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MCD - Transcript 2002.4Q
MCD - Transcript 2002.4Q
Company Participants
James Cantalupo, Chairman of the Board and Chief Executive Officer
Mary Healy, Vice President of Investor Relations
Matthew Paull, Chief Financial Officer and Executive Vice President
Other Participants
Andy Barish, Analyst, BMA
Howard Penny, Analyst, SunTrust
Janice Meyer, Analyst, CSFB
Joe Buckley, Analyst, Bear Stearns
John Glass, Analyst, CIBC
Mark Chowanaowski, Analyst, Soloman Smith Barney
Mark Mccoviak, Analyst, John Levins
Mathew Defrisco, Analyst, GKM
Peter Oakes, Analyst, Merrill Lynch
Troy Hoff, Analyst, US Bancorp
Unidentified Participant, Analyst
Presentation
Operator
Hello and welcome to the McDonald's January 23, 2003 investor conference call. At
this time, I'd like to turn the conference over to Ms. Mary Healey, Vice President of
Investor Relations. Ms. Healy, you may begin.
Thank you. Hello, everyone and welcome. I'm joined on today's call by McDonald's
Chairman and CEO, James Cantalupo and our CFO Matthew Paull. For your
information, this conference is being webcast live and being recorded for replay on
the web. Also, the language in this morning's earnings release regarding forward-
looking statements applies to our comments on the call. Our press release can be
found at the website investor.McDonalds.com.
As most of you have had an opportunity to review our press release by now, we'll
focus our remarks on providing additional perspective. Matt will review the charges
reflected in our fourth quarter results and discuss our capital allocation plans, and I
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will provide an overview of our business in U.S. and Europe. But first, Jim will make a
few introductory comments.
Thank you, Mary. I think you'll recall that from our conference call last week I hadn't
planned on participating in this call. But I did change my schedule because I wanted
to be a part of what's going on here this morning. Because I know you're interested
in what our plans are and where we're going. As CEO, I know I'm responsible for the
performance of the company. And I recognize that in this day and age, there's no
such thing as the CEO honeymoon, if there was, I probably set the record for the
shortest one.
In any event I wanted to reach out to you last week because it was early in the game
and I wanted to give you an idea where my head was going. I know there weren't a
lot of details. But I hope as we move forward you'll get those. Today Mary and Mats
are going to take you through the nuts and bolts of last year, I wanted to emphasize
a couple point that is came out of last week's meeting that needed further
clarification or comment. The first was really redefining what growth means for
McDonald's. I think you saw in our press release that I said that 10 to 15% range we
had talked about before was unrealistic. On the near term over the next 12 to 18
months, we're going to concentrate on foundation of our business. And that's really
reversing the sales trend and margin trend declines. And then longer term through
innovation, we're going to add on to our growth picture over the long term. And this
is the main reason I talked about trying to put that all under one individual, so that
we can really have a good, innovative, long-term growth plan.
What does this end up meaning in terms of long-term growth rate? Well, I think last
week somebody asked a question of whether we're sticking to our 10 to 15% growth
rate and whether it was reasonable to pursue that, or whether we should become a
cash cow. Well, my answer is, that we're not going to be a cash cow or a gazelle.
What we’re going to do is we're going to likely end up somewhere in the middle of
that range. Months ahead we're going to be finalizing our business plan, and I hope
to be able to define that range for you sometime early this year. One thing is pretty
obvious, though, that chasing an unrealistic growth target won't get us anywhere.
We're going to seek reasonable growth, and growth from a strict focus on our
restaurants and our customers.
Second point that I wanted to underscore was achieving growth. Near term would
have been growth building sales at our existing restaurants and prudently adding
new restaurants. We're going to focus in our 30,000 existing restaurants, eliminate
distractions that get in the way of restaurant focus, and rebuild our -- the foundation
of our business. Then we're going to innovate to achieve even more growth over the
long term. McDonald's is in business to attract as many customers as possible, as
often as possible. And that is what growth means to us. I'm absolutely confident that
we're going to get that growth.
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Finally, I wanted to comment on how we're going to finance that growth. Matt's
going to discuss our capital spending in just a minute. But I want to introduce one
critical point. We don't intend to throw capital at problems. And while we're being
very selective about where and how many restaurants we will open, again, we will
only invest capital where it makes sense. It's absolutely the guiding principal on how
we're going to conduct business and why you can expect progress.
Let me turn the phone over to -- I'm going to stay around for the Q&A period also,
but I want to turn the phone over to Matt now for more details.
Thanks, Jim.
The key components of the charges are as follows: First, we recorded about $200
million of charges in conjunction with market restructuring and closings. These
charges largely consist of asset writedowns and exit costs. We are in the process of
restructuring operations in Turkey, Egypt, Pakistan, and Jamaica by transferring
ownership to developmental licensees. This is a business structure that we've
successfully employed in more than 25 international markets. In total, 170 restaurants
will be affected by this change of ownership. Also, we are ceasing operations in
Bolivia, Paraguay, and Trinidad, where we operated a total of 23 restaurants. We also
recorded charges of $63 million primarily related to the elimination of approximately
600 positions and the consolidation of home office facilities. The positions were
about evenly split between the U.S. and international and include job losses
associated with the terminated technology project.
Fourth quarter results also reflect charges of $292 million, related to management
decisions to close, 719 under-performing restaurants and $67 million in asset
impairment charges for certain existing restaurants. I'd like to provide some texture
regarding these closings. About 200 were closed in 2002. The remainder will be
closed in 2003. Approximately 70% are traditional McDonald's restaurants, and 25%
are satellite restaurants. Satellites are lower costs, lower volume units. The remaining
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5% are Donato's restaurants. The 719 closings are spread evenly across all markets.
While we routinely close about 350 to 400 restaurants each year, due to relocations,
lease expirations, et cetera, we further tighten our strings and accelerated our
decision making process and ensure that we are focused on running the restaurants
with the greatest potential.
Most of the restaurants associated with the charge have negative cashflows and/or
very low annual sales volumes. The vast majority of traditional restaurants being
closed carry unit volumes well below $1 million. In many cases they would have
required significant capital investment over the next several years to remain
financially viable and to reflect well on our brand. In addition to these charges, we
took a write-off of $170 million due to the termination of a technology project which
was projected to deliver long-term benefits. Yet with an anticipated systemwide cost
in excess of $1 billion over several years, we determined it was not the best use of
capital in the current environment.
Now I'd like to turn to 2003. We are embarking on a turnaround; we are making
many changes, changes that we believe will generate positive momentum in our
business. Yet our outlook for 2003 remains cautious, especially for the first half of the
year as we need to see improved performance in our key markets. However, we've
decided not to give EPS guidance for the year and quarters, and said we are
providing a perspective on key line items impacting earnings per share. We will
update you on our business results and initiatives as the year progresses. Of course
we will update you on business results as the year progresses
Let me quickly comment on two items. First, the G&A savings from the long-term
technology project is reflected in our expectation for essentially flat G&A for the year.
Second, In December we shifted a larger portion of our debt into fixed rate. We
viewed historically low interest rates, an opportunity to lock in favorable rates for the
next 5 to six years. This will reduce earnings volatility due to interest rates fluctuation
during that period. Now I'll turn the call over to Mary.
I'll discuss four key markets, the U.S., France, Germany and the U.K. let's start with the
U.S. Despite a positive start in 2002, growth overall in industry business declined in
the second half of the year. These trends reflect the lackluster economy and
declining consumer confidence. Our sales increased 1% for the year and 2% for the
4th quarter. However, U.S. sales declined 1 1/2% for the year and 1.4% for the quarter.
Negative costs as well as higher labor costs hurt company operating margins, while
negative costs increased financial assistance to the franchisees impacted our U.S.
franchise margins.
Our U.S. business initiatives are all about improving results by giving customers what
they want most. And in the current economic environment, all retail businesses are
finding that consumers are spending carefully and looking for good deals.
McDonald's was founded on value, and customers look to us for predictable every
day afford an offerings, although we didn't invent dollar pricing, our dollar menu is
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one way in which we are meeting that demand. It has also allowed us to advertise an
international message that's getting customer's attention.
Awareness of our dollar menu is tracking historically higher than other averages for
other McDonald's value programs. Customers like the price and appreciate the
variety. However, initial results indicate that incremental transactions and add-on
purchases have been more than offset by a shift in product mix to dollar offerings,
and the use of the dollar menu for single items rather than meal purchases. We're
not pleased with these results. We'll continue to evaluate what's working and what
needs to be refined on our dollar menu. And while we're committed to value, we're
not married to any single product on the dollar menu.
With respect to the Big and Tasty, it has accomplished the dual objective of
encouraging customers to try the dollar menu and reintroducing them to this great
tasting lettuce and tomato sandwich. As we speak, our U.S. leadership team is
currently working with our owner/operator leadership to assess all of the data and
determine the next step that makes the dollar menu even more effective for our
owner/operators and restaurants while building on its customer appeal. Keep in
mind that the dollar menu is only one part of our customer-focused initiatives in the
U.S.
On the product front, we will roll out our new line of premium salads towards the
end March just in time for the arrival of spring. Customers will be able to choose
from Caesar, California cobb and Bacon Ranch salads topped with cheese their
choice of warm crispy or grilled chicken breast meat. Then in June we'll create more
food excitement at breakfast with the national introduction of McGriddle
sandwiches. This tasty variety of sandwiches includes favorite breakfast foods such as
sausage, egg, and cheese sandwiched between two hot cakes with the taste of
maple syrup baked right in. I know I'm making you hungry.
We'll also continue to focus on improving operations, and we know it's critical to get
the basics right for every customer every time. So we continue to monitor our
restaurant's performance from the customers' perspective. Since our mystery shop
program began in February 2002, independent evaluators conducted more than
183,000 restaurant visits. And our scores demonstrate we're making progress. But
we're not satisfied. One encouraging note is that of everything of that we're
monitoring, our service scores at the important peak lunch hour show the greatest
overall improvement with the vast component of service up nearly 5 points in this
department. We attribute this increase to our 11:00 a.m. to 1:00 p.m. peak staffing
initiative which is all about maintaining the proper staffing to maximize sales during
peak periods.
With have also had success at company-operated restaurants with extended hours
during 2002, with evening hour comparable sales at these restaurants showing at
double-digit increase for the year. The results of these various initiatives demonstrate
that we're beginning to make a positive difference in our customer's experience, yet
we have a lot more to do. We need to continue to focus on things that matter most
to customers, and we must deal with owner/operators and managers of poor
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Moving on to the U.K., comparable sales in this market were mid single digit
negative for the quarter against solidly positive comps a year ago. Higher wages and
insurance costs, and negative comps put pressure on margins. The growth in the
informal eating out sector in the U.K. slowed significantly during the first half of last
year. Yet we increased our share of the QSR segment, despite the fierce competition.
We attribute this to our customer focus and our on-going commitment to increasing
our relevance among our U.K. consumers One initiative designed to achieve this
goal involves re-energizing our Happy Meal program. We are planning to expand a
variety of our Happy Meal entrees and beverage offerings, with products such as
chicken filets and a no-sugar-added fruit drink. And for a small extra charge,
customers will be able to add a dessert such as a fruit cup to their Happy Meal
purchase. What better way to increase the appeal of Happy Meals among moms as
well as the kids?
In France, our business outpaced the spending experienced by the informal eating
out market during the first nine months of the year. Comparable sales continue to
track positive throughout the fourth quarter against a solid quarter last year and
margins improved. For the year, France recorded mid-single digit positive
comparable sales. We continue to focus on making McDonald's a destination in
France with our upgraded decor and relevant foods such as the , with the addition of
breakfast croissant sant sandwiches in Nouveau 280 sandwich and the addition of
breakfast croissants sandwiches at some locations.
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Thanks, Mary. Now I'll review capital allocation. We announced in October the capital
expenditures would be about $1.9 billion in 2003. Yet as we said in today's press
release, we intend to review the returns on these investments to determine if
spending should be reduced. This applies to the discussion of capital spending on
both new and existing restaurants that follows. While the current plan for capital
expenditures is essentially flat with last year, our allocation of those dollars is
intended to be very different.
Consistent with our intense focus on improving the existing business, we plan to
increase spending on existing restaurants, and we will concentrate those efforts only
on restaurants with strong operations that will benefit most from the enhancements.
More importantly, we will closely monitor our reinvestment spending. For example,
we have identified 200 U.S. restaurants for remodeling in the first quarter. We plan to
conduct research before and after these remodels to measure the sales performance
of these restaurants relative to their markets.
Let me assure you that if we don't see a significant sales improvement we will rethink
our strategy. Our franchisees will provide an additional check and balance in this
matter. Clearly they will not support these reinvestments if they do not realize the
sales benefits for doing so as they are effectively financially responsible for 70% of
the investments.
With the 400 traditional restaurant closings we expect for 2003, our plans currently
reflect the addition of 450 traditional McDonald's restaurants. We also plan to add
about 180 satellite and about 150 partner brand restaurants in 2003. Our partner
brand additions will primarily be Chipotle restaurants, which is continue to post
strong comparable sales and unit economic sales.
Now, I'd like to make four important points about our 2003 openings. First, we plan
to add about 40% fewer net traditional McDonald's restaurants this year than in
2002. Second, the openings will be concentrated in a few strategic markets; only
nine countries will add more than ten traditional restaurants. Third, we've
significantly reduced capital allocated to Asia Pacific and Latin America, as the
returns in these two segments have been the most dramatically affected by
deteriorating economies. Fourth, our focus on returns is intense; if we have any
doubt at all in the ability of these openings to build shareholder value, we will make
adjustments.
Thanks, Matt. Now we'd like to open up the call for your questions. Press star one if
you have a question, and press star two if you want to remove yourself from the
queue. We ask that you try to limit yourself to one question so we can get to as many
people as possible.
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Q - Unidentified Participant
Hi, can you hear me?
Q - Unidentified Participant
Okay. I don't know if the first part was heard, I may have been on mute. The question
was on the U.S., and on how many under-performing restaurants you have identified
in the U.S. You mentioned a few have left the system already; how many are still
under-performing and how do you encourage them to leave the system? Can you
buy back the restaurants and sell them off to your better performing franchisees?
And then a clarification on the guidance, an easy questions here. The SG&A would
be flat, did you mean in dollars or as a percent of revenues? And then if you could
run through the net openings by region for '03, that would be helpful.
They've quintiled [ph] the U.S. stores. But I don't want to say that any particular
percentage is under-performing. In terms of the way we turn those stores over, the
first choice is always to improve them. And by identifying how the store is doing,
that's the first step towards seeing improvement. If things don't improve, the ideal
way for a store to turn over is by an operator-to-operator transaction, that's much
better than us step in and buy and then spin the store out to somebody else. And in
the majority of cases where there's under-improvement that doesn't show
improvement by identifying the issues, that's what will happen.
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When you look at your strategy of adding value or creating value for the customer by
using the dollar menu and using price points to draw in the business, why is it in
today's world that that still is a good strategy? Because the costs are rising, your
labor costs are rising, food costs -- you know, there is food inflation over time, yet
you've continued to lower prices, and you can't bring the cost structure down quick
enough to bring your margins up. So part of your strategy is improving margins at
the store level, yet you're bringing your prices down. So I'm a little unsure as to,
again, the conclusion, why new units are still performing well and how can you bring
the margins up when you use lower prices as a way to drive the business?
So with the opportunity down the road with 30,000 restaurants, focusing on the
stores being the problem, I have a different perspective of where the opportunity is.
And that's not to say -- I get your point that new units become old units. In terms of
our new unit development, we're very focused on current value levels, achieving
investment ratios. When we develop restaurants, we tend to reflect the current reality
of those developments -- the development picture. So the new units generally come
on at acceptable hurdle rates because they've made adjustments, whether it be in
location volumes they've picked or in development costs, et cetera, et cetera, et
cetera.
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Where I come from, is we get -- we open any restaurant, we'd still have a problem.
That problem is in the 30,000 existing restaurants that need to have positive
comparable sales and positive customer compliments. This is going to be a long
answer, because I think you kind of have to understand where I'm coming from on
this. I am one of the few people that have eaten our food regularly for 15 years,
outside the United States where we have mostly the original system that McDonald's
started with and inside the United States where we've gone through two different
operating systems, changes in our grading process to no grading over that period of
time. Changes in our training systems, which are critical to keeping a million and a
half million people up to date on how the McDonald's experience is executed.
So I personally have experienced the compromised food chains of all those changes
we've made over those years. I think it's possible to get back service standards. And
times have been compromised a bit with the latest system. It can be fixed. We're
working on all those things that I have confidence, that when we get all that fixed
over the longer term we will build our customer base back. And that in itself will
have a dramatic impact on our average volumes, et cetera. That's where I'm coming
from. So maybe that puts a little more texture on the new versus old restaurant issue.
It let us introduce this lettuce, tomato hamburger to people who may not have
sampled it before, and it allowed us to advertise nationally a value message to take
advantage of the efficiency and power of national advertising, which is important for
us given how big we are. What we don't like about this, one of the issues that we
have seen a small drop in sales in our signature sandwiches, things like the Big Mac
and QPC. We're not thrilled with that. I have to go back to my own experiences as a
consumer and let's take the discussion out of our industry for a second and talk
about different value offerings to different kinds of customers in other industries.
If we were an automobile dealer, we would offer cars for consumers who wanted to
spend different amounts of money. In our business, we've always said to ourselves,
we want to offer customers the tastes they crave at portion sizes they want at prices
they can afford. When I was coming out of school, I had not that much money in my
pocket, I wanted to buy a Toyota car, I bought a Corolla. When the time came I could
afford a Camry or a Celica. But the point in time came when I could afford a Celica,
but if the Corolla offered as many features and as much power and pizzazz as the
Celica, I would have never paid for the Celica.
One of our issues is that the differentiation in our customer's minds between the Big
and Tasty and our signature sandwiches is not as great as the price difference, and
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we need to do something about that. We're not pleased with the results, and so I
think you'll see us making adjustments. I think everyday value is important. There's
some segment of our customer population who are driven by value. We need to
appeal to those people without causing the people who love the Big Mac and the
Quarter Pounder with Cheese to trade down.
Q - Mark Chowanaowski
Hi. There's two things I wanted to ask about. First, just a clarification. Does no share
buy backs in the first half imply that you're going to do at least $500 million in the
second half or is that imply that the prior $500 million saw that had been spoken
about, that's no longer something we should look toward in 2003 as a whole? The
second question, just in terms of as I go through my model calculating what I think
earnings per share should be in 2003, my understanding is that in a normalized cost
environment, you need roughly 2% seams per sales to hold margins flat. And I want
to make sure that that is truly how you view the business. Thanks.
The issue having to do with how much of a sales boost do we need to see to hold
our margin. The 2% number isn't a bad number, but I have to tell you have to make
an assumption of how you're getting your comp. If the comp you're getting is 2%
because you are the raising prices, you don't need a full 2% to cover the cost
inflation. If the comp you're getting is all coming from transactions, you probably
need that 2% or a bit more.
Q - Mark Chowanaowski
Thank you.
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net numbers about 80. Latin America is about 20 net and Canada is somewhere in
the 70 range. That gets you just over 600 net openings, including traditional and
satellite for 2003. I think we gave you that breakdown. Thanks, our next question
comes from Matthew DeFrisco at GKM.
Q - Mathew Defrisco
Given that some of your competitors are shifting to a cobranding strategy. Can you
give us your argument why we wouldn't see more aggressive stints by yourself, to
sort of make that position with something that could go well with McDonald's on a
mature base to jumpstart sales even more or maybe even rejuvenate the brand. And
secondly, by opening up the new McDonald's stores -- continuing to open up new
stores, should we assume that -- and Chipotle being the only other brand that you're
looking to grow -- should we assume then that you're not seeing the returns yet to
grow faster the Prep brand or Donato's Brand?
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I think you'll see us keep our brands separate for a much longer period of time than
some of our competitors. I also want to remind you, some of our competitors just
don't have the average unit volumes we do, and they have to combine brands to get
the real estate. With respect to the other partner brand, the reason we're not talking
about expansion there is because we haven't seen a consistent unit level economic
picture that we need to see before we can talk about rapid expansion. I'm
specifically talking about Donato's and Boston Market. In Boston Market's case, we
have a pretty good cash on cash return, but we bought most of those stores out of
bankruptcy. We got them at a great price. It's when we build a new store it probably
costs four to five times what we paid to bring each of those stores out of the
bankruptcy, and you need to get higher cash flows before it makes sense to expand.
We targeted a specific unit volume we need to reach before it makes sense to
expand more rapidly. We're not quite there yet.
Q - Mathew Defrisco
Thank you.
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stores in 2003. Although one of the things we like about Chipotle is, in fact, that
expenses are very low, compared to what we have to spend for McDonald's and/or
Boston market. So it doesn't have that much of an impact.
Q - Unidentified Participant
Hi, thanks. I think you brought up Happy Meals in the context of Germany and the
U.K. in terms of some changes that may be coming. Could you talk about any
changes that may be happening to the United States that may be significant, is one
question? And a second one, I don't know if it's obvious, actually, thinking about it.
Would you care to talk about earnings for 2003 just in the context of being flat up or
down relative to 2002 as you think about it? Thanks.
We're open to new ideas. I'm sure our U.S. team will take a look at how these
changes that the U.K. and Germany are putting in work for them and maybe assess
those earnings. I think there are some opportunities to refresh our Happy Meal
program that we may be able to take advantage of. But nothing specific to report on
that at this time.
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We're not going to give any specific guidance as to earnings per share numbers. As I
know you know, we're trying to give you everything we can on important
components, but we're not going to try to predict comp sales, which is probably the
only single item we haven't given you a lot of flavor for. Thanks.
So in terms of what happened in '02, I think we expect the paydown debt levels
somewhat -- we're focused on maintaining a strong credit rating and maintaining as
much financial flexibility as possible. Until we know what '03 looks like, we can't tell
you what somewhat means, but I expect our debt levels to be reduced when we end
2003.
Now -- so, that would be my answer. I think convenience is important to our business,
I think it's a theory that all the sales that were in the stores that closed went to other
stores, which has been put forth by some that that would change my presumption.
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That doesn't happen. We have to be very, very careful about losing our convenience
edge, losing our top line awareness edge by being out in the marketplace where
people work, shop and live. So that's real important to me. So I don't see a scenario
at least today that -- or a strategy that would involve closing a lot of stores and
reducing market share and gaining a solution to what our challenges are.
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interest expense, because we fixed a larger piece of our portfolio, how will that be
offset by the fact that we expect to have less debt by the end of the year?
That unfortunately is a function of how much cash we generate and how much debt
we choose to pay down. I can tell you if we didn't pay down debt our interest
expense would be up, because rates aren't going down and we fixed a larger piece
of our debt portfolio, but I can't tell you the extent of the offset.
As I said before, the problems are positive comparable sales and margin
improvements. And I was looking the other day, if we could just get the customers
we lost over the last few years back in the stores, get comparable sales and
recapture only half our margin, our financial picture would look dramatically
different. So going after from that perspective, which is why I talk about, that's where
our focus is at. Is really going to pay the dividends in the long term. We're going to
be able to do a lot more things after we do those two things.
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negative cashflow stores. Any chance we could get a rough number for savings for
'03. And then on the G&A numbers coming out of the 4th quarter -- the 4th quarter
number was 50 to 100 million higher than the run rate for the rest of '02 depending
on the quarter. Was that all incremental ad costs as well as one-time clean up stuff in
there. I'm trying to get a sense of what the real run rate is.
Q - Troy Hoff
Could you go back to, you were talking about the folks that are out of this system,
and first you try to approve it, and then -- what kind of time frame are you looking for
improvement before you start discussing with them their exiting system?
We seem to know where the restaurants are that have issues. And the ideal is to not
to force the restaurant to turnover. You have to allow some amount of time, probably
a few months, to see if there's improvement. And in some cases, we send
unannounced McDonald's people back in to see how things look after we've given
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notice that it's not working. So it's hard to say there's a time frame. But from this
point forward, two years is way too long, and probably expecting that it's all going to
happen in the next month is way too short just for some perspective.
So by getting away from the grading, we also lost the calibration of standards and
training that might have gone on in the restaurant. All the stuff that Matt talks about,
mystery shops, the 800 numbers, also the new grading procedures, and full-field
procedures really get people the opportunity to improve their business. As I said
before, the great majority want to. There are some barriers out there; they differ
store-by-store. And we want to do the servicing with our owner/operators. But by the
same token, some of it becomes very clearly when you have folks getting measured
twice. And you can move much more rapidly on those that just aren't getting with
the program for whatever reason.
Secondly we saw in the 4th quarter assistance being earmarked for some of the
difficulties in both the U.S. and Europe. And yet both those markets' was less than
2%. So I'm curious as to one, the magnitude and two, what's the likelihood of seeing
those continuing if any -- of any significance going into '03 here. And lastly, Jim, on
the kitchen modifications, particularly revisiting the use of bins, can you give us a
timing as to when you're think thinking about putting those back in? Thanks a lot.
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We know what it is, so we make judgments about that. I think this year really
indicates -- we're still struggling to comps. So that's not -- the new unit opening
program is not the major problem. And I think we have a good handle on
cannibalization. And the front end, Peter, when we're growing the international
marketplace, it wasn't only about openings, it was about dominating the
marketplace, about the seizing the marketplace we talked many years about, and I
think the benefits of that have proven themselves in terms of our position in the
international arena. Today is tight, and it has been for several years. So that's one
perspective on international cannibalization.
On the kitchen stuff I talked about -- that's one of our major priorities, in terms of
service. In my view -- and not everyone agrees with me, service has been challenged
by the system. Now, can it be fixed? Yes, it can. I think this is one of the major layouts
we have. Our taste issues. So it depends how soon. There are 30 stores right at the
moment. I don't know that the bin is the only way to solve this problem; there are
other initiatives that go directly at surface and basically have food ready when it's
ordered. Things such as an anticipator, which was built into the made-for-use system
but never used. It has its challenges. It may end up with anticipated sandwiches in
the landing area that we have now, but that is the top priority, because in my view
that is going to be the biggest thing to solve our service challenges.
Earlier in the call we talk about the dollar menu, what we liked and what you didn't.
Certainly there was a tradedown to big and tasties, we're going to be re-examining
that, and I assure you that our customer, owner/operator and shareholder
perspectives will be brought to bear on this decision. And the fact that we had to pay
more downside assistance than we wanted to or expected to will be a big factor in
what we decide to do with it.
Q - Mark Mccoviak
Can you hear me?
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Q - Mark Mccoviak
My question really goes back to a comment made earlier regarding balance
between a cash cow and a gazelle, and then thinking back to when management
was visiting analyst investors in the fall. And I think a pushback on why you could not
change the roughly 1.9 of CapEx in '03 that a lot of it was committed and spoken for.
You can't back out of commitments and change things so quickly. And I'm trying to
think, I know we've got a lot on our plates here in '03, but thinking past '03. If you're
still a business that can generate 3 billion roughly of operating cashflow preCapEx,
predividend, preshare buy back, how would you feel so fiercely about what you're
doing with that cashflow?
Regarding the cashflow we generate, I think our message today is pretty clear. We
have a new management that's been here for 22 days, and we don't want to make
firm commitments as to how we're going to allocate the 3 billion or so of cashflow
we generate in '03. We're rethinking a lot of things, we're rethinking the 1.9 not
going up. The issue is, if it's smaller, how much smaller will it be, and we're
rethinking what we can do with share repurchase. Unfortunately, I don't think we can
share a lot of details with you right now.
Q - Unidentified Participant
To follow-up on your statements, the closings in the U.S. and Japan, when you look
at the charges, the largest restaurant closing and asset impairment charges in
Europe. Can you give us details on that? And then a follow-up, you talked about
cashflow negative stores, assuming they're company-run stores, can you give us an
amount of that negative cashflow? Thank you.
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And in the U.S. we have some satellites that were closed that would have a much
smaller first-store class. And then -- we forgot the second part of your question. It
was the -- oh, for the -- to the extent that those were company-operated restaurants -
-
Thanks a lot for joining us. I'm looking forward to talking to you again.
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