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Heard on the call: McDonald’s Corp.

Company provides update on remodelings, beverages and consumer trends

McDonald’s Corp. touted its third-quarter earnings results not only for the 6-percent rise in global same-store sales, but also for healthy growth in operating income in all areas of the world.

Operating income rose 7 percent in the United States, 3 percent in Europe and 22 percent in its Asia/Pacific, Middle East and Africa, or APMEA, division.

Chief executive Jim Skinner, chief financial officer Pete Bensen, and president and chief operating officer Don Thompson told investors that the quarter’s robust results resulted from a focus on growing the top line. They said those efforts would continue into 2011 as McDonald’s looks to stay relevant with remodeled restaurants, new products and improved efficiencies.

READ MORE: McD's barbell strategy drives 3Q sales

Bensen said McDonald’s was “encouraged” that its traffic growth was 50 percent greater than its comparable sales through September. Other highlights from a conference call with investors included:

Restaurant remodelings

“With our cash from operations, the first priority is to reinvest,” Bensen said. “We have slightly trimmed our capital expenditures this year from $2.4 billion to $2.3 billion, and that was a purposeful reduction.”

Approximately half of those expenditures would be spent on remodeling about 1,800 restaurants worldwide, he added.

In the United States, 40 restaurants have completed their concurrent interior and exterior remodels, and another 300 units are expected to finish in the next six months, the executives said. Bensen added that “while it is still early, given the small sample size,” the preliminary sales results of the refurbished restaurants are in line with or better than the company’s estimates of 6 percent to 7 percent incremental sales gains.

“We’re encouraged by the support of our owner-operators leading this transition,” Bensen said.

Elsewhere, 500 units have been reimaged in Europe, and that region plans to have 90 percent of its interiors remodeled by 2012. In the APMEA region, where Australia is “virtually 100-percent reimaged,” Bensen said, remodels are focused primarily on China and Japan.

“We’ll use the rest of our capital expenditure to open about 1,000 new restaurants this year, with approximately half of them in APMEA, particularly in China,” Bensen said. “The United States already has opened 100 restaurants and is well on its way to 150, and about 100 restaurants will be opened in Latin America and Canada.”

The executives noted that the decelerated pace of reimagings in the United States, from an initial goal of 400 to 500 down to a target of about 200 remodels for 2010, reflected a desire to go slow and get it right, despite a balance sheet that could have allowed for more robust development.

“In the U.S., we’ve benefited from watching France and Australia move forward [with these remodels],” Thompson said. “We took those ideas from those markets and employed them in the U.S. designs. Also, these remodels are internal and external at the same time … so we consciously slowed down and revisited the designs.

“When we looked at the results in Australia and Europe, we noticed the second and third years have been very positive [regarding comparable sales], mostly around what they’ve allowed in terms of menu. We know as we get more done, there’s a broader synergy from a consumer awareness perspective, and the franchisees are ready to be more aggressive with this.”

World-beating beverages

Thompson said McCafe Frappes and Real Fruit Smoothies continue to exceed sales expectations and that, even though some fall-off is expected as the weather turns cooler, McDonald’s would continue its promotional support for the drinks while drawing sales growth from across the menu board.

“Frappes and smoothies have some seasonality to them, but that was baked into our model as we look at sales contributors,” Thompson said. “Breakfast is a strong contributor in the U.S., and we still have lots coming from Angus. There will be additional media and continuous weight of media to Frappes and smoothies, and we’ll be marketing McCafe coffees as well. Plus, the McRib is coming on nationally in November, which we’ve never done before. The U.S. plan is solid, and we’re looking forward to a strong 2011.”

McDonald’s operators and franchisees in many areas of the world, particularly Europe, are contemplating bringing the high-margin Frappes and Real Fruit Smoothies to their systems, Thompson added.

Keeping traffic moving

When asked if McDonald’s could maintain its growth in profit margins, the executives stressed that comparable-sales growth in the United States of 2 percent to 3 percent in times of normal inflation and wage increases typically ensures margin growth, and they planned to maintain that by increasing guest counts.

“We’ve focused on top-line growth and ensuring gains in traffic, and the rest tends to take care of itself,” Skinner said. “That doesn’t mean we’re not smart about our pricing, but we play it as it lies and control what we’re able to hedge. The concern I have with all our segments around the world is, what are we doing to continue to drive the top line and preserve traffic increases?”

In Europe and the APMEA region, one of the key opportunities for top-line growth is the drive-thru, the executives said. The drive-thru accounts for about 45 percent of sales in Europe, compared with 67 percent of sales in the United States, so the company would look to increase the percentage of restaurants equipped with drive-thrus outside the United States and to increase throughput efficiencies at the window at all its locations worldwide.

Skinner stressed that plenty of attention would be paid to efficiencies within the dine-in experience as well, especially with the adoption of a new point-of-sale system in the United States, which is meant to speed ordering times, simplify processes for the restaurant crews, and allow for some new applications like hand-held ordering. Other dine-in improvements like free Wi-Fi and a bolstered snack lineup aren’t meant to cannibalize sales from the drive-thru, he added.

“Those could possibly change the mix over time, but that’s not why we pursued them,” Skinner said. “We did it to offer those for convenience and to be relevant to lifestyles today. I couldn’t make an argument for a change in drive-thrus, because customers are on the move all the time.”

Contact Mark Brandau at [email protected].

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