around modernization, value and menu will resonate with consumers and yield results for our business.
  
• Shifting to Asia Pacific, Middle East and Africa or APMEA, for the quarter and year comp sales were up 6.9% and 4.7% respectively. We delivered significant operating income growth of 19% for the quarter and 17% for the year in constant currencies.
  
• APMEA remained focused on building breakfast, providing exceptional affordability and convenience and delivering menu excitement and variety.
  
• Breakfast continued to be the fastest-growing day part for many markets including our big three markets of Australia, Japan and China.
  
• Compelling value at breakfast combined with a focus on our menu and coffee as well as popular local offerings including the Tuna Muffin in Japan and new muffin sandwiches in Australia helped drive results.
  
• Across Malaysia, China and Japan new varieties of chicken offerings also positively impacted the top line. In 2012 we will maintain our focus on new and innovative offerings around chicken as well as locally relevant products such as chicken and beef sandwiches with bacon, lettuce and tomato in Australia and the return of our successful line of Big America Burgers in Japan.
  
• Throughout APMEA our value leadership remained a draw for customers. Value at lunch was a strong driver across the region, particularly in China where our Value Lunch Program has become a true brand differentiator.
  
• In 2012 we will continue to expand services like delivery in Asia and increase our extended hours across the region.
  
• Overall, we remain extremely excited about our progress and potential in APMEA, especially in China where we opened a record 200 restaurants in 2011 and in Japan, which is recovering after the devastating tsunami there last March.
  
• Our first priority remains reinvesting in our business. In 2011 we opened 1,150 new restaurants and reimaged 2,500. In 2012, we plan to spend $2.9 billion in capital to accelerate our development plans. Half of our planned capital expenditures will go towards opening more than 1,300 new restaurants in both emerging and mature markets.
  
• With about 45% of our interiors and 25% of our exteriors reimaged globally, we have tremendous opportunity to keep building on a proven initiative that increased both sales and brand scores. To that end, we're planning to reimage more than 2,400 restaurants in 2012.
  
• Our talented and committed owner operators, suppliers and employees continued working together to make every experience great for our guests which have now reached nearly 68 million a day.
  
• (Peter J. Bensen) At 31.6%, our operating margin compares quite favorably to other large global consumer companies.
  
• Turning to restaurant level margins, our global system is 81% franchised and our overall profitability is driven primarily by franchise margins.
  
• For the full-year, consolidated franchise margin dollars increase 9% in constant currency to $7.2 billion.
  
• The consolidated franchise margin percent - driven by solid comparable sales growth in each area of the world - rose 70 basis points to 83.1% for the quarter and increased 60 basis points to 83% for the full-year.
  
• For a perspective, that 83% is our highest annual franchise margin since 1993. Consolidated company operating margin dollars increased $66 million for the quarter.
  
• As a percentage of sales, margins declined 30 basis points to 18.7% for the quarter and slipped 70 basis points for the full-year as positive comparable sales were more than offset by higher costs, most significantly commodities across all segments.
  
• Considering the significant cost pressure and economic volatility we experienced this year I'm pleased to end the year with a consolidated margin of 18.9%.
  
• Menu pricing had a significant impact on margins and our philosophy remains intact as we start 2012. Where warranted we will strategically take increases to offset some but not all of our higher costs.
  
• Maintaining traffic growth has been such a critical element of our recent success so we remain focused on a balanced approach to growing traffic and average check at our restaurants while being mindful of store level margins.
  
• Looking at segment performance, the U.S. once again delivered strong comparable sales growth in both the quarter and full-year by remaining focused on the customer. Our 2011 comp increase of 4.8% was the highest since 2006.
  
• For the quarter, U.S. company operated margins grew 40 basis points to 21% as comparable sales growth of 7.1% more than offset 4% higher commodities and other cost increases. For the full-year, company operated margins declined 70 basis points to 20.6%, still an impressive level considering the environment.
  
• As we look to 2012, we continue to project commodity cost increases of 4.5 to 5.5% in the U.S. with increases above this range expected in the first half of the year, particularly first quarter. From a pricing standpoint we begin the year in the U.S. with a 3% increase over the last 12 months.
  
• Our restaurants in Europe are some of the best representations of our brand with about 80% of the interiors and nearly half of our exteriors reflecting a current contemporary look.
  
• Fourth quarter company operated margins declined 30 basis points to 19.2% due in part to 6% higher commodity costs. For the year, company operated margins were down 50 basis points to 19.3%. Europe's commodity inflation is expected to moderate a bit in 2012 with the projected increase of 2.5% to 3.5%.
  
• In terms of pricing in 2011, Europe averaged a 2% increase excluding Russia, which is experiencing significantly higher inflation. This year, with lower commodity cost increases and continued economic volatility, we will again then likely see lower menu price increases excluding Russia compared to the U.S.
  
• Turning to Asia Pacific Middle East and Africa, virtually every country posted positive comparable sales for the quarter and full year including Japan, no small feat considering the tragedy that occurred in March and the subsequent challenges.
  
• Relative to profitability, APMEA's company operating margin was down 80 basis points for the quarter at 16.3% as positive comparable sales were more than offset by higher commodity, labor and occupancy costs. For the year, company operating margins declined 50 basis points to 17.3%. New store growth in China negatively impacted our margins but we believe this impact is temporary and remain very bullish about the long-term potential of this market.
  
• Regarding G&A, in constant currency consolidated G&A decreased 1% for the quarter and was flat for the year. This was a little higher than our initial expectations, primarily due to higher incentive-based compensation resulting from the strong fourth quarter performance.
  
• We project 2012 G&A to increase about 6% in constant currencies due in part to the three items discussed at our November investor meeting, the first being the technology enhancements across several markets to expand restaurant capabilities and upgrade our HR and financial systems. The other two significant non-comparable items are the costs associated with the second quarter biennial owner operator convention and the third quarter London Olympic and Paralympic games.
  
• Next I'd like to comment briefly on our tax rate, which we expect to be between 31% and 33% for 2012. In 2011, our effective tax rate benefited from a couple of noncash deferred tax adjustments that will not repeat this year, resulting in a slightly higher 2012 range.
  
• As Jim discussed, about half of our $2.9 billion of CapEx will be used to open more than 1,300 new restaurants. The breakdown for openings in our largest geographic segments is as follows: 175 in the U.S.; 250 in Europe; and 750 in APMEA including 225 to 250 new restaurants in China. The other half of our CapEx will be reinvested in our existing locations including reimaging at least 2,400 restaurants.
  
• In November, we indicated that the U.S. would likely exceed 600 reimages by the end of 2011. I'm pleased to report that over 900 U.S. restaurants were reimaged last year.
  
• For 2012, we expect the U.S. to reimage 800 restaurants while Europe expects to reimage about 900 and APMEA about 475.
  
• (Q&A) I wanted to ask about the U.S. specifically in which on a two-year basis accelerated to the highest level in years, so that equivalized for any of the weather impact, and I wanted to understand more about what you perceive to be that primary drivers. And the reason I ask is in my opinion the 2012 NPD pipeline seems maybe a little lighter than the last few years and I'm curious if you think you can sustain the high level you've established and mostly based on the core or secondarily as part of this question, it there maybe something in the pipeline that's more meaningful for the back half the year, 2013 maybe, that you're internally excited about and not talking about yet? (A) Well, Michael, this is maybe Jim and then maybe Don would like to talk a little bit about the U.S. business in terms of the pipeline. But I think the answer to your question is yes, we do believe we can sustain our growth with core being the fundamental driver of that as I mentioned in my comments this morning. Core plays an enormous role in terms of our overall sales growth on the top line every year, not just in 2012 as it did in 2011. And you have to remember that some of these new menu items as well that we add on are not all 13th month yet from last year, and at the same time we're continuing to add new menu items in the pipeline around the McCaf and other sandwich line items. And so I don't know if Don, you want to talk - and we have no visibility around the back half of 2013 just yet, or if we do, no one's told me about it. Don? (A) Hi, Michael. In the U.S. several major drivers, one of which has been consistent over the last several years as breakfast continues to drive the business not just from a value component perspective but also even in some of the new product entres such as oatmeal, we continue to see leverage from some of the McCaf-based beverages, even the blended iced beverages which is spread across the day so we get some lift from that. The whole notion of core that Jim mentioned is really big in the U.S. Nuggets, Big Macs have played very, very well but there's a lot of other basic things that the U.S. is doing, expanding hours and continuing to extend that is something that's helping us out. The benefit that the U.S. has today relative to core or technology and the fact that we now have the restaurants up on the new POS platform is allowing us to be able to begin to address capacity, particularly at peak hours, in a stronger fashion. So those things - all of those components and several others are really helping the U.S. continue to drive. What the U.S. has not done as much yet and we still have headroom is some of the global pipeline also that Jim alluded to in terms of premium-based sandwiches from Europe are still products that we have opportunities within the U.S. and I know the team is looking at that.
  
• (Q&A) I wanted to ask two things actually. For the China same-store sales number for the quarter and then sort of similar to the question about Europe, I'm curious if you're seeing anything encouraging on the U.S. consumers' part in terms of this very strong U.S. performance. And any change in pattern or mix or anything of that sort? (A) Joe, I'll take the China question and then Don can talk about the U.S. consumer. In the fourth quarter, comps in China were 15.6 with double-digit guest count growth as well. And that's on top of a mid-single-digit increase last year fourth quarter. (A) Hey, Joe. And on the U.S. consumer side, just from - and I'll reference this from a purchase perspective in the U.S. So a couple of things we always look at in terms of trying to determine whether or not we see substantial consumer movement, one of which is daypart analyses. So as we look at dayparts like evenings and breakfast, do we see - are we seeing more momentum in some of those dayparts which typically starts to, if you correlate that with some of the unemployment numbers and some of the hired numbers, the new job numbers, it tends to help us a little bit. We see a little bit of movement. I mean our evening dayparts were pretty strong comp and breakfast has been a pretty strong comp for us. But it's still pretty early to tell and Pete mentioned the word volatile. I think in the U.S. we're still volatile. And so our value still appeals but even in our value numbers we've not seen our value numbers really change dramatically from a percent of sale perspective. So we noted the P-mix is pretty solid, we do some strength in evening dayparts and breakfast but I think it's a little too early to tell whether or not this is a sustainable trend.

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