麥當勞 (MCD) 2015 Q3 法說會逐字稿

Hello and welcome to McDonald's October 22, 2015, investors conference call.

At the request of McDonald's Corporation, this conference is being recorded.

(Operator Instructions)

I would now like to turn the conference over to Mr. Chris Stent, Vice President of Investor Relations for McDonald's Corporation.

Mr. Stent, you may begin.

Hello, everyone, and thank you for joining us.

With me on the call are President and Chief Executive Officer, Steve Easterbrook, and Chief Financial Officer, Kevin Ozan.

Today's conference call is being webcast live and recorded for replay by webcast.

Before I turn it over to Steve, I want to remind everyone that the forward-looking statements in our earnings release and 8-K filing also apply to our comments.

Both documents are available on www.investor.

McDonalds.com, as are reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.

Last month we provided unaudited summary financial information and historical segment data consistent with the Company's new structure.

The updated annual information was provided for 2010 through 2014.

Quarterly details were also provided for 2014 through June 2015.

Specific questions related to this summary financial information and historical segment data will be addressed by the investor relations team through a Frequently Asked Questions document that will be distributed on October 30.

Given the very limited number of questions received, we are no longer planning to host a separate conference call to discuss this information.

And now I'd like to turn it over to Steve.

Thank you, Chris.

Good morning, everyone.

It has been eight months since I stepped into the position of CEO.

Since then, we have made meaningful progress to fuel our turnaround and begin repositioning McDonald's as a modern, progressive burger company.

Our turnaround is operationally led.

It is grounded in running great restaurants, which is the first step to enhancing the customer experience.

People have more choices than ever about where to dine.

We want to give them more reasons to dine at McDonald's by re-committing to hot, fresh food, fast friendly service, a contemporary restaurant experience, all at the value of McDonald's.

Our number-one priority is to return critical markets to sustainable revenue and income growth.

To do so, we must be customer centric in our planning and our decision-making.

We must have the best talent in the most critical positions and our system must be aligned around the actions we are taking to consistently run great restaurants.

We must execute initiatives that ultimately enhance our appeal in the areas that matter most to consumers, which is great tasting, high-quality food, convenience and value.

Whilst we're still in the early phases, our turnaround plan is working.

Customers are beginning to respond to the actions we are taking and this progress is reflected in our third-quarter results.

As we've discussed previously, the US and international lead market segments generate over 80% of global operating income.

For third quarter, five of our six most significant markets drove positive comparable sales growth, with France's comparable sales being marginally negative.

We also grew consolidated margins, operating income and earnings per share on a constant currency basis.

These results do, in part, reflect the benefits from comparisons to the 2014 China supplier issue and the prior-year increase in tax reserves.

However, operating results for the quarter were still up modestly when you exclude these items and take into consideration the significant currency headwinds.

Looking ahead, as we begin fourth quarter, global comparable sales are expected to be positive in all segments.

Every market plays a significant role in our global turnaround.

Some markets, like Canada, Australia and the UK, are further along.

They continue to deliver strong sustained growth.

That said, all markets have adjusted how they think and how they operate to ensure their actions and decisions are grounded in satisfying customers in their local markets today and for the long term.

The US business remains front and center, given its fundamental importance to overall consolidated results.

Its shift to positive comparable sales in the third quarter, the first quarterly comparable sales increase in the US in two years, is a tangible sign of progress and reflects the initial steps we have taken in areas that matter most to our customers, great tasting, high-quality food, convenience and value.

In the area of food, we have made progress toward enhancing the taste of our products and improving consumer perceptions of quality.

Our core classics define the McDonald's brands.

That is why we've been [hardest on] operational procedures.

We're toasting buns longer, changing how we sear and grill burger patties to bring out the best in our menu and serve hotter, juicier sandwiches to our customers.

We transitioned back to the original recipe for our Egg McMuffin, using butter instead of margarine to deliver an even tastier sandwich.

Customers appreciated the change and we saw a double-digit increase in the number of Egg McMuffins sold immediately following the rollout.

In August, we introduced the Buttermilk Chicken Sandwich, made with 100% chicken breast meat and real buttermilk.

This new product complements our ongoing core menu emphasis and customers have responded favorably.

Initial results have exceeded the high end of our expectations.

At the start of the fourth quarter, we rolled out All Day Breakfast across the US.

Customers have been asking for this for years and we challenged ourselves to move past legacy barriers to deliver, and we did.

Our ability to move from one market in May to all 14,000 restaurants speaks to the commitment and alignment of franchisees and our entire system to being customer-led in our decisions and our actions.

We have also taken actions to enhance our convenience and the overall customer experience.

Early this year, we implemented operational procedures designed to improve order accuracy, removed some items from the menu and simplified the drive-thru menu boards.

Our goal is net simplification.

We have established screens to evaluate operational complexity versus the expected impacts on the customer and the business.

Ultimately, we want to focus our efforts on fewer, bigger decisions that generate bigger rewards.

We also took a first step toward enhancing the customer experience digitally, with the deployment of the mobile application.

To date, there have been over 2 million downloads of the app and 1.5 million offers redeemed.

We will begin national advertising later this month.

From a value standpoint, we are aligned with franchisees on the need for national value.

The summer $2.50 Double Cheeseburger and small fry promotion was a first step.

We remain committed with operators in working towards restoring a more permanent national value platform in the future.

Customers are noticing the differences.

Our customer feedback system, which now tracks approximately 10 million customer touch points each year, reflects consistent improvement in customer feedback scores.

We're seeing this across all key categories measured, with the most significant improvements seen in the areas we focused on, namely food quality, friendly and fast service and order accuracy.

Let's now turn to the international lead market segment, starting with Australia.

Third quarter marks four consecutive quarters of comparable sales and guest counts in Australia.

The market's turnaround began last year as customers responded to the combined initiatives that collectively improved their overall experience.

This included a renewed focus on improving operations, the added convenience of offering barista, craft and McCafe beverages through the drive-thru and a stronger value platform with the relaunch of the Loose Change Menu.

This year, we have been given customers even more reasons to visit our restaurants, with the rollout of a new value menu at breakfast and through effective marketing and promotional efforts, including Monopoly.

National advertising of the Experience of the Future, which includes self-order kiosks, digital menu boards, table service and burger customization through Create Your Taste, began July 1. While early, we are encouraged with the initial results and the positive buzz we've created in the market.

And we're fueling that energy as we add chicken and salad offerings to the Create Your Taste platform later this month.

Let's now turn to Germany, a market showing early signs of a turnaround.

Customers are responding to the steps we've taken to enhance the appeal of premium products by emphasizing the provenance and sustainability of ingredients.

The new Clubhouse Veggie sandwich in August, along with a re-hit of a proven customer favorite, Wilde Kueche 3, contributed to positive comparable sales in the third quarter.

This month's launch of the McB, a premium burger that's made with 100% organic beef from farms in Germany and Austria, reinforces food quality messages to our customers.

In France, we continue to maintain share despite the challenging macro environment and the formal eating-out market experiencing its fourth consecutive year of decline.

Customers appreciate the actions we have taken to strengthen value at every price tier.

This includes introducing McFirst earlier this year, a three-item meal combination for under EUR5, and extending P'tit Plaisir across all product categories and dayparts.

In addition, strong marketing campaigns, including the Grand Premium and the American Summer Food events have successfully driven premium sandwich sales.

They also are elevating the service experience by providing customers with new ways to order and be served in our restaurants.

Self-order kiosks are now in more than 90% of French restaurants and we are now offering table service in more than half.

Strong performance continues in the UK and Canada.

These two markets' ability to sustain prolonged growth is a direct result of their robust planning process, which directly links actions to specific consumer needs.

Strong quality campaigns in both markets are boosting customer perceptions of core classics and successful promotions, a new menu in use, like the Chicken Legend in the UK and the new Mighty Angus in Canada, have driven growth in premium products.

Since Russia and China are two high-growth markets of particular interest, let's spend a moment on them.

Both markets posted positive comparable sales for the quarter as they recover from last year's well-documented issues.

The team's execution against strong recovery plans, with a comprehensive focus around great tasting, high quality food, convenience and value has successfully restored brand trust scores in both markets.

However, we face near-term headwinds, given an economic slowdown in China and continued volatility in Russia.

In addition to the operational elements of the turnaround plan each market is executing around the globe, we continue a regular cadence of meaningful moves consistent with a leadership brand.

We believe these moves will ultimately improve consumer perceptions of our brand.

In September, we announced our plans in the US to transition to cage free eggs over the next 10 years.

More recently, we collaborated with a number of global brand leaders to raise awareness of the plights of refugees and the need to support the United Nations World Food Program.

Earlier this week, we announced our participation in the White House Climate Pledge.

Turning around our business requires a relentless focus on what consumers want and expect from McDonald's.

Our responsibility is to give them reasons to feel good about visiting time and again.

Our opportunity is to differentiate McDonald's by delivering what consumers want today, while laying the foundation for what they'll expect tomorrow, and our commitment is to deliver on both.

I am pleased with the progress we have made and remain confident in the ability of our talented system of franchisees, employees and suppliers to revitalize our connection with customers as we execute our turnaround plan into 2016.

Thank you and I will now hand it over to Kevin.

Thanks, Steve, and hello, everyone.

Today's earnings release of marks our first quarterly reporting under the new segment structure, so I want to spend a few minutes outlining the new segments as a lead-in to my discussion of the factors that impacted the Company's third-quarter performance.

Effective July 1, we completed an important first step in the Company's global turnaround plan, the reorganization of our business from a geographically focused structure, to segments that combine markets with similar characteristics and opportunities for growth.

Our reporting segments now include the US, our largest individual market, accounting for over 40% of consolidated operating income; the international lead segment, which includes our established markets of Australia, Canada, France, Germany and the UK, that collectively account for about 40% of the Company's operating income; the high-growth segment, which includes markets with relatively higher restaurant expansion and franchising potential, including China, Italy, Poland, Russia, South Korea, Spain, Switzerland and the Netherlands -- together, these markets account for about 10% of the Company's operating income; and the foundational and corporate segment that encompasses the remaining markets, each of which has the potential to operate under a largely franchised model.

These markets are combined with corporate activities for reporting purposes.

From a business operations standpoint, this new structure brings similar markets together to leverage their collective insights and expertise to deliver a better overall experience for our customers.

From a reporting standpoint, the new structure provides greater visibility into the key markets driving the vast majority of the Company's underlying financial performance.

So let's take a look at the major drivers of our third-quarter results.

Earnings per share for the quarter increased $0.31, to $1.40.

In constant currencies, third-quarter earnings per share increased $0.48.

These results benefited from the comparison against prior-year results, which included an increase in our tax reserves and the China supplier issue.

These items negatively impacted third-quarter 2014 earnings per share by $0.41.

Excluding the impact of the unusual prior-year items, third-quarter earnings per share would have increased $0.07, or 5% in constant currencies.

Looking beyond the unusual prior-year items, third-quarter global comparable sales were up 4%, reflecting positive comparable sales across all segments and positive guest counts in all segments except the US.

The international lead market segment was the largest contributor to the Company's third-quarter comparable sales performance, posting an increase of 4.6%, led by strong comparable sales and guest counts in Australia, the UK and Canada.

Germany's results were uneven, but encouraging as the market posted positive comparable sales for the second consecutive quarter.

And in France, comparable sales were marginally negative, as the market's macroeconomic environment and informal eating-out industry remain challenged.

The high-growth markets generated strong comparable sales of 8.9% for the quarter, reflecting sales recovery in both China and Russia.

For perspective, China's comparable sales were up 26.8% for the quarter.

The US reported a comparable sales increase from 0.9% for the quarter, supported by the introduction of the new Buttermilk Crispy Chicken Sandwich and a return to the classic recipe for our Egg McMuffin.

Comparable sales performance improved toward the latter part of the quarter.

With more than 80% of our global restaurants franchised, the largest driver of operating income continues to be our franchise margins, which totaled $1.9 billion, a 7% increase in constant currencies for the quarter.

The franchise margin percent increased 20 basis points to 82.2%, driven by the positive comparable sales generated by the international segments.

Global Company-operated margin dollars increased 9% in constant currencies to $675 million for the quarter, while the Company-operated margin percent increased 10 basis points to 15.8%.

China sales recovery accounted for the majority of the margin improvement for the quarter, partly offset by ongoing labor cost in the US.

The incremental labor cost in the US related primarily to our decision to invest in our people by raising wages and providing paid time off for employees at our Company-operated restaurants, as well as providing educational assistance to all eligible US restaurant employees, effective July 1. These costs, along with wage increases mandated by several states during the first half of the year, impacted third-quarter US margins by about 400 basis points.

For the quarter, US commodity costs rose about 1%, primarily due to higher beef prices.

Our US third-quarter pricing year over year was up about 2%, which remains below food away from home inflation of about 3%.

The current projected increase in food away from home inflation for the full year remains at 2% to 3%.

Commodity costs for the international lead market segment were up about 0.5% in the quarter.

While price increases vary by market, year-over-year increases for these markets averaged 1% to 2%.

Moving down the P&L, G&A for the third quarter ended at $584 million, up 9% in constant currencies, due entirely to higher incentive-based compensation accruals versus the prior year.

Despite this unfavorable quarterly comparison, we are making progress against our previously announced savings target.

Looking beyond the third quarter, currency translation is expected to be a headwind for the final quarter of 2015, as the US dollar remains strong against nearly all of the world's other major currencies.

Based on current exchange rates, we expect currency translation to negatively impact fourth-quarter earnings per share by $0.08 to $0.10.

As usual, take this as directional guidance only, because rates will change as we move throughout the quarter.

Before I conclude my remarks, I want to make a comment about our financial outlook for the full year 2015.

As you know, each quarter, we typically provide details around our expectations for several key components influencing our financial results in an outlook section.

In light of our upcoming November investor meeting, we did not provide an update on our financial outlook in either today's prepared remarks or as part of today's 8-K filing.

An update on these components will be provided in conjunction with our investor meeting in a few weeks.

In closing, the transition in both our operating and reporting structure represents a new era for McDonald's as we move toward becoming a more focused and efficient organization.

While we are less than six months into executing our turnaround plan, our third-quarter results demonstrate early signs of progress, with both our top- and bottom-line results.

We are encouraged by this progress but recognize that there is much more work to be done.

As we begin fourth quarter, we are energized by the challenges in front of us.

Thanks, and now I will turn it over to Chris to begin our Q&A.

Thanks, Kevin.

We will now open the call for analyst and investor questions.

(Operator Instructions) Joe Buckley, Bank of America Merrill Lynch.

Good morning.

Thank you.

I would like to ask a question about the US All Day Breakfast launch.

I don't know if you can talk about the experience so far, sales-wise.

Whether you can talk about the sales or not, maybe talk about some of the operational issues, challenges and what you have learned two weeks into the national launch.

Hi, Joe.

Steve here.

So we launched officially nationwide on October 6 and I would say, the enthusiasm levels from customers and from our teams in the restaurants are high.

It has been a successful rollout.

The owner-operators have really embraced this.

To go from a test market in May to a nationwide rollout by October is a significant validation of the alignment of the operators behind this.

When they approved it, they approved it with a 98%-plus approval rating around the country, so there is a lot of unity and alignment behind it.

From an operational perspective, having spent a fair bit of time in the markets the last two or three weeks, the operators have been really, again, enthused at the fact that this has created -- it has been a lot smoother from an operational perspective then perhaps people had feared.

The reality is, the ingredients, the equipment, the training, the procedures is already very, very well established in the restaurants and by launching All Day Breakfast whilst at the same time, removing some of the more complex, lower sales items at the same time we have a net simplification in the restaurants and we are driving for the Fall.

It is early day to give too much of a read on sales, but we're certainly encouraged and, more importantly, the owner-operators are very encouraged about how we've kicked off.

Andy Barish, Jefferies.

Guys, just on the US margin side of the story, is that 400 basis points going to continue on the labor line, just to try to get a sense of that investment over the next year or so?

Okay, Andy.

As we announced in April, we made this decision to invest in our people and raise wages, provide paid time off.

At that time, we indicated that we expected the impact of this, as well as other state-mandated increases, to be about 200 basis points on our margins for the full year this year.

Since obviously the largest majority of that impact happens in the second half of the year, that implies that the impact on the second half would be substantially more than 200 basis point.

So the impact is relatively in line with our expectations.

The payback from the investment will take a little time in terms of lowering turnover, having stronger employees deliver a better customer experience, ultimately driving top-line sales.

Moving forward, it will obviously continue to impact margin comparisons for the next three quarters until we lap the July 1. But as you know, margins are also significantly impacted by our top line, so if we are able to generate higher comps, that would certainly mitigate some of that impact.

Andy, just to add on to that, clearly, there is the cost element.

We try to be very transparent about that.

Ultimately, the ambition from the move we've made is to just drive the experience in the restaurants and we see this as a meaningful move for us to attract and retain the best talent in the marketplace.

If we can drive some efficiencies by reducing turnover, which a motivated, committed workforce tend to reduce the turnover levels, we may be able to get some benefit that comes back from that.

But I just wanted to broaden out the conversation, because yes there's a cost but frankly, this is part of the bigger picture, running better restaurants, motivated teams and committed crew.

Will Slabaugh, Stevens.

Thanks, guys.

This is actually Billy on for Will.

Just wondering if now that we have a new reporting structure, if you could walk us through some of the cadence and distribution of the re-franchising initiatives, and maybe some of the new store openings across each segment.

Yes.

You can see the actual new store openings within each segment in the back of the earnings release.

As far as moving forward and how capital and re-franchising and new openings may happen in the future, we will talk about that more in the upcoming investor meeting in November.

David Palmer, RBC.

Thanks.

Looking back at the Summer Lovin' Value Menu, could you give comment as to where that did work, where it didn't work, some of the lessons of that?

Separately, the simplification of the menu in the US, that seems to be something that's more to come.

Where do you stand on that and where do you see that going forward?

Thanks.

Hi, David.

From the value program across the summer, I think on the call last quarter acknowledged that it got off to a little bit of a bumpy start.

As we launched it, it was, in a way, bumping into some of the local value initiatives that each of the regions were driving, which made -- yes, and then we reset and the performance of the $2.50 Doubles Cheese and small fry improved across the summer as the focus got clearer and our execution in restaurants got sharper.

It filled a gap for us, yes.

We do have a desire, along with our owner-operators, of a more sustained value platform, which we will be looking to introduce through 2016.

But it certainly played a meaningful role across the summer at helping to drive the footfall.

In terms of simplification, again, simplification and the way we are looking at this and the way the team in the US are looking at it, is menu is part of it, but there is a lot more we can do to help simplify the restaurants on a day-to-day basis, both from a customer perspective but also from our managers and our crew.

So there is operational simplification.

There is training simplification.

There's things we do with merchandising that make it easier for customers to navigate the restaurant and also with packaging as well.

The team -- there are sub-teams that are addressing each of these areas of opportunity.

So, yes, menu is one piece, but the whole operational complexity, the training and merchandising and packaging, is another.

And it is the sum of those parts is what managers are beginning to recognize, that we are working hard to make their life a little easier, so they can just focus on what they love doing, which is just running the restaurant and serving customers.

Matt DiFrisco, Guggenheim.

Thank you.

Question is, you guys cite that the chicken item which I think most of us perceived to be somewhat premium, was a successful driver and welcomed by the American consumer and a part of the recovery and the comp going positive.

But a lot of the attention has been mentioned about the value consumer and the value coming down and there are some votes coming on the new value menu in the weeks ahead.

I'm just curious, has this experience maybe emboldened you to think there is -- the new product innovation might be a little bit more skewing towards the premium side?

Or how should we look at where the easiest opportunity is to recover the consumer that might be in the near term laps and you can get back quicker?

What would be the thing of the marketing they respond to the most?

Do think it would be premium or value?

Thanks for the question.

Again, the way we look at this is, how can we deliver the best value across all tiers on the menu?

You are absolutely right.

With the Buttermilk Chicken, that was premium product, premium quality and a premium price that goes with it.

And because of the taste, because of the quality and the execution in restaurants, customers really did respond well.

As I said earlier, it's outperformed the high end of our expectations.

But I think you will see, as we build our calendars out across any of our markets, but certainly here in the US, we do want to provide the best value at each level, great value core products, great value premium.

Probably one of the areas where we are still little weaker is at that more entry level, value level.

That is what you have been hearing about.

That is what we are working on the operators on and the operators are aligning behind what they believe will be strong platform as we enter 2016, to help drive the footfall, because we know that the top line going into positive territory was encouraging for us.

There is no doubt about that.

Our ultimate measure of success will be serving more customers more often.

That's getting the guest counts moving as well.

Jake Bartlett, SunTrust.

Thanks for taking the question.

Just to gauge the core, the turnaround in the US aside from the breakfast all day.

Would you think that the fourth quarter in the US would be positive even without the breakfast all day introduction?

It is a difficult one to read.

What I would say is, what has given me the most satisfaction from the way that the team have galvanized themselves in the US is actually, we are running better restaurants than we were a year ago.

That is ultimately what customers respond to.

And then as we innovate around the menu and have promotional activity and have fun with that, that will increment the sales.

But running better restaurants day in and day out, and customers are telling us through this very material feedback loop we have now that we are -- they're noting the changes in the areas that matter most to them, which is speed, friendliness and accuracy.

Through the quarter, it's probably fair to say we ended the quarter just a little stronger then we started, but I wouldn't read too much into that.

Turnarounds are about momentum.

We want to establish momentum over the short, medium and long term.

We put one marker out there.

As we start to build quarter upon quarter, you will be able to read the more underlying momentum in the business.

But running better restaurants is a great start.

Sharpening up our merchandising, simplifying the drive-thru operation, underpin everything else we have been doing.

So I feel good about that.

Sara Senatore, Bernstein.

Thank you.

I wanted to ask about some of the high-growth markets.

Obviously, very, very strong comps out of China and it sounds like Russia also.

I guess a couple of questions.

One is, you did mention that some near-term headwinds from volatility, or slowdown in the economy, but certainly that would not have appeared to be the case in the quarter.

So I just wanted to ask about that comment.

Also, the margins there, again, on such high comps, I might have expected even more margin expansion.

Can you just talk about, is that your emphasis on value in that market?

Clearly, again, with such strong comps, the right trade-off to make, but is that what we are seeing there?

And I guess last piece on that segment is, I think you are targeting more of a franchise mix.

So is it safe to assume that most of the re-franchising you have laid out will come in China and Russia, or a disproportionate amount?

Thanks.

I think probably both Kevin and I will have a go at that one, Sara.

There's a fair bit in there.

China clearly took a hit third quarter last year.

We expected a return to growth, clearly, and we are pleased that we did.

I have got to say, I am very proud of the team in China, because they were in a very difficult situation a year ago.

They set up basically a two pronged approach to recover the business momentum.

One was around trading hard, and particularly trading hard on value.

The second one was restoring brand trust.

Actually in that market now, our trust metrics are higher than they were prior to the supplier incident a year ago.

So I think that validates the focus they put on there.

As we look forward, there are probably four elements that the team are working on across the next couple of quarters: continuing on brand trust, consistent every-day value at the entry and mid-tier levels.

They have got a big an exciting play around convenience, and particularly around digital activation and delivery.

Those are two drivers that aren't unique to China but are very material to the consumer in China.

Digital activation, working with some of the main tech partners in China.

We've got some great relationships there and a very strong delivery business.

The fourth one is just around consumer excitement, just having fun with products and the experience in the restaurants.

I don't want anyone to think that just because we were down last year, you would automatically bounce back.

You have got to work hard for it.

The team have worked for it.

Net-net, if you look at the two-year comp, we were slightly up across the two-year period, across that quarter, which I think is a credit to the team.

Let me touch on margins and franchising.

Related to margins in that group, a couple things.

One, certainly China's margins recovered this quarter versus last year, as a result of their sales recovery.

Russia has currency pressure.

We import a chunk of our food and paper in Russia both in terms of dollar and euro.

There is still pressure on Russia's margins because of those imported food and paper costs.

That is still putting pressure on the margins within the high-growth segment.

Related to franchising, I think we have said that most of our franchising opportunity certainly is probably within Asia, so China certainly would be a part of that.

We will update a little bit more of our detailed franchising plans as we get to the investor meeting in November, but I think it is safe to say that, that high-growth segment would certainly have franchising activity going forward.

Karen Holthouse, Goldman Sachs.

Thank you for taking the question.

I know when we originally started talking about some of the wage increases at your stores, my understanding was they were going to be phased in towards $10 over a period of years.

So if that is correct, once we get to the full rollout out of 200 basis points, how to think about quantifying the next leg of that.

And then also on the franchise side of the system, what sort of pressure might they be seeing on their margins right now from just overall wage pressures and the environment?

Or is another way to look at that, just general wage inflation rates?

Karen, the plan was never to phase in these increases.

We did an increase across the board in July, really impacting all the restaurants.

So our average rate right now in our Company-operated restaurants is nearly $10 right now.

And so I wouldn't see a significant additional phasing in above and beyond where we are right now.

Certainly, as states mandate changes, we may have to adjust to some of those.

But there isn't another wave in our plans to go and hit all restaurants again.

Nicole Miller Regan, Piper Jaffray.

Thank you.

I want to understand a little bit more where you are taking share from.

I'm not sure these are the buckets you would define it, but maybe you could adjust accordingly.

In order of magnitude, do you think that you are, and can continue to, pick up share from C stores, or is it other legacy large QSR players, or is it from consumers eating at home?

Thank you.

This is a US question I'm assuming, Nicole.

Yes.

I will answer on that basis.

I think our immediate term is to win back share from our nearer-term competition.

That is what we are focused on.

And then as we build out our Experience of the Future, I think that will get us -- that will make us more attractive to a broader set of customers.

But at the moment, I would say nearer-term, traditional competition is the market share we are fighting at the moment.

Clearly, we're playing to our strengths.

Breakfast has always been a historic strength and we continue to do very well at breakfast during the breakfast daypart but now into other dayparts as well.

Just an additional perspective, for the third quarter, our comp gap was a negative 3.2%.

We still have room, certainly, to increase that.

That's substantially down that's substantially down from Q2 and Q1.

That is QSR sandwich category that it's against.

But we certainly have opportunity.

We have been seeing a few recent weeks the opposite, where we have been out-comping some of that same competition.

Brian Bittner, Oppenheimer.

Thank you.

(technical difficulty) the US segment, operating income was still down a little bit even though comps turned positive, and that is obviously because of all of the investments you're making.

But as you look out towards next 6 to 12 months, given the way you are thinking about cost, what type of same-sales growth do we need to see some positive operating income growth for that overall segment?

How are you thinking about that?

Brian, we had a little difficulty hearing, but I think you are asking about the US comp and what we would need potentially to maintain or grow margin there.

We obviously talked about the labor costs that are impacting the US.

We've said in a normal inflationary environment, we generally need a 2% to 3% comp in the US to maintain margins.

With these additional labor costs, certainly the comp needed to maintain margins in the near term would be higher than that.

Commodities right now aren't a big pressure on us, so commodities really aren't the concern.

It is more of the comp needed to kind of overcome these near-term labor costs.

Karen Short, Deutsche Bank.

Thanks for taking my question.

Congratulations on a good quarter.

Just a question on All Day Breakfast.

I guess any early read in terms of what your preliminary estimates may be on the comp benefit from the rollout?

And I guess just maybe any early read on what kind of customer you are getting buying breakfast?

Is it a new customer?

It is a cannibalizing sale?

Any color there would be great.

I really don't want to give too much guidance yet, Karen.

Not to be evasive, but just when you are a first couple of weeks in and we have got a lot of media behind it, I don't want to give a wrong read.

We are starting higher as you would expect out of the box than what we would expect our steady run rate to be when things settle down, but we see it being incremental profitable business that is driving existing customers in more often and attracting new customers.

So the anecdotals I get as I move around the country and get into the restaurant is, if you are in a student town, you are seeing a lot of activity into the evenings and the overnights around breakfast items.

That is just cultish amongst the students.

But you can go into a restaurant in mid-afternoon and see a more mature group of people sitting there who can now enjoy the fact they can have their Egg McMuffin mid-afternoon and aren't having to watch -- you know, clock watching and try and make the 10:30 AM deadline.

It just makes life easier for customers.

They don't have to look at their watch and manage too hard their time.

So broad appeal, a strong start from an operational perspective, from an execution perspective and I think the team has done a great job in the marketing launch and having some fun with it.

More than anything else, it is fun.

Customers are enjoying it and so are teams in the restaurants.

Keith Signer, UBS.

Thank you.

Congratulations.

So as this momentum in the US hopefully builds off all of this stuff, from ops and product, value, digital messaging, all this, how do you feel about the status of the US asset base, and the opportunity maybe to re-image into this momentum and even further bolster it?

Thanks.

So you said the word here.

The most important word, I think, in any consumer-facing business or any retail is momentum.

Momentum breeds confidence.

Confidence breeds -- it becomes a virtual cycle of success, if you like.

And we're just beginning to feel some early signs of that.

You can see the confidence flowing through the restaurants and through the team.

Clearly, for a turnaround, you want sustained growth and we've, so far, delivered one quarter.

So this is one data point.

But the steps that we have taken to get to here are steps that are going to continue to keep supporting our business going forward.

One of the opportunities you mentioned, Keith, certainly is, as you know, we are only about 50% re-imaged in the US, so there is certainly opportunity going forward to more modernize that asset base in the US and make sure that we have got the right facilities to bring in the customers that we want.

It's driving cash flows.

David Tarantino, Robert W. Baird.

Good morning.

Steve, I have a question, or maybe a clarification on how you are thinking about the improvement you see in the US business so far.

Specifically, on the Q3 improvement, it seems like it got better as the quarter progressed.

Do you think that was more about the new product news that you had or the structural improvements you are making in the restaurants, with respect to operations?

And then maybe, as part of your answer to that, if you could touch on what the metrics look like on speed of service now that you have simplified the drive-thru menu.

Yes.

I think there are a number of ingredients that are beginning to come together.

If you remember from the past, the US undertook a fairly significant structural change itself now about a year ago, where we eliminated a layer, liberated a little more entrepreneurial spirit into the region.

That takes time to settle down.

You can't just hit your stride straightaway.

I think, as the regions and the teams in the regions begin to find their feet, as it were, that helps.

I don't want to underestimate just the investments we are making in food quality.

The investments that consumers care about, such as the announcement to go to free range eggs, for example, such as the quality Qs that you deliver with the Buttermilk Chicken, that is getting strong.

But underpinning it, and I will never, ever move away from this, any market that is successful around the world is because they are focusing on the day-to-day operation and just delivering at that moment of truth for the customer.

That is what McDonald's is all about.

What we're seeing with speed of service -- well, actually, we're seeing a greater improvement in the accuracy.

So accuracy is probably the strongest metric improvement we're getting, which, on the basis that around 70% of the business goes through the drive-thru, clearly accuracy is particularly important.

But we're beginning to see a few seconds being shaved off average service times as we simplify the menu and sharpening up the operations.

But it is early days and we've got -- there is a lot more progress we want to make, I've got to say that.

John Glass, Morgan Stanley.

Thanks very much.

My question has to do with the new operating segments, particularly outside the United States.

Two items.

Can you talk about, what the cost savings opportunities you are discovering are?

It looks like G&A and many of those segments are lower, but maybe you are just picking it up in the corporate.

Or are you actually finding real opportunities to consolidate some of those into the new structure?

From an operating standpoint, given your first quarter of operating under these different segments, are there are examples of where you are operating the restaurants differently because different leadership is looking at these markets differently, or is that too early to really say?

I will start with the cost side and then I'll let Steve talk about the leadership and running the markets differently.

A couple things going on here.

One, you may have seen and it might have been a little confusing, but we tried to explain one of the things that's gone on is we are moving a little bit from a very decentralized structure to one that centralizes certain non-customer-facing functions and activities.

Along with that, some costs that historically were managed at a segment level, now are being managed, or will be managed, at a central corporate level.

So some of the costs that were reflected last year in the segments are now in corporate.

That's about $30 million of those in total of those costs.

That does not impact consolidated or total G&A.

That is more just a reallocation.

At the same time, we've obviously talked about saving real consolidated G&A.

As I said, we're making progress on that and we will give a further update on those activities at the investor meeting in November.

I'll just talk about, if you like, the operating segments and just the way the leadership teams are thinking.

We will certainly give more flavor to this in our investor meeting.

But if I was to take the lead market, as an example, we have got the five major countries that contribute to the lead markets.

They are overseen by a team of just three people.

These are three very senior, highly talented individuals.

But the decision-making is -- as the visibility into those five markets is so much clearer because we've removed the layers that tended to just obscure what is going on.

If those three leaders can see something work in Australia, our ability to share that with the Canadians, with the UK, German, France team, and vice versa, obviously, is far clearer.

So speed of decision-making, visibility into what is working, visibility into what is not is working, and just sharing that knowledge and getting to market quicker with things that work, we are already seeing the benefits of that.

I think that is incredibly encouraging.

Because we have always had pockets of excellence.

I want fewer pockets of excellence; I want broader-based excellence.

I believe the structure will help deliver that.

Jeff Farmer, Wells Fargo.

Sorry if I missed the question.

I'm actually multitasking myself.

But given the importance of a national price point in value platform as you guys have discussed in the past, can you walk us through the steps it could take to potentially make that happen?

I guess what I mean by that is, any potential timeline for formulation of a menu, testing of that menu, and then assuming you are happy with the results, potentially how quickly could we see a broad-based national price point in value platform hit the US?

The process, as I'm sure you are fairly familiar, here in the US is somewhat unique compared to other markets around the world because it's by nature a more complex and diverse market here in the US.

We're at the stage now where, driven by insights, we have created a number of potential concepts.

Some of those are in test already.

But they're certainly all being discussed and being voted on for approvals and discussed by the operators now.

So the national teams have had real rigor around it and have challenged it and have come up with something that we feel is strong, could be strong and compelling.

The operators are discussing that and, yes, they will make the right decision, because the most important piece is alignment.

We have got great alignment now as a result of All Day Breakfast.

And that is part of the magic ingredient at McDonald's here in the US, it's the alignment with the owner-operators, and I know they are doing the right thing, working through it and certainly into next year, there will be something that we believe will be compelling from a customer perspective.

Howard Penney, Hedgeye.

Thank you so much for taking my questions.

Steve, you used the phrase net simplification a couple times, I think, in your prepared remarks.

I was wondering if you could explain that term.

I know you've talked about simplification before, but what does net simplification mean, and how much more is there to go?

Yes.

I tell you, Howard, and thank you for the question, because I have strong conviction around simplifying our restaurant operations because I believe the customer is the ultimate beneficiary.

And then when we do talk about doing something like an All Day Breakfast, people scratch their head and say, well hold on a minute.

You talk about simplification but now you are adding.

So when I talk about net, I'm saying we have got to take more complexity out through our decision-making than we ever put in.

That is where my language of net simplification works.

If we are not adding any new SKUs into the restaurant for breakfast, because all the ingredients are already there.

They are in the chillers, they are in the freezers.

The equipment is already in place.

So, yes, there is the operational shift running.

There is an operational complexity but not an ingredient complexity.

In the meantime, around the country, the US team has been very rigorous in their analytics on this and helping provide each and every co-op with a tool that helps them assess operational complexity versus contribution to product mix and margin.

And then there's a final screen, which is around the brand value.

So that helps have actual detail, insight and rigor around supporting the co-ops taking items off.

So on average -- well, I think near the start of the year, we removed around seven items permanently from the menu.

There's probably at least another seven, if not more, on average across the co-ops around the country now.

I know they are continuing on this path.

And as we offer more abilities to customize and personalize food going forward, that may give us another opportunity to actually take further items off.

I hope that makes sense.

The trouble with saying simplification is that means whenever you do add anything to your restaurant, people turn around and say, hold on a minute, that's going to make you more complex.

We're not going to be static.

We are going to be energetic.

We will innovate.

We will have new products.

It is fun.

That is what customers want.

We've got to make sure we take more than that out of the restaurant complexity.

So I hope that makes a little more sense.

Andrew Charles, Cowen.

Thank you.

Just on the improved order accuracy in the US, how do you plan to sustain this improvement as customization and personalization will become an increasingly important component of the experience as is the case in Australia?

Obviously, digital initiatives can be a big help.

Any other factors should we be thinking about?

Thanks.

I think two pronged, again.

Just from the day-to-day operation with our teams in the field, it is around training.

The training that was rolled out across the US, which actually was an operator-led initiative initially, was around something called Ask, Ask, Tell.

It was a way that we reconfigured our own internal procedures about how we take the orders, confirm the orders and then present the orders.

That has had a positive and noticeable benefit in our accuracy.

As we go forward, the more of that heavy lifting that we can get technology to do, then the greater our accuracy will become.

So whether it is ordering through apps, whether it's ordering through self-order kiosks that we see elsewhere around the world, technology can certainly help us with putting the customer in charge of the ordering process and allowing technology to do the heavy lifting and then we can just prepare the food and serve it in a friendly way.

So two-pronged.

We will never get away from day-to-day training.

But secondly, we are working hard on a technology to help support us.

We have time for one more question.

Jeff Bernstein, Barclays.

Great.

Thank you very much.

Actually, just two follow-ups, one on the All Day Breakfast.

I know there's been lots of questions on the topic.

I'm just wondering, being that you had it at least in test for a while, whether there is any color in terms of what type of lift you might have seen in test market.

Or maybe what that mix has gone to in that test market.

The other question was just on the mention you had of commodity costs.

It sounds like beef isn't that onerous anymore.

I think you said the overall basket was only up 1% this past quarter.

I'm just wondering what your thoughts are as we look ahead on whether that could actually -- whether you think, qualitatively, that would impact McDonald's or maybe the industry as you think about promotions and discounting and your new value platform, potentially.

I will take the first one, Jeff.

I'm a fairly resilient guy.

I won't get worn down by the same question coming from a slightly different direction; but I appreciate the interest in it.

Of course we are as well.

What I would say is the test markets gave us that kind of -- that curve of initial launch volumes and then the settling down, sustaining.

Because that, then, created a business case that then got the buy-in from the broader operator community.

We are confident in the curve we expect to see of the contribution of All Day Breakfast.

We are encouraged that it's early days.

We're sitting here today 15 or 16 days in and I can tell you that the unity of the system around this and the response from customers, which is the most important piece, is very positive.

We will be able to share a bit more in November, obviously.

Totally understand the interest in it, but it's just too early.

It just wouldn't be fair to give a read on it right now.

Then related to the commodity costs in the US, yes, as we said, it was up about 1%, primarily beef costs.

Not a lot of commodity pressure on the other commodities in the third quarter.

Going forward, again, with the rest of the outlook stuff, since it is all interconnected, we will provide an update at our upcoming November investor meeting related to how things look in the future.

We're near the top of the hour, so I will turn it over to Steve who has a few closing comments.

Yes, thank you, Chris.

Again, thanks to everyone for joining us this morning.

In closing, I want to reemphasize our commitment across the entire system to consistently running great restaurants to give our customers even more reasons to dine at McDonald's.

We're focusing on executing fewer, bigger initiatives that will ultimately deliver a better experience for our guests around the areas that matter most to them, great tasting food, fast, friendly service, contemporary restaurant experience, all at the value of McDonald's.

The progress we have made in a short amount of time gives me confidence that we are making the right moves to turn around our business and reposition McDonald's as a modern, progressive burger company.

Thanks to all of you and have a great day.

This concludes McDonald's Corporation investor conference call.

You may now disconnect.