DES MOINES, Iowa -(Dow Jones)- McDonald's Corp. (MCD) (MCD) Tuesday said it plans to franchise several hundred overseas restaurants the company now owns, but once again rejected calls for a spinoff of that business.

The fast-food giant also indicated it plans a significant stock repurchase program this year, spending more than $1 billion in that effort in the first quarter alone.

"We believe some of the 8,000 restaurants we own will be better served in the hands of franchisees," Chief Financial Officer Matthew Paull said on a conference call.

All told, about 1,500 of those units are likely to be offered to franchisees and licensees in more than a dozen countries over the next three years, he said.

Those stores now account for $1.5 billion in annual sales and about $60 million in net operating losses for the company.

They also represent nearly $100 million in general and administrative expense and $50 million of maintenance capital expenditure a year, he said.

The restaurants will be converted from company-owned into development licensed units, with the assumption that in the hands of individual owners they will realize improved returns. McDonald's (MCD) would realize royalty income on their sales.
One early focus of that will be in the U.K., where McDonald's (MCD) now owns about 800 restaurants, he said.

The company also said it will provide investors with more "transparency" to its company-owned, or McOpCo, restaurant business, beginning in the forthcoming 2005 10-K report.

Some on Wall Street have recently called for greater disclosure of the McOpCo operations, in part to determine whether there is a major difference in financial performance between company and franchise units, and whether an initial public offering might make sense.

Commenting on what he called "a lot of interest in the accountability of McOpCos," Chief Executive Jim Skinner said, "We will continue to own and operate restaurants. Having said that, it's reasonable to ask, what's the right balance?

"We believe we have the right balance in the U.S., Australia, France and Russia. But we also believe some of the 8,000 restaurants we own will be better served in the hands of our franchisees," he said.

As for the possibility of an IPO, Skinner said, "We believe it's critical to own and operate a certain number of restaurants. We call it skin in the game. We firmly believe that owning restaurants is paramount to being a credible franchisor."

Analysts reacted favorably to the company's intentions.
UBS analyst David Palmer said the developmental licensing program could increase earnings and cash flow by perhaps $100 million a year and lower per- share volatility. Palmer calculated the potential cash proceeds from such sales at $1 billion - money that could go to further share repurchases.

Banc of America Securities' Andrew Barish said the franchising of money-losing stores would give the company more earnings flexibility as they are sold.

He also raised his target price on McDonald's ( (MCD) stock to $39 from $37.

McDonald's (MCD) said it plans to open about 800 restaurants worldwide this year, compared with about 350 a year ago. Primary markets targeted for growth are the U.S., China, France and Russia.

Perhaps 125 units will open in China, including a dozen or so more drive- thrus. The company opened its first drive-thru on the mainland late last year.

Although its long-term plans call for franchising restaurants in China, that country's current laws preclude such a move, CFO Paull said.

The goal in the U.K., he said, is to shrink McDonald's (MCD) ownership of restaurants there to "something less than 50%" from the current 63%.

The intent, as with all developmental licensing and related refranchising efforts, is to "put restaurants in the hands of operators who can keep them relevant and continue their growth without any use of McDonald's (MCD) capital," he said.

On the new-product front, McDonald's (MCD) said one goal this year is to increase its share of the U.S. chicken market. With the recent launch of a premium chicken-sandwich line the company is selling 20% more chicken sandwiches than before.

A spicy chicken sandwich and an Asian chicken premium salad will be introduced this year. Premium coffee will begin to roll out across the U.S. starting next month, McDonald's (MCD) said.

Contact:
Richard Gibson
Dow Jones Newswires
515-282-6830
dick.gibson@ dowjones.com

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