McDonalds 2007 Annual Report Download - page 29

communicate our everyday value offerings and feature limited-time
variations of classic menu favorites.
We believe locally-owned and operated restaurants are at
the core of our competitive advantage and make us not just a
global brand but a locally relevant one. To that end, we
continually evaluate ownership structures in our markets to
maximize brand performance and further enhance the reliability
of our cash fl ow and returns. We completed a detailed analysis
of the appropriate ownership mix in key markets around the
world taking into account our plans for each of those markets,
the risks associated with operating in the market and restaurant-
level results. This analysis also considered the current legal and
regulatory environment which, in some countries such as China
and Russia, may make it prudent for the Company to own and
operate the restaurants. Based on this analysis, we expect to
refranchise a total of 1,000 to 1,500 existing Company-operated
restaurants, primarily in our major markets, over the next three
or more years. This will be dependent on our ability to identify
the appropriate prospective franchisees with the experience
and fi nancial resources in the relevant markets.
In addition, we will continue to evaluate several small markets
in APMEA and Europe for potential transition to developmental
license structures. We will only convert such markets when we
believe that we have identifi ed a qualifi ed licensee and our
business is ready for transition to optimize the transaction for
the long term.
Our evolution toward a more heavily franchised, less capital-
intensive business model has favorable implications for the
amount of capital we invest, the strength and stability of our
cash fl ow and for our returns. As a result, we expect free cash
fl ow — cash from operations less capital expenditures — will
continue to grow and be a signifi cant source of cash used to
fund our total cash returned to shareholders target for 2007
through 2009 of $15 billion to $17 billion. In addition, we expect
our share repurchase activity will continue to yield reductions in
the share count in the years ahead.
While the Company does not provide specifi c guidance on
net income per share, the following information is provided to
assist in analyzing the Company’s results:
• Changes in Systemwide sales are driven by comparable
sales and net restaurant unit expansion. The Company
expects net restaurant additions to add slightly more than
1 percentage point to 2008 Systemwide sales growth (in
constant currencies), most of which will be due to the
503 net traditional restaurants added in 2007.
• The Company does not generally provide specifi c guidance
on changes in comparable sales. However, as a perspective,
assuming no change in cost structure, a 1 percentage point
increase in U.S. comparable sales would increase annual net
income per share by about 2.5 cents. Similarly, an increase
of 1 percentage point in Europe’s comparable sales would
increase annual net income per share by about 2.5 cents.
• In 2008, U.S. beef costs are expected to be relatively fl at
and chicken costs are expected to rise about 4% to 5%. In
Europe, beef costs are expected to be relatively fl at in 2008,
while chicken costs are expected to increase approximately
6% to 8%. Some volatility may be experienced between
quarters in the normal course of business.
• The Company expects full-year 2008 selling, general &
administrative expenses to decline, in constant currencies,
although fl uctuations may be experienced between the quar-
ters due to items such as the 2008 biennial worldwide owner/
operator convention, the 2008 Beijing Summer Olympics and
the August 2007 sale of the Company’s businesses in Latam.
• Based on current interest and foreign currency exchange
rates, the Company expects interest expense in 2008 to in-
crease approximately 15% to 20% compared with 2007, while
2008 interest income is expected to be about half of 2007
interest income.
• A signifi cant part of the Company’s operating income is
generated outside the U.S., and about 65% of its total debt
is denominated in foreign currencies. Accordingly, earnings
are affected by changes in foreign currency exchange rates,
particularly the Euro and the British Pound. If the Euro and the
British Pound both move 10% in the same direction compared
with 2007, the Company’s annual net income per share
would change by about 8 cents to 9 cents.
• The Company expects the effective income tax rate for the
full-year 2008 to be approximately 30% to 32%, although
some volatility may be experienced between the quarters in
the normal course of business.
• The Company expects capital expenditures for 2008 to be
approximately $2 billion. About half of this amount will be
reinvested in existing restaurants while the rest will primarily
be used to open 1,000 restaurants (950 traditional and 50
satellites). We expect net additions of about 600 (700 net
traditional additions and 100 net satellite closings).
• For 2007 through 2009, the Company expects to return $15
billion to $17 billion to shareholders through share repurchases
and dividends, subject to business and market conditions.
In 2007, the Company returned $5.7 billion of this goal to
shareholders.
• As a result of the new developmental licensee structure, the
Company’s operating results in Latin America will refl ect royalty
income of approximately 5% of sales and minimal selling,
general & administrative expenses to support the business.
• We continually review our restaurant ownership structures
to maximize cash fl ow and returns and to enhance local
relevance. We expect to optimize our restaurant ownership
mix by refranchising 1,000 to 1,500 Company-operated
restaurants over the next three or more years, primarily in our
major markets, and by continuing to execute our developmental
license strategy.
• In February 2008, a European private equity fi rm agreed to
acquire U.K.-based Pret a Manger. As part of that transaction
and consistent with its focus on the McDonald’s restaurant
business, McDonald’s has agreed to sell its minority interest
in Pret a Manger. The Company expects to recognize a non-
operating gain upon the closing of the transaction in late fi rst
quarter or early second quarter of 2008, subject to regulatory
approvals and other closing conditions.
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