McDonald's Corporation (MCD) Q4 2011 Earnings Report, Transcript and Summary

Kathy Martin - James A. Skinner - Vice Chairman, Chief Executive Officer and Chairman of Executive Committee Peter J. Bensen - Chief Financial Officer and Executive Vice President Donald Thompson - President, Chief Operating Officer and Director

Michael Kelter - Goldman Sachs Group Inc., Research Division David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division David Palmer - UBS Investment Bank, Research Division Joseph T. Buckley - BofA Merrill Lynch, Research Division Jason West - Deutsche Bank AG, Research Division Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division Jeffrey Andrew Bernstein - Barclays Capital, Research Division John S. Glass - Morgan Stanley, Research Division Larry Miller - RBC Capital Markets, LLC, Research Division Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division John W. Ivankoe - JP Morgan Chase & Co, Research Division Keith Siegner - Crédit Suisse AG, Research Division Phillip Juhan - BMO Capital Markets U.S. Andrew M. Barish - Jefferies & Company, Inc., Research Division

Hello, and welcome to McDonald's January 24, 2012, Investors Conference Call. At the request of McDonald's Corporation, this conference is being recorded. [Operator Instructions] I would now like to turn the call over to Ms. Kathy Martin, Vice President of Investor Relations for McDonald's Corporation. Ms. Martin, you may begin.

Thank you. Good morning, everyone. With me on the call are our Chief Executive Officer, Jim Skinner; Chief Financial Officer, Pete Bensen; and Chief Operating Officer, Don Thompson. Today's conference call is being webcast live and recorded for replay via phone, webcast and podcast. Before I turn it over to Jim, I want to remind everyone that, as always, the forward-looking statements in our earnings release and 8-K filing also apply to our comments, and both documents are available at www.investor.mcdonalds.com, as are reconciliations of any non-GAAP financial measures mentioned on today's call with our corresponding GAAP measures. Now I'd like to turn it over to Jim.

Thank you, Kathy. Good morning, everyone. I'm pleased to report a strong fourth quarter and another strong year for McDonald's in 2011. 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 7 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 1- and 5-year periods ending in 2011. The global economy remains challenging with a recovery that's predicted to be slow and prolonged, and our industry still faces significant headwinds, including flat to slow growth, low consumer confidence and volatile commodity prices. Amid all this, we remain committed to the Plan to Win and elevating our efforts around the 5 Ps of our business: people, products, place, price and promotion. We still have plenty of growth through the Plan to Win, and we're seizing those opportunities with a focus on our global priorities of optimizing the menu,…

Thanks, Jim, and hello, everyone. As our fourth quarter and full-year performance demonstrates, McDonald's global business is resilient and fundamentally strong, operating effectively across varying markets and economic conditions. Our ability to continue to generate positive comparable sales, combined with prudent expense control amidst an inflationary environment, drove a 60-basis-point improvement in combined operating margin for the year, with every area of the world contributing. 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% franchise, and our overall profitability is driven primarily by franchise margins. For the full year, consolidated franchise margin dollars increased 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-operated 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 flipped 70 basis points for the full year, as positive comparable sales were more than offset by higher cost, 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 has 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…

Thanks, Pete. I'm going to now open the call for analyst and investor questions. [Operator Instructions] Our first question comes from Michael Kelter from Goldman Sachs.

I wanted to ask about the U.S. specifically, which, on a 2-year basis, accelerated to the highest level in years, so that equivalized [ph] for any of the weather impact. And I wanted to understand more about what you perceive to be the primary drivers. And the reason I ask is, in my opinion, the 2012 MPT [ph] pipeline seems maybe a little lighter than last few years. And I'm curious if you think you could sustain the high level you've established mostly based on the core. Or secondarily, as part of this question, is there maybe something in the pipeline that's more meaningful for the back half of the year, 2013 maybe, that you're internally excited about and not just -- you're not talking about yet?

Well, Michael, this is Jim, and then maybe Don would like to talk 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 and 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 McCafé 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.

Michael, in the U.S., several major drivers. One of which has been consistent over the last several years is breakfast, continues to drive the business, not just from a value component perspective but also even in some of the new product entrées such as oatmeal. We continue to see leverage from some of the McCafé-based beverages, even the blended ice beverages, which are 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., and not just 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 a 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.

Our next question comes from David Tarantino from Baird. David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division: A question on Europe. And, Pete, I know you mentioned all the issues and austerity measures and low consumer confidence in December, yet your comps ended the year on a high note. So I was just wondering if you could maybe comment on the underlying tone of business and whether you're starting to see any signs that the consumer is starting to pull back as you parse through your data, either in your internal data for McDonald's or as you look at the market conditions.

Yes, David, this is Jim. I'll just give you an overview from my vantage point. You've already talked about all the bad news in Europe, and certainly, there are a number of issues there that we have to deal with in terms of headwinds. But I think regarding the McDonald's brand, despite negative market momentum, McDonald's continues to show increases in both informal eating out and the QSR share. We continue to take share in those marketplaces. And sales have been solid. Our value, convenience and overall business model continues to serve us well there. We're positioned well with branded affordability, strategic menu price increases in premium products across the board in Europe. And as I've said many, many times, I think that our business model serves us well in any environment, as long as we propel ourselves through that time period with the proper level -- levers in our business. The most important thing right now around the world, and has been, really, if you look at it for the last 8 to 9 years, is everyday affordability on the menu, coupled with premium sandwiches and fourth-tier menu items in that marketplace that continue to serve us well, along with the reimaging. We've not stood still. So if you look at the contemporary nature of our brand in that market during what one could term a very, very difficult economic downturn, which we've had before in Europe -- this is not the first time we've gone through this -- McDonald's continues to push forward on behalf of the consumers in those marketplaces, and it continues to serve us well. Now relative to parsing the data, which is something that Pete would do, maybe he has some other information that might differ from my opinion.

No. David, I think Jim gave a good overview. And in terms of looking at things like menu mix or product change, we're really seeing no change in customers' behavior. The premium food events and fourth-tier items continue to sell extremely well, and that happened throughout the fourth quarter.

Your next question is from David Palmer from UBS.

A quick question on margin leverage at the restaurant level. Certainly, this was a year that the franchise revenues and the G&A and just your top line accelerating through the year with inflation and innovation, those were the big drivers. But company margins haven't been in the game here. Do you expect 2012 to be perhaps a year when your price catches up to inflation, particularly with the momentum you have, and you start to see more leverage at the company restaurant level?

David, this is Jim. Is that a pricing question? Or is that a...

It's a company -- are you going to just -- are we going to see margin leverage at company restaurants in 2012? But maybe directly, you're not going to answer that. I'm just wondering if the balance is going to improve because, I mean, certainly through the fourth quarter, we weren't seeing leverage on that part of your business yet, particularly in Europe.

I'll let Pete talk a little bit about the margin leverage.

Yes, David, specifically about Europe, as we head into 2012, based on the guidance we've given, so we expect commodity cost increases to be lower in Europe compared to 2011. Some of these incremental austerity measures, so the increased social charges and some of the other taxes that are hitting the restaurants, those are going to be -- while we'll have some new ones, the magnitude of those will be lower than we saw in 2011. On the negative, if you will, it's an uncertain pricing environment there. So while we mention these things that are happening to the consumer, we're still optimistic we'll be able to take some price. But when you throw all that in the hopper, I think on a trend basis, compared to 2011, we have an opportunity in Europe to finish this year better trend-wise than we did 2011. The U.S. looks more like a similar year to 2011, frankly. Cost increases are going to be similar. We're -- 7 states hit us with minimum wage increases here, January 1, in the range of 4% to 5%. And again, while we'll take a similar philosophy and approach to our pricing throughout the year, food at home is expected to be up 3% to 4% this year; food away from home, 2% to 3%. And those are kind of some guide rails we look at. So again, factoring all that in, it feels pretty similar. But on a consolidated basis, the margin trend should be a little better than it was in 2011. But I did point out specifically in my comments that it's going to be a little choppy in the quarters. And then the first quarter, we're going to see the highest increase in commodities for the year.

And next question is from Joe Buckley, Bank of America Merrill Lynch.

Wanted to ask 2 things actually, the China same-store sales number for the quarter. And then sort of similar to the question about Europe, curious if you're seeing anything encouraging on the U.S. consumer's part in terms of this very strong U.S. performance. Any change in pattern or mix or anything of that sort?

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.

Joe, and on the U.S. consumer side, just from -- and I'll reference this from a purchase perspective in the U.S. They'll come with 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 a 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 know that the P mix [ph] is pretty solid. We do see 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.

Our next question comes from Jason West from Deutsche Bank.

Just 2 quick ones. I guess, first, if you could parse out the weather impact for us as you did last year in Europe and U.S. And then, any color on the timing of some of the new products that you've announced such as McBites or the oatmeal or maybe smoothies, internationally. I'm not sure where you guys stand on that timing.

Jason, the weather impact, we talked about last year having like a 2-point impact in the U.S. and a 5-point impact in Europe in December. So that's basically what we overcame this year and what benefited this year's -- or 2011 December. Regarding new products, Don, you want to take a stab at that one?

Kind of real quick across the board, in terms of new products we see on the beverage front, Australia just launched smoothies. And so we're taking a good read of that. They've got some pretty good volume on the first launch of that. We see some of the other premium sandwiches, particularly the wraps that started off in Austria and Poland -- those are really traveling around Europe quite aggressively. We see, also, the ability for us -- we're seeing a little bit more of some of the premium sandwiches that Europe has had also stretching into some of the Asia/Pacific, Middle East markets a little bit. Probably, the biggest of all of the menu pieces, I would say, is breakfast. Breakfast is beginning to circulate around the rest of the world. We're starting to see some changes. The U.K. is up to about 14% and Germany is at about 5%. So if you look at the U.S., relative to 25-plus percentile, you begin to say, "Wow. There's some tremendous opportunity there." So we got a lot of room still in breakfast products, the premium sandwiches. Wraps are traveling. McBites are in the U.S. from Australia and smoothies and beverages are traveling around the world. So those things are going to continue. Not everyone is going to launch smoothies in 2012. It'll be kind of stretched out over several years around the world.

Jason, specifically about the McBites, we launched that product nationally yesterday. So you'll start to see national advertising for that. And that's a limited time promotion that will be around for a couple of months.

And our next question is from Diane Geissler from CLSA. Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division: I'm not sure if you've covered this, but could you break down the drivers of the comp growth? Whether it was -- I think you talked about traffic being up, but was there pricing in there as well?

Yes, Diane. This is Pete. Specifically in the U.S. for the year, we had about a 3% price increase spread throughout 3 different price increases that we took. Europe, if you exclude Russia, which had pretty high inflation, we averaged about a 2% increase throughout the year. And in APMEA, across the various markets, again, various amounts and various timings, we averaged about a 4% increase.

Our next question comes from Matt DiFrisco from Lazard.

Pete, if you can help us just understand. In modeling out, looking at the other income line, I was under the impression that was maybe going to start to tail off. But looking at the components of it, I guess the equity line, or income from equity investments, looks like it's coming in a little stronger. And 1Q, obviously, with the tail end of that having the disaster in Japan, should we start looking for the other income line to be more reflective of what we saw in 2010 1Q rather than 1Q '11? And then sort of drawing into that as well, while we're over in APMEA, looking at your margins, you mentioned a little something about the store growth starting to weigh -- the China growth starting to weigh on the margins over there. Is that going -- but it might reverse. I was wondering, can you give us some color on why that would reverse? Or what are going to be the key drivers of that even though growth is going to be relatively strong still?

All right, Matt. Other op is really a -- there are a lot of items impacting that. But you specifically talked about equity and earnings. A couple things this year, obviously, we had the stronger yen. So our -- that's an as-reported number that we put in there. So we were getting some FX benefit from the stronger yen. Yes, in the first quarter, I would expect our performance in Japan will be better than first quarter last year. But remember, the tsunami hit in March. So we had 2 pretty good months of performance already in Japan before that hit. So in total, in that line, I don't think it's dramatically different trend-wise. Regarding China, I didn't say it was going to reverse. What I said was that, that impact is temporary. And so what I'm getting to there is we had a large jump in non-comp stores this year relative to last year as we accelerated the new store openings. And yes, we're going to continue to increase new store openings. But as we do that, the comp store base is larger. So the impact of accelerated new stores on the total base will become less, and at the same time, those new stores should be coming on at higher volumes as the market averages grow. And therefore, the new-store impact should be moderating as well. So hopefully, that clarifies that comment.

Our next question is from Jeff Bernstein from Barclays.

Just one clarification on Europe and then a separate question. Just specific to Europe, you mentioned not seeing any change in mix despite the austerity measures. And correct me if I'm wrong, but I believe that was similar to the message you sent related to the U.S. over the past couple of years. Just wondering, when you think about Europe, do you think of it similar to the U.S. in terms of consumer behavior and use of the quick service offering? Or perhaps is the European offering more premium? And therefore, would there be any particular regions that are more or less susceptible, you would think, to the ongoing austerity measures? And then just as the aside, on the balance sheet, you obviously mentioned a strong financial positioning. I didn't know if there was any update on whether there's room for a leverage opportunity while maintaining your rating and returning more cash to the shareholders.

Jeff, this is Don. I'll take the first part of that on mix due to austerity and then I'm sure Pete will take the next one on leverage. The challenge with Europe is there's not one -- as you all know, there's not one country called Europe. So it's very different across the various markets. And let me give you perspective. Spain's at 22% unemployment. Have we seen a shift in terms of P mix [ph] into Spain to more value-based products? Yes, we have. But what Europe's done a really great job of is also adding in the premium-level products. So we still get some balance, so that we're not tremendously eroding margins. If you go to some other markets, better yet the upcoming year with Portugal, Pete talked about some of the VAT increases. We expect we'll see the ability to have a stronger value presence as well as a mid-tier presence in a market like Portugal. On other extremes, a market like France, France has been able -- and Germany have been able to implement some premium-based sandwiches. And although the German consumer is a little tighter relative to the expenditures, products like -- and Jim talked about Hutengoutie [ph], big beef sandwiches. Those things can sell a little bit better in those type of markets. The U.K. has movement across all price tiers. So when we talk about whether or not the mix will be affected due to austerity, I think there's 2 different things. One is what we do in those markets relative to our marketing messages and our value offerings, that helps us to modify our mix just a little bit. The other thing is Europe has done a great job on the premium-based products. And so the 2 of those things have helped us to manage through margin pressures a bit. But in a broader sense, it's helped us in terms of generating income.

And regarding leverage, Jeff, as we have the last couple years, our assumption for 2012 is that we will increase debt -- our debt levels. And our interest rate assumptions for 2012 assume a couple of different scenarios: one a more modest increase in debt, and one a little higher increase based on the range of business performance we see. And as you point out, all within the context of staying within the credit metrics and the credit ratings that we enjoy today.

And our next question is from John Glass from Morgan Stanley.

Pete, while I know you don't talk about earnings growth targets specifically, it seems that at the enterprise level, in 2012, there are number of items that in aggregate may create some drag. Those include the investment spending in SG&A, higher interest expense. We've got a higher tax rate now. It seems like it's hitting a new sort of higher level. Then of course, we've got things like foreign exchange and commodities, which are at least at U.S. -- levels in the U.S., experienced in '11. So I guess 2 questions for you. One, do you agree with that, that there may be a depressed level of earnings growth in '12 versus '11 given all -- the confluence of all those factors? Are there any offsets that you see that we're not seeing right now, so that maybe that's an incorrect assumption? And maybe can you also just talk about which of those features that I talked about are permanent? In other words, do you expect G&A spending beyond '12 to remain at these levels? Do you expect the tax rate beyond '12 to also remain at these levels?

Well, John, one of the things we said at the investor conference was that despite these items that you mentioned, that we expect our earnings to be consistent with our long-term targets. And that's one of the things we've committed to and something we feel pretty confident about. The G&A, we indicated an incremental $100 million for the technology, the convention, the Olympics. And that kind of magnitude of growth, growth of that magnitude, we do not expect to continue. Currency is one of those things that we look at over time as being neutral. You're going to have positive years and negative years. That's why we like to look at our business x currency for our internal reporting. But obviously, it does impact our reported EPS. And the tax rate, I'm not sure that we've necessarily set a new high, but it's something we obviously continue to look at around the world, how we can minimize our tax rate. You may recall, 2 years ago, they took away a tax credit -- foreign tax credit that was providing a little more than 200 basis points of improvement to our rate. And we've been looking at opportunities to get some of that back, and I'm confident we'll be able to.

John, this is Don. Just I think we have to keep in mind as well, we drove a lot of demand. 60-plus percent of our growth was due to increased demand in the restaurants. So while we talk about some of the limiting factors associated with cost or taxation, the thing that we continue to strive for is to make sure we continue to bring in additional customers into the restaurants. So when you see at U.S. with great guest count movement and sales, when you see Europe and Asia/Pacific, Middle East, Africa, China, even our Latin American markets with the high inflationary environments that they're in, continuing the growth guest counts -- as long as we can continue to do that and appeal with compelling offers, the top line portion of that -- and manage the margins effectively, we'll still be able to drive this business forward. And that's what we've been doing for the last several years.

Our next question is from Larry Miller, RBC.

Jim, I think you mentioned one of the plans for the U.S. is to build capacity. And clearly, new POS is part of that. I'm not sure if there's other operational initiatives out there. But I was just wondering if you were -- or Don can talk about the order of magnitude of that opportunity. I guess, it's around speed of service.

Well, I wouldn't tell you exactly what the magnitude is. It varies by marketplace and by restaurant, of course. I think the important thing to understand is that increasing capacity, particularly during peak hours in our restaurants, is critical for us to be able to continue to grow guest counts and grow the top line. And we've done a number of things to facilitate that. You talked about the POS. We talked about multiple ordering points. But scheduling, planning and positioning, the blocking and tackling in the restaurant, with an attitude of serving more customers during those peak hours, is probably the most important thing. It's not rocket science. It takes the managers and crew being positioned properly, having enough staff there to take care of the demand that Don talked about. And it's been a mission at McDonald's, the 40 years that I've been here, to continue to do that better and better every year and every day. And so when you see us go from 64 million customers a day to 68 million customers a day, that throughput is coming from facilitation that I've just mentioned. And we're very excited about the number of things that we're able to bring to the party. But it's not all technology. A lot of it is simple things like proper scheduling, positioning and then planning for your shift, planning for that time period from 11 to 1, for example, to be able to facilitate faster service, and fast service begets more customers.

Our next question is from Sara Senatore from Sanford Bernstein. Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division: You've talked a lot about some of the menu initiatives. I want to go back to a comment you made about breakfast, basically, just talking about what you can do in the stores as a comp driver. So could you either anecdotally or maybe more systematically talk about some of the things like the opportunity for, in Europe in particular, drive-thru, late-night, 24 hours. And then maybe in the U.S. and also in Europe, as you approach some of these fairly high rates of reimaging -- so 90% of interiors in Europe. You've accelerated in the U.S. -- how should we think about that? Is that a diminished benefit to comps? Because if you were -- reimages as a percentage of the store base? Or is it enhanced because of the kind of the critical mass that you always talked about?

Sara, I'll try to take a cut at several things in there. Real quick on the U.S. relative to reimaging, I mean, if you really think about it, we're just getting started. We were able to do a couple of hundred in 2010 and then 900-plus in 2011. We have a lot of opportunities still left. And the returns that we're seeing, as we've talked about to you guys, have been very strong. Relative to some of those other things -- and I just call it multiple drivers. So in Europe, drive-thru. So 63% of the restaurants that have drive-thrus, about 46% of sales in those restaurants. That's only 30%. When you look at that relative to a U.S. business that is in the upper 60 percentiles overall, we have a lot of room to go. And a lot of it has to do with what Jim just mentioned, which is staffing, scheduling, positioning, as well as the physical plans that we have. So we're doing more dual-lane drive-thru, more handheld order taker, kiosk opportunities in France and other areas. So those kinds of things in Europe. Breakfast, if you look at Europe in terms of the number of restaurants that we have serving breakfast, we have a long way to go. APMEA is probably moving forward in that direction a little quicker. We got about 70-plus percent of our restaurants that serve breakfast in APMEA -- across APMEA. But you've got certain markets that have really made a big jump. Malaysia, as an example, China. So we have good focus in Japan now on breakfast. So I think when you look across the board, those kinds of things will be big, as well as, you mentioned it again, extended hours. So we'll keep focusing on all of those opportunities. We have a lot of headroom left around the world in those areas.

Next question is from John Ivankoe from JPMorgan. John W. Ivankoe - JP Morgan Chase & Co, Research Division: Actually the question is on franchise margins. And I guess, maybe we could focus on U.S. and Europe. Is there anything that structurally prevents those margins from continuing to rise? And I ask that in terms of presumably, when you -- remodels are costs that get reflected into -- in the franchise margins as a cost, but there might be other things such as franchisee renewals and even, from your perspective, renewal of the underlying lease that the franchisees occupy. So there's a few different moving pieces that might be within that. But I guess, Pete, just hoping that you could comment on whether franchise margins can continue to expand with sales, which would be, I guess, the simplest way to think about that.

Yes, John. Yes is the short answer. You did mention a couple of things on the cost side that do impact it. So some higher depreciation if we're reimaging, potentially some higher underlying occupancy costs if we have a lease site and the rent is going up. But because a great majority of those franchise expenses are fixed, we get tremendous leverage by growing comps. And so if we continue to grow comps the way we expect we will, we believe franchise margins can continue to expand.

Our next question comes from Keith Siegner from Crédit Suisse. Keith Siegner - Crédit Suisse AG, Research Division: Another question about Europe, actually, and more from the perspective of an opportunity. The Olympics this summer, being in London, this the first time in a long time they're being hosted in a truly major market for McDonald's, and definitely since the brand -- I mean, both food and box have been so relevant and resonating so clearly. I mean, how big an opportunity is that this summer? And how do you approach that, this opportunity? Does it influence the timing and the approach of the marketing? I know you probably don't want to get into specifics, but is there anything you could talk about how this Olympics might be different than some of the others in the past?

Well, Keith, this is Jim Skinner. I heard your comment on this yesterday on CNBC, by the way, and thanks for the positive plug. But yes, it's an enormous opportunity for us. There's not a lot different about it except to say that it's sort of in the proper time zone, if you will, being in London and being in Europe. And so that you get viewing audiences from the U.S. and from all across Europe. And so that's good for us. Our success with the Olympics is always about the implementation of our efforts on the ground through all of this. We have all of our programs in place today to take advantage of opportunities for our crew people and the local communities to participate with the athletes, in many cases, and being associated with the Olympics and the Paralympics. We also, of course, are going to have 4 restaurants right there on site. We always do a great deal of business and have the brand front and center regarding that. And of course, the overall integration of these planning processes across the United States and around the rest of the world in conjunction with the Olympics is really the linchpin to the success of a particular Olympic event. And we're very optimistic about the plans that we have in place to do that. I'm hearing a lot of good news out of London, and the team there is doing a tremendous job preparing themselves for execution around this Olympics. And we expect great success. And as you know, we've signed just signed up through 2020 now. Don Thompson was just in Austria to execute that agreement. And we're excited about the association with the Olympics well into the future.

Next question comes from Phillip Juhan from BMO Capital.

Just thinking we'll get the food cost margin in the fourth quarter, I know you guys have guided for 4.5% to 5% food cost inflation. And it looks like, perhaps based on our calculations, that food cost, that food basket inflated at a slightly higher rate in the top end of that range. If that indeed was the case, can you discuss some of the more meaningful variances to plan?

Phillip, for the U.S., we finished the year at 4.9%. So almost right in the middle of that 4.5% to 5.5%. And as we talked a lot throughout the year, beef was probably the biggest variable for us. Traditionally, you would see some of the beef prices come down after the summer months, and we didn't see that traditional decline in beef prices. So we have frankly ended the year with beef costs up in the mid-teens. And as we look at our guidance for 2012, we've built another mid-teens increase for beef, expecting that the dynamics in the marketplaces that we see and are expecting will continue.

And our last question now is from Andy Barish from Jefferies. Andrew M. Barish - Jefferies & Company, Inc., Research Division: I was actually right along the same lines in terms of a little bit more color on the U.S. commodity basket, and Pete, you provided a little bit of that. Maybe then just dovetailing into that, does that impact anything you guys are anticipating doing on a promotional product basis this year? We obviously saw a lot of chicken last year. Does that continue to be an emphasis? And where do you think chicken prices will be for 2012?

Andy, I'll talk a little bit about the pricing and Don can talk about some of the promotional activity. But we don't want to get into individual components. Beef was the most significant, so I call it out. Chicken is much more manageable in terms of the price increase that we expect in 2012. And the only other thing I'll say about the commodities is, different from prior years, more of the hedges this year were done using option contracts which allow us to participate in some of the downside. So as you know, for the price of chicken, around 40% of the cost is the cost of the feed. So hedging the grains is a big piece of controlling those chicken costs. And with using some of these option contracts, there is a potential, if the grain markets decline, that we'd come in a little more favorably than we expect on that. But certainly, the numbers we've given you assume the contract prices, and assume, as I mentioned, that mid-teens increase in beef.

Andy, and relative to the promotional calendars, we try to take into account some of the commodity movements. But sometimes, they're so volatile that by the time you plan something out, which is typically at least 8 to 12 months ahead of the time that you all see it on the calendar, we don't have the level of flexibility. But the reason that we do McRibs when we do McRib and we look at some of the chicken-based products when we look at us some of the chicken-based products is part of our attempt to look at when those commodities are at their high points and make sure that we stay away from those time frames. But in a volatile economy and volatile commodity marketplace, that's a little difficult. So what we try to do is make sure that, even with the range of price change, that the food cost itself won't prevent us from being able to sell these products and have some decent margin at a restaurant level.

All right. That concludes our Q&A, so I'll turn it over to Jim, who has a few closing comments.

Thank you, Kathy. Thanks, everyone, for joining us this morning. In closing, I want to reemphasize the fundamental strength of our global business. Looking ahead, we remain optimistic that we can continue to drive results in any environment. We'll execute our proven customer-focused Plan to Win while strategically managing through the market forces around us. With our entire system aligned and committed to the success of the brand, I'm confident we'll keep delighting our customers and achieving our revenue income and return goals. Thanks to all of you, and have a great day.