McDonalds 2014 Annual Report Download - page 20

14 McDonald’s Corporation 2014 Annual Report
APMEA
In APMEA, comparable sales declined 3.3% and comparable
guest counts declined 4.7% due to negative performance in Japan
and China. This was slightly offset by positive results in Australia,
the first of our priority markets to demonstrate signs of recovery
due to strengthened marketing, re-emphasized value, menu
improvements and stronger franchisee alignment.
In mid-July, food quality issues were discovered at a supplier
to McDonald’s and other food companies in China, negatively
impacting results in China, Japan and certain other markets. We
moved quickly to source from alternative suppliers and initiated
aggressive recovery plans to restore consumer trust and
confidence. As a result of our efforts, sales trends in China are
showing signs of improvement. McDonald's Japan is not
recovering as quickly and has been working to overcome
significant challenges.
We continued to make progress in our reimaging program,
completing about 340 restaurant reimages during the year. By the
end of 2014, over 70% of restaurant interiors and over 60% of
exteriors were modernized.
We are committed to ongoing restaurant expansion, although
the pace of new openings was slowed in China in response to
local market dynamics. We opened 655 new restaurants, including
227 in China.
Global
Globally, we have been focused on strengthening the foundational
elements of our business, namely value across the menu,
marketing and operations excellence to deliver a better customer
experience while actively pursuing comprehensive initiatives to
capture the sizeable longer-term growth opportunities in our
industry.
Even in periods of softer performance, McDonald’s unique
business model and structure enable us to generate significant
cash flows. Cash from operations benefits from our heavily
franchised business model as the rent and royalty income we
receive from franchisees provides a stable revenue stream that
has relatively low costs and enables us to return significant cash
to shareholders. In addition, the franchise business model is less
capital intensive than the Company-owned model. We believe
locally-owned and operated restaurants are important to
McDonald's being not just a global brand, but also a locally-
relevant one.
In 2014, cash from operations totaled $6.7 billion. Our
substantial cash flow, strong credit rating and continued access to
credit provided us flexibility to invest in critical growth initiatives
while still returning significant amounts of cash to shareholders.
Capital expenditures of approximately $2.6 billion were invested in
our business, of which more than half was devoted to new
restaurant openings and the remainder was reinvested in our
existing restaurants. Across the System, 1,316 restaurants were
opened and about 930 existing locations were reimaged.
As part of our ongoing commitment to build long-term
shareholder value, in May 2014, the Company announced a 3-
year cash return target of $18 to $20 billion between 2014 and
2016 through a combination of dividends and share repurchases,
representing a 10% to 20% increase over the amount of cash
returned between 2011 and 2013. This target is based on several
activities including the significant free cash flow generated from
our operations, as well as the use of cash proceeds from our debt
additions and refranchising at least 1,500 restaurants over the
2014-2016 period (over 400 restaurants were refranchised in
2014), primarily in APMEA and Europe. In 2014, we returned
$6.4 billion to shareholders consisting of $3.2 billion in dividends
and $3.2 billion in share repurchases and remain on track to meet
our 3-year target.
RESULTS FOR THE YEAR:
Global comparable sales decreased 1.0%, reflecting a
decrease in all segments with the exception of Other
Countries & Corporate, while comparable guest counts
declined 3.6%, reflecting negative guest traffic in all
segments.
Consolidated revenues decreased 2% (flat in constant
currencies).
Consolidated operating income decreased 9% (8% in
constant currencies), primarily due to the impact of the
supplier issue in APMEA and weak operating performance in
the U.S.
The Company's effective tax rate was 35.5%, including an
increase in reserves related to certain foreign tax matters.
Diluted earnings per share was $4.82, a decrease of 13%
(11% in constant currencies). The following items, which total
$0.54 per share, negatively impacted diluted earnings per
share by 10% (10% in constant currencies) for the year:
* $0.31 per share due to an increase in reserves
related to certain foreign tax matters; and
* $0.23 per share due to the estimated impact of the
supplier issue resulting from lost sales and
profitability in APMEA.
Excluding the impact of these items, earnings per share for
the year would have been down 3% (1% in constant
currencies) compared to the prior year.
Cash provided by operations was $6.7 billion.
One-year ROIIC was negative 21.9% and three-year ROIIC
was 1.4% for the period ended December 31, 2014 (see
reconciliation on page 27), reflecting the impact of lower
operating income in 2014.
The Company increased the quarterly cash dividend per
share 5% to $0.85 for the fourth quarter, equivalent to an
annual dividend of $3.40 per share.
The Company returned $6.4 billion to shareholders through
dividends and share repurchases, in connection with our
$18-$20 billion, 3-year cash return target for the years
2014-2016.
OUTLOOK FOR 2015
McDonald's begins 2015 taking decisive action to drive
foundational improvements in our major markets and executing
our recovery efforts in markets affected by unforeseen events.
While we expect pressures on operating performance to
persist as we continue to face significant headwinds, particularly in
the first half of the year, sizable growth opportunities exist in the
$1.2 trillion global IEO segment. We are committed to pursuing
these opportunities by relentlessly focusing on the customer and
adapting to the changing marketplace through the following
initiatives.
We are redefining menu choice and personalization, exploring
solutions that will provide our guests a customizable restaurant
experience. We are also focused on enhancing the appeal of our
core products and addressing food perceptions by improving and
highlighting the quality of our ingredients and engaging with our
customers in more transparent dialogue.
Convenience continues to be a cornerstone of McDonald's
business, and we will evolve our value platform, strategically
evaluating pricing relationships across the entry level, core and
premium tiers. Service elements focus on hospitality and