McDonalds 2007 Annual Report Download - page 28

Venezuela and 13 other countries in Latin America and the
Caribbean to a developmental license structure. The Company
refers to these markets as “Latam.”
Based on approval by the Company’s Board of Directors
on April 17, 2007, the Company concluded Latam was “held
for sale” as of that date in accordance with the requirements
of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets. As a result, the Company recorded an im-
pairment charge of $1.7 billion in 2007, substantially all of which
was noncash. The charge included $896 million for the differ-
ence between the net book value of the Latam business and
approximately $675 million in cash proceeds received. This loss
in value was primarily due to a historically diffi cult economic
environment coupled with volatility experienced in many of the
markets included in this transaction. The charges also included
historical foreign currency translation losses of $769 million
recorded in shareholders’ equity. The Company recorded a
tax benefi t of $62 million in connection with this transaction.
As a result of meeting the “held for sale” criteria, the Company
ceased recording depreciation expense with respect to Latam
effective April 17, 2007. In connection with the sale, the Company
has agreed to indemnify the buyers for certain tax and other
claims, certain of which are refl ected as liabilities in McDonald’s
Consolidated balance sheet totaling $179 million at year-end
2007.
The buyers of the Company’s operations in Latam have
entered into a 20-year master franchise agreement that requires
the buyers, among other obligations to (i) pay monthly royalties
commencing at a rate of approximately 5% of gross sales of
the restaurants in these markets, substantially consistent with
market rates for similar license arrangements; (ii) commit to
adding approximately 150 new McDonald’s restaurants over the
fi rst three years and pay an initial fee for each new restaurant
opened; and (iii) commit to specifi ed annual capital expenditures
for existing restaurants.
In addition, we transitioned another fi ve small markets in
Europe with a total of 24 restaurants to the developmental
license structure in 2007.
We also made progress franchising certain Company-operated
restaurants in key markets. As a result of our developmental
license strategy and franchising initiatives, the percent of
franchised and affi liated restaurants worldwide increased
from 74% at year-end 2006 to 78% at year-end 2007.
Highlights from the year included:
• Comparable sales increased 6.8% building on a 5.7%
increase in 2006.
• Systemwide sales increased 12% (8% in constant currencies).
• Company-operated margins reached an eight-year high
of 17.3%. Franchised margins were 81.5%— a level not
achieved in over ten years.
• Cash provided by operations totaled $4.9 billion and capital
expenditures totaled $1.9 billion.
•
The Company announced that for 2007 through 2009, we
expect to return $15 billion to $17 billion to shareholders
through share repurchases and dividends, subject to business
and market conditions. In 2007, the Company raised its
annual dividend by 50% to $1.50 per share, or $1.8 billion,
and repurchased 77.1 million shares for $3.9 billion, driving
a reduction of over 3% of total shares outstanding at year end
compared with 2006.
• One-year ROIIC was 49.9% and three-year ROIIC was 39.4%
for 2007.
Outlook for 2008
The McDonald’s System is energized by our current worldwide
momentum. We intend to build on this momentum by continuing
to execute our Plan to Win with its strategic focus on our
customers and restaurants while exercising disciplined fi nancial
management. As we do so, we are confi dent we will continue
to meet or exceed the long-term fi nancial targets previously
discussed.
We will continue to drive success in 2008 and beyond by
leveraging key consumer insights and our global experience,
while relying on our strengths in developing, testing and im-
plementing initiatives surrounding our global business drivers
of convenience, branded affordability, daypart expansion and
menu variety.
In the U.S., our key areas of focus will be breakfast, chicken,
beverages and convenience. In 2008, we expect to build on our
breakfast momentum and at the same time extend our leadership
in the chicken category with the launch of the Southern Style
Chicken Biscuit Sandwich for breakfast and the Southern Style
Chicken Sandwich for the remainder of the day. We will also
continue to provide value and convenience to solidify our
connection with consumer lifestyles. In addition, as part of a
comprehensive, multi-year beverage business strategy designed
to take advantage of the signifi cant and growing beverage
category, we will begin introducing hot specialty coffee offerings in
2008, on a market-by-market basis. It will not be until late 2009
when we will begin to recognize the full sales benefi t of
our beverage opportunity. This fi rst component of our beverage
business may require construction, new equipment, new
processes and training in our restaurants; all of which will
serve as a platform for the anticipated future introduction of
smoothies, frappes and other beverage options.
In Europe, we plan to strengthen our local relevance using a
tiered menu approach featuring premium selections, classic menu
favorites and everyday affordable offerings. We will complement
these with new products and limited-time food promotions developed
in our European food studio. Building greater brand transparency
will remain a priority in Europe, especially in the U.K., with ongoing
communication efforts highlighting the quality of our food and
building our reputation as an employer of choice. We will also
create stronger bonds of trust by being accessible and main-
taining an open dialogue with customers and key stakeholders.
As part of our efforts to upgrade the customer experience, we
will continue remodeling additional restaurants in the U.K. and
Germany. In Germany, an integral part of our reimaging program
includes adding about 100 McCafes in 2008. We will also
continue installing our new kitchen operating system to ensure
that we can consistently deliver high food quality, with a goal for
this new system to be in virtually all of our European restaurants
by the end of 2009.
In APMEA, locally-relevant execution of our strategies sur-
rounding convenience, breakfast, core menu extensions and
value is essential to sustaining momentum in this diverse and
dynamic part of the world. Convenience initiatives include
leveraging the success of 24-hours or extended hours of
service, offering delivery service in certain countries and building
our drive-thru business, particularly in China. In addition, we will
continue to emphasize breakfast to further build this daypart,
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