麥當勞 (MCD) 2016 Q2 法說會逐字稿

Hello, and welcome to McDonald's July 26, 2016, investor 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.

Now I'd like to turn it over to Steve.

Thank you, Chris and good morning everyone.

Midway through 2016 I'm encouraged by the progress we've made and turning around our business.

And the way we've challenged legacy thinking, acting with through greater urgency and shared successes quickly across markets.

These actions underlie the positive momentum that continued in second quarter marking four consecutive quarters of positive comparable sales growth across all segments, and franchisee cash flows at all-time highs in many markets.

More specifically, global comparable sales increased 3.1% for the quarter.

Operating income was up 3% in constant currencies and earnings per share was up 1% in constant currencies.

Excluding the impacts of the current and prior-year strategic charges, earnings per share for the quarter was up 13% in constant currencies.

As we enter 2016 we expect quarter results to be variable throughout the year.

Our topline performance in second quarter, while positive, reflects slower growth due in part to changing conditions in several countries.

I'm encouraged that we continue to win relative to our QSR competitors in key markets around the world.

In the US, our comparable sales versus the across all sandwich segment was consistently positive and average 130 basis points for the quarter, despite softer industry growth.

Our balanced focus on All Day Breakfast value and relevant promotions including monopoly attributed to topline performance.

In Australia, Canada, and the UK, we are getting significant market share within the IEO segments and in particular relative to our traditional QSR competitors.

Our formula for success in these markets is consistent.

Commitment to running great restaurants, coupled with initiatives that create customer excitement across our menu, promotion, and value offers, all supported by strong alignment with franchisees.

Early last year we customer in the were doing.

That mindset expanded our turnaround and continues to guide our decision-making.

As evidenced by the enhancements we're making to the All Day Breakfast menu in the US, the leadership moves we made around sustainability, and the significant progress we're making to create a more modern customer experience as part of the experience of the future.

Over the past few quarters we've heard from customers looking for more choice in the All Day Breakfast menu.

Those of McMuffin sandwiches on the menu offer biscuits for those with biscuits asked for muffins.

We listened, worked with the operational challenges, and this fall will begin offering muffins, biscuits, and McGriddles all day in all US restaurants.

Under the broader food quality umbrella we continue take it leadership stance on sustainability because it is the right thing to do for our business, society, and the world at large.

In Canada we're breaking ground in the beef industry with our recently concluded sustainable beef pilots, part of our work with ranchers and larger producers around the globe to measure and track sustainable beef from farm to fork.

Sustainability matters to our customers and it matters to us.

At the same time experience of the future is quickly becoming to life in key markets around the world.

For example, in Canada over half of our restaurants have been fully converted, the UK is almost 40%, and France is at nearly 25% with table service and about 80% of restaurants.

This marks a significant progress from where we were just three months ago.

Customers are noticing the steps we're taking to build a better McDonald's.

The most recent customer satisfaction scores reflect improvements and seven of our nine largest markets.

In the US we're seeing further evidence of improved brand perceptions according to a recent report that measures consumer perceptions across the 1400 brands.

McDonald's is ranked fourth most improved brand across all brands of measured and the most improved within QSR.

We're taking smart risks to address what matters most to customers.

We're also being smarter about our structure and resources, and prioritizing activities to deliver the greatest impact.

This includes putting more restaurants in the hands of dedicated franchisees, getting us closer to the customers acumen's as we serve, and unleashing more entrepreneurial spirit, innovation across the system ultimately accelerating growth.

At the same time we're further streamlining how we operate.

We're in the midst of rightsizing our organization, taking a critical look at how we can reduce layers to be more agile in our decision-making.

We also recently announced the relocation of our corporate headquarters.

Our new location will support greater collaboration and innovation, help us better attract and retain talent, and move us toward a more modern progressive culture with the added benefit of reducing costs.

These are all important steps forward in our journey to building a better McDonald's.

With that context let's now turn to performance highlights and a major markets.

Beginning with the US, comparable sales in the second quarter increased 1.8%.

While modestly positive this growth was not as strong as the last year quarters.

This is due in part to the recent softening of the IEO industry, which experienced minimal growth for the trending 12 month period ending in May, 40 basis points.

The All Day Breakfast platform continues to contribute to topline momentum's and draw new customers into our restaurants and reasons for existing customers to visit more often.

This also delivering bottom-line growth with resturant level cash flows up for the third consecutive quarter.

Franchisees are excited about the platform and its future growth potential and the next phase of All Day Breakfast, which I mentioned earlier, was voted in with an overwhelming approval rating exceeding 99%.

With food we continue to enhance quality perceptions around our core menu and we've been more vocal about improvements we've made.

Just last week we launched our new [brand] campaign called The Simpler the Better, which highlights the progress we've made in the areas that matter most to our customers and will have even more news to share in the coming weeks.

Value remains a top priority in the US.

Franchisees have embraced the [McPick2 patty] platform at both the national and local levels, which happens to [give] flexibility to this platform provides in terms of products and price points to enhance our appeal to a broader population of value-seeking customers, which is increasingly important given a softer IEO industry trends.

Although the progress we've made in the US is encouraging our most significant opportunity continues to be bringing customers into our restaurants more often.

As such, we are actively exploring new ways to increase the frequency of visits for loyal customers and win back customers we've lost.

Let's now turn to the International Lead segment.

Second-quarter comparable sales increased 2.6% with 4 of the top of 5 markets delivering positive comparable sales for the quarter.

France was the exception with results of a relatively flat.

While the recent Brexit vote has created uncertainty in the UK and across Europe, our business remains strong and we're confident in our ability to manage through the change.

Having operated in these markets for over year 40 years were accustomed to dealing with external challenges.

I believe we're well-positioned to seek out the opportunities it provides to build upon the strength of our UK business.

In fact, the UK market long track record of success continued into second quarter.

Compelling promotions, limited time offers such as: the relaunch of big flavor apps, and positive performance from experience the future restaurants, drove the growth in both average check and guest counts with volume breaking all-time monthly highs in April and May.

In Canada, our continued focus on lunch along with successful marketing campaigns and positive formants from their experience of the future restaurants, drove solid sales and guest count momentum into the second quarter.

Performance of All Day Breakfast in Australia is mirroring the success in the US, driving incremental sales are providing customers with even more reasons to visit McDonald's.

In addition, we continue to fuel growth in more established platforms like Experience the Future and McCafe.

We're introducing new customizable flavors and ingredients, supported by engaging marketing and promotional campaigns to create energy and excitement for our customers.

Sales were slightly positive and Germany for second quarter.

The heavy concentration of price conscious customers value remains a critical priority.

The new pricing structure we rolled out in February continues to perform in line with expectations, and McPick 2 for 5 euros, which we launched in May, resonated well with customers.

However, these initiatives weren't enough to mitigate ongoing guest count in market share declines.

Macroeconomic challenges persist in France.

We're enhancing our builder customers offering more compelling options at lower tiers of our menu.

Were also pursuing growth opportunities at the premium and through engaging promotions and limited time offers, including the recent New York street food event, which successfully drove sales a premium burgers and wraps.

In the high growth segment, second-quarter comparable sales were up 1.6% driven by positive performance in China and Russia.

Despite a challenging environment, including aggressive discounting by competitors, China's comparable sales were up 2.1% for the quarter.

We continue to gain significant market share in IEO and more specifically from Chinese QSRs whilst undertaking meaningful cost savings initiatives to enhance profitability and this important market.

In an effort to give customers more reasons to choose McDonald's, we've introduced appealing new products like a chicken snack sharing box.

In addition, we're expanding our delivery business by tapping into growing additional channels as well as other vendors to offer added convenience to Chinese customers.

In Russia, comparable sales remain positive driven in part by successful promotions that showcase compelling, affordable menu options across multiple dayparts and product categories.

Results may be volatile moving forward given continuing macroeconomic uncertainties and lower consumer purchasing power.

I'm encouraged by our continued progress.

We are creating a better McDonald's.

Ones that customers will recognize as modern and progressive anti-true global leader.

Whilst we've come a long way, we recognize there is much more to do.

That's why we remain committed to executing our turnaround plan through the end of the year.

For now we remain focused on continuing to went within the QSR segment as we give customers more reasons to choose McDonald's.

At the same time we're taking steps to build upon the progress we've made as we chart our long-term strategic path forward within a broader about $1.2 trillion formal eating out market.

I am confident McDonald's will generate long-term value for both our system and shareholders.

Thanks.

I'll now turn it over to Kevin.

Thanks, Steve.

And good morning, everyone.

As follow-up to Steve's remarks I'd like to cover the key performance drivers for the quarter, provide an update on our outlook for the second half of 2016, and outline the recent progress we've made against our financial initiatives.

Starting with the performance drivers for the quarter.

For the quarter as a whole we're pleased with our efforts to effectively manage restaurant profitability, particularly in light of the industry trends and economic factors that we've experienced in certain markets.

With more than 80% of our global restaurants franchised, the largest driver of operating income continues to be our franchise margins.

For the quarter, growth in global franchise margins was led by the US and the International Lead markets.

Franchise margins totaled $1.9 billion, a 6% increase in constant currencies, and contributed about $100 million to our global operating income growth for the quarter.

Growth in global company margins also contributed to quarterly results, as margins rose 150 basis points with China leaving the overall improvement.

In the US, but he operated margins increased by 30 basis points for the quarter, as positive comparable sales and favorable commodity costs more than offset the investment we made last July to raise crew wages and enhance benefits for our restaurant employees.

Given the magnitude of this investment, the improvement and second quarter margins is a noteworthy achievement for our US business.

Moving onto G&A.

Our second-quarter expect an increased 2% in constant currencies, due to higher incentive-based compensation as a result of our year to date performance, as well as costs associated with our biannial owner operator convention in April.

Excluding these items, G&A would have decreased.

Looking ahead, third quarter G&A levels will remain elevated due to our sponsorship of the summer Olympic Games in Rio next month.

Taken together, the cost of our worldwide convention and the Olympics are expected to total about $25 million, or roughly 1% of our G&A in 2016.

For the full-year 2016, we continue to expect G&A in constant currencies to be 1% to 2% below prior year spending levels, excluding changes in incentive-based compensation and any impact from changes in timing of certain refranchising transactions.

Global operating income for the quarter totaled more than $1.8 billion, up 3% in constant currencies, reflecting roughly $230 million in strategic charges recorded during the quarter.

These charges were comprised of non-cash impairment related to our ongoing refranchising and Asia and Europe and G&A initiatives, as well as the decision to relocate our corporate offices.

Diluted earnings per share for the quarter declined $0.01 which included $0.20 related to the strategic charges and $0.02 and negative foreign currency impact.

As a reminder, and second quarter 2015, we had a strategic charges of $0.04 per share related to restructuring.

Excluding the impact of the current and prior year restructuring charges, earnings per share for second quarter 2016, were up 13% in constant currencies.

Turning next to menu pricing and commodity costs.

In the US, commodity cost declined 4.5% during the second quarter.

Looking to the second half of the year, we expect commodity cost to remain favorable maintaining our outlook for the segment's full year basket of goods to be down 3.5% to 4.5%.

Commodity costs for the international lead segment were down about 1% for the second quarter, and are expected to remain relatively flat during the second half of this year.

Where possible, we source possible in local currency to minimize cost fluctuations, and our suppliers also hedge a portion of foreign currency exposure.

So at least in the near term we don't expect Brexit to significantly impact UK commodity prices.

While we are benefiting from favorable commodity costs around the world, we are facing rising labor costs in many of our markets.

As a result, we are carefully balancing pricing increases with a focus on maintaining our strong value proposition, which remains a key pillar of McDonald's brand to drive guest counts.

In the US, second-quarter pricing year over year was up about 3%, compared with food away from home inflation of 2.6%.

Given the widening gap between food at home and food away from home inflation in the US, we continue to track both of these metrics very closely.

As it stands, food at home is projected to increase modestly from relatively flat to up about 1% for the full-year, while food away from home inflation is projected to increase between 2.5% and 3.5%.

For the international lead segment while price increases vary by market, year-over-year increases for these markets averaged 1.5% to 2%.

Next I'd like to provide an update on the impact of Brexit and our global foreign currency outlook.

As I mentioned, we don't expect Brexit to have a significant impact on our near-term commodity prices in the UK.

And as Steve noted earlier, we also haven't seen a significant change in consumer demand in the UK since the vote.

While the long-term impact of Brexit is uncertain, in the near term the most significant impact on our business will be currency translation.

We view our geographic diversification as a key competitive strengths.

For perspective, the UK represents about 10% of consolidated operating income and the euros own collectively represents about 25%.

Given recent currency fluctuations, foreign currency translation is now expected to have a more significant impact on our reported results than previously estimated.

Based on current exchange rates, we project foreign currency translation to negatively impact our earnings-per-share by $0.02 to $0.04 in the third quarter and $0.09 to $0.11 for the full-year.

As always, please take our currency guidance as directional only because rates will change as we move throughout the year.

Beyond the currency impact we continue to expect variability in quarterly results due to increased volatility in the evolving global economic and geopolitical landscape, as well as uneven prior-year comparisons.

It was just over a year ago, beginning with the announcement of our turnaround plan and may 2015 that we began reshaping our business.

From our organizational structure and restaurant ownership mix, to our capital structure and the strategic allocation of our resources around the world.

We've taken decisive actions to pursue each of these opportunities and we continue to make meaningful progress.

In the past six quarters we've refranchised about 850 restaurants, including over 160 in the second quarter.

The large majority of restaurants refranchised to date were sold to existing conventional franchisees.

Overall, our global refranchising efforts are moving along as expected and we're pleased with the progress we've made to date.

It's important to keep in mind that due to the unique nature and scope of the refranchising activity underway, the more complex, larger refranchising transactions do take time.

We remain committed to our refranchising strategy and the benefits that will be realized by moving to a more heavily franchised system for McDonald's globally.

From a G&A standpoint, we remain on track to achieve our net annual savings target of $500 million by 2018, with the vast majority of the savings expected to be realized by the end of 2017.

As Steve noted, we're in the midst of transforming our organization.

We expect to share more detail on the role that our organizational restructuring is playing in reaching our G&A goal as part of our third-quarter earnings update.

Relative to our capital structure, 2016 represents the final year of our three-year, $30 billion cash return to shareholders target.

During the second quarter, we repurchased $3.4 billion of stock, bringing our year to date share repurchases to $7.1 billion or 57 million shares.

In May we completed a $2.7 billion accelerated share repurchase program and also entered into a new $2.6 billion program, which accounted for a significant portion of the share repurchase activity completed during second quarter.

Through June 2016, the cumulative cash return under our three-year target stands at $24.4 billion, and we're on track to complete the remaining amount during the back half of this year.

We've delivered positive results over the last 4 quarters, not just from improving efficiency and working to reduce costs but most importantly from topline growth as we've made strides in improving the customer experience.

These results reinforce my confidence we're focused on the right things.

We are also making good progress on all of the actions we outlined last year.

We're actively refranchising restaurants, building stronger G&A discipline, and returning more cash to shareholders.

The strategic changes we're making and the action we've taken over the course of the last year our positioning us to optimize our business operations and deliver sustained profitable growth.

Thanks.

Now I'll turn it over to Chris to begin our Q&A.

Thanks, Kevin.

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

(Caller Instructions)

Brian Bittner, Oppenheimer.

Thanks for taking the question.

Two questions, one on the US industry and one on -- you guys, on US business.

On the industry, your out-performance against the industry this quarter is very similar to last quarter which suggests the entire industry saw a huge deceleration around 350 basis points.

So what do you believe, sitting in your seat looking at the United States, what are the two largest drivers of this softening in the IEO trend, and do you see it continuing into the rest of the year?

And secondly on your own business, when you look at lapping All Day Breakfast in the fourth quarter, how are you thinking about the ability to sustain positive trends here as you lapped that?

Is extending the All Day Breakfast menu enough, or are there more initiatives required in your mind?

Thank you.

Hi, Brian.

So, on the first one, on the industry, well clearly -- it's been fairly well documented on the consumer slowdown across most consumer segments, to be honest with you, through this second quarter.

And therefore we are very mindful of our competitive position and competitive gap.

It was important to us that we maintain that competitive advantage and fought for market share.

We're not immune from what's happening in the outside world at all, but nor are we letting that deflect our focus on what really matters to us and our customers.

I think the general sense is there's a couple things at play.

First of all there is a widening gap between food away from home and food at home where the commodity decreases have been passed through by the grocers, so the food at home is -- there is value to be had for families there where as eating out, there is a price inflation environment.

So that's a small part of it.

I think generally there's just a broader level of uncertainty in consumers' minds at the moment, both trying to gauge their financial security going forward, whether through elections or through global events.

People are certainly mindful of an unsettled word.

And when people are uncertain, when families are uncertain, caution starts to prevail and they start to hold back on spend.

And for a business like us, clearly we generate a lot of our own business directly, but also we do benefit from people moving around, going to the malls, driving around going on vacations.

And if people are reining in their spend across broader categories, that will have a little bit of a flow through to us as well.

So we're mindful of it.

It just means we've got to be closer to our customers than ever and adapt and make sure that we're building compelling plans in the short term as well as the long.

In terms of sustaining trends, we plan to grow our business, but at the same time we're not trying to do that on a quarter to quarter to quarter basis.

We are mindful of the short term, but we have our [eyeline] on the long term.

We believe we've got a number of the right drivers in place to give us sustained, long-term growth here in the US.

Our value platform, we continue to learn -- so from McPick2 for 5, for example.

We have our second national campaign in May and we learned more about it in terms of the items we have within the bundle and how we position that.

All the way through to some of the early markets where we're testing out the Experience the Future in the US where we're making a significant and exciting rollouts program in Florida and certainly within New York as well, which we believe the results there are a mirror of what we're seeing elsewhere in our other major markets, provide a very exciting opportunity across the next few years in the US as well.

So, mindful of the short term.

We're going to fight for share, but also we don't want to lose the strategic direction that we believe is right for long term.

David Palmer, RBC.

Thanks, good morning.

Steve, you have some comments about improving consumer perceptions in most of your major markets.

Does that include the US, and what measures are getting better?

Where does the opportunity still remain to improve?

And then which of your initiatives do you think are really going to help you get where you want to get with your brand with the result for, I would imagine, being traffic getting better from here?

Thanks.

Thanks, David.

Yes.

So if I was to be US-specific, I referenced earlier the YouGov [link] just on brand perceptions, and we've made really encouraging progress.

And I believe that's because as well as trying to drive the business in the immediate term we've also made the investments and the commitments around food, food quality, sustainability, the employment proposition where not only do we move pay for our hourly-paid staff, but also a far broader enhanced range of benefits including training and education opportunities for them.

And with a brand like McDonald's, everything you do communicates.

So the better you move on every single consumer touchpoint, then the broader halo on the brand starts to improve.

We're encouraged.

We've got plenty of plans to maintain that momentum, but it's nice to see it being recognized by consumers.

Part of that comes out of the basics of running better restaurants.

We've maintained a 6% year-on-year improvement in overall customer satisfaction.

When I look into the detail there, we've made the progress on the areas that the Team had intended to make the progress.

We spoke in the past about an attention to order accuracy, particularly in the drive-through, are actually -- has improved.

The quality of the food perceptions improved.

Friendliness improved.

All by the order of about 6%, including speed of service as well.

So, I believe the day-to-day customer experience also enhances the brand and also just drives up immediate satisfaction.

In terms of going forward, what's important?

I'd say a couple of things.

Clearly, continuing the journey we are around food and food quality, both investing in the ingredients, the recipes, and the items in the restaurants as well as the perception of better explaining what's in our food, where it comes from.

So that's where The Simpler the Better campaign starts to focus.

It chronicles the big, meaningful moves we've made, and I believe signals the direction of travel for us going forward.

And as I say, I'm not going to disclose anything more about it, but there will be more news to come which we know is going to be powerful to the customer agenda and very, very strong for the brand as well.

The other element that's -- I'm excited to introduce that we will be introducing increasingly in the US, because we've seen it work elsewhere in our major mature markets, is rolling out the Experience of the Future.

It is a fundamentally different experience for the customer and a lot of that does involve technology as well as the service experience as well.

So how can we take out any of the interactions that customers have with the experience for McDonald's, whether it's coming into the dining area or going to the drive-through, how can we take out the non-value added processes and just make a smoother, more enjoyable and easier experience for customers?

So the [injuncture] of self-ordered chaos.

The development of the -- of our mobile apps so that you can order in ahead and just check in when you get into a restaurant.

It takes out many of those human interactions where complications can arise, and just makes it a smoother experience for customers.

We're seeing a good pickup in sales as we roll this out across the UK, Canada, Australia, and early days, but also in Germany as well.

So we know we're onto something.

We know customers respond well and certainly it brings on new life into our restaurants and into the brand.

Brett Levy, Deutsche Bank.

Good morning.

If you could give us a little bit more insight into how you're looking at the structural margins, especially in the US, as you've regained some of your lost footing.

What do you think are realistic margin expansion targets, assuming more modest same-store sales in the [flat up] 2% or if you're able to reaccelerated to 2% or greater?

How should we really be thinking about it given the current labor and [cogs] outlook?

Yes, thanks, Brett, it's Kevin.

You saw in second quarter this year we were able to actually grow margins 30 basis points in the US with the 1.8% comp sales, which we were certainly pleased about.

As you know, long-term, margins are at top line game for us.

We need to grow comps in order to maintain and improve margins, but what we were able to do this quarter was effectively manage the restaurant profitability as well.

So while commodity costs were more favorable this quarter, our management of what we call controllable costs both on the food side and the labor side was better this quarter than prior quarters.

And so we're pleased that we're doing a better job of managing -- running the restaurant, but also managing the profitability of the restaurant.

Going forward we've always said that we need about a 2% to 3% comp in a normal inflationary environment.

That probably hasn't changed much, and there certainly isn't anything structural that would prevent us from getting back to kind of where we were on high margins in the US.

David Tarantino, Baird.

Good morning.

I wanted to come back, Steve, to the commentary around speed of service.

I think you mentioned that that had improved at least from a perception standpoint.

But could you give an update on where you are on that front?

And it seems like such an important factor when you think about how much of the business goes through the drive-through.

What are the keys to improving that going forward?

Yes, thanks, David.

You're absolutely right.

The reality is the customer experience is critical in just our underlying business momentum.

Speed of service has predominantly improved largely because we've got the accuracy element of service far better.

We've enhanced the training, some of the operational procedures through the drive-through.

You may have heard me talk about a program we called Ask, Ask, Tell, which was a way of really ensuring we both took and then delivered the right order day in, day out to our customers.

Once you get your accuracy right then the whole drive-through lane just operates far smoother.

We also made significant changes to the merchandising in the drive-through with more tailored and focused merchandising menu boards, which again just made it easier for customers to order and to identify the products they want, but also easier for our Teams to take and get right.

So I think there's a lot of work that's gone on.

The real devil in the details, down to the font size on the order receipts to make sure our Teams collecting the orders can gather the right items.

But also there's a lot of work we're doing in the future where we believe we can also enhance service, speed, and accuracy and get technology to do some of that heavy lifting for us.

So whether it's voice recognition in the drive-through speaker post all the way through ordering ahead via either the Internet or the app.

Now we have elements of this going on around the world.

I'm not sure we're going to pull them all together here in one market, but we're going to take those learnings and see how the customer responds to some of the capabilities we are introducing.

And clearly if the response is strong we can bring that in and that will help, again, further enhance speed of service all the way to -- we have markets where we have curbside collection for orders.

If you actually order that ahead, via the Internet, you can actually just go along to curbside.

And therefore, when you think about it, you've got one satisfied customer who is ordering and collecting and paying exactly how they want.

That's also one fewer car go to the drive-through, so the existing drive-through lane runs smoother.

We're looking at this from a number of different directions.

I'm definitely not underestimating the day-to-day operation improvements the Teams have done so far.

But also we're looking at innovation in the future to try to keep it smoother and easier for customers and easier for our Teams to get right.

Nicole Miller Regan, Piper Jaffray.

Thanks.

Good morning.

Wondering how do you benefit or not from the Summer Olympics, and is there anything you want us to be aware of in the third quarter relating to that for modeling purposes?

Thanks.

For us there's a brand association with sports.

We've been a long-term sponsor of the Olympics so we have some fun and engaging initiatives going on, particularly in and around Rio and working with our partners down there, Arcos Dorados.

I'd don't -- I wouldn't say that anything material that's going to impact our business trends.

We'll have some fun with it in certain markets where there's promotional activity, where there's tie-ins that allows consumers to get a little closer to it.

I do expect to see us with a little piece of that across the US as well, but I wouldn't see it materially impacting our business one way or the other.

It is just a brand reinforcement that we're committed to global sport, to supporting participation at local community levels just like we are with football or soccer around the world with our FIFA partnership.

Andrew Charles, Cowen.

Great.

Thank you.

Given that 3% pricing in the US this quarter which is at the midpoint of the food away from home inflation outlook, how should we think about your willingness to let price roll off?

Steve, you called out the differential between food at home and away from home creating pressure on the topline.

And if I can sneak one more in there, Steve, you called it out in your prepared remarks, but there was no mention in the release of the Monopoly promotion in April and the Angry Birds promotion in May, so is it fair to categorize June as the strongest month of the quarter for US same-store sales?

I'll speak to a couple, and Kevin may want to add to that as well.

When we look at the average check increases, so call it the gap between topline sales and our guest count momentum, clearly price is a differentiator but so is also the product mix, the bundling of items within each purchase.

One thing I would want to say is that when we have offers redeemed from the global mobile app you see an average check increase.

When we see the breakfast items bought during the main daypart we also see an average check increase.

So part of it is not just price driven, it's actually product mix and bundling driven.

I don't particularly want to talk to the monthly trends because we've got away from that.

I just don't think, honestly, that's very valuable.

I guess what I would say across the quarter is there wasn't really a deeply meaningful trend one way or the other.

We consistently performed and we consistently outperformed the market, and if I look at the competitive gap week to week to week, which clearly we do, we had a pretty consistent outperformance right across the 13 week period.

I don't know if, Kevin, you want to add anything to that?

I will talk about some of the pricing stuff that you mentioned, Andrew.

Related to what rolls off, I guess what I would say is in the second quarter we had some pricing from the prior year that rolled off and we didn't replace all of that, and you can probably expect similar for the rest of this year.

Again, partly because of that widening gap between food at home and food away from home inflation, so we're certainly keeping a close eye on both of those metrics because it's really important for us to focus on maintaining and growing guest counts.

I'm just coming back on Monopoly and Angry Birds.

I think it's really important for a business like ours and a brand like ours to create energy and engagement amongst our customers on multiple fronts.

And clearly, standing for everyday value is important, certainly, but also so is some fun and some engagement.

That's the role that games like Monopoly play, or meaningful promotions like the Angry Birds.

It just provides some excitement and some buzz around the brand.

We do have a, I would say, competitive advantage that we are able to attract many of the best partners in the world because of our size and scale matching theirs.

A recent example of the work in Japan, [it's something] with Pokemon Go is a great example where clearly we are preferred partner and it's been a fun program.

It's doing great things for the business, and customers respond to that both at a day-to-day level in the restaurants.

But actually they recognize that we are a leadership brand and we attract leadership partners.

John Glass, Morgan Stanley.

Thanks.

Back on the US sales, you're still in an early phase of a turnaround so one could argue that your gap to the industry should still be widening and it didn't this quarter.

I wonder just a couple questions.

One is, do you think the change from a dollar menu to the bundled value had any adverse impact on transactions and the way people think about the brand?

And clearly, as you are very well aware of, the fourth quarter and early 2017 comparisons are more difficult.

Do you think just adding to the Breakfast All Day menu is sufficient to lap those, or are there other things you are thinking about that are more profound, you just don't want to talk about today?

I think you mentioned something about loyalty.

Is this the time that a loyalty program would fit into the marketing plan, for example?

Hi, John.

On value, is there a trade off in transactions having moved away from the dollar menu?

I think there is, yes, absolutely.

We recognize that.

That doesn't come as a surprise to us.

What we want to do is work hard to still have a compelling, everyday value proposition in our restaurants.

And that can take the form of many things.

We've gone with the McPick 2 platform.

And again just to step back and remind why we believe this is strong, it's because it's grounded in what customers tell us is most important to them, which is choice and flexibility.

You're not locking them into a certain price point, nor are we locking them into a certain selection of bundled items.

So we believe that choice and flexibility is right for our customers and gives us flexibility and new news as we return to these programs across a year.

Sometimes they will be at a national level.

If it's not national it will be locally reinforced in the marketing windows in between.

So we're continuing to learn.

We've only been national with McPick 2 for 5 twice now, and again the local co-ops have been working on their variations of the -- particularly the McPick2 for 2 or other value price point.

We're continuing to learn and evolve that.

Is there a transaction trade off?

Yes.

There is.

We knew that.

We planned for that, but we still believe we have an everyday value proposition.

And again, it's not just McPick 2.

There is local promotional activity in the co-ops on an ongoing basis whether it's $1 drink promotion, for example, all the way through to the offers we're now offering through the global mobile app.

We've had 12 million downloads of that.

We've got 8 million registered users on the app, and clearly the offers and the frequency caught on there are a driving of the interaction.

In terms of quarter four, clearly we know -- if you like the quarterly cycles we're on we believe the enhancement to All Day Breakfast will help reinforce the baseline momentum, as does running better restaurants, as does reinforcing value.

The Team is certainly working on other activities.

There's nothing in particular to share today, but I would say that we are playing the long game here.

So we're not going to manage the business.

We're mindful of the quarters, but we're not going to manage it by quarter.

We believe we are getting the right fundamental foundations and platforms in place to reinforce the long-term success and profitability of McDonald's.

And we have consciously expanded our business plans and our activity away from just a product and price led program, which we had been somewhat drawn to in the past.

We believe that the brand enhancing long-term perspective, as long as we're winning the short-term market share [fight], is a good combination for us.

Joe Buckley, Bank of America Merrill Lynch.

Thank you.

You mentioned Pokemon Go in Japan.

Just curious if there are opportunities besides Japan for Pokemon Go?

And then I wanted to ask as you lap last summer's wage increases in the US, what do you expect to see in wage inflation in the US in the back half of the year versus what you've seen in the first half of the year?

Hi, Joe.

I'll take the first one because I'm more knowledgeable about Pokemon than I am about the detailed financials.

I'll let Kevin deal with that one.

So, our relationship with [DN Tech] really has been driven by our Japanese Team.

It's a global phenomenon, clearly.

They are working really hard to roll it out across a whole bunch of different markets across the world with, again, great success.

We'll keep talking to any leadership partners and leadership partners around the world.

So nothing else to say, no other speculations to add to it, but we're certainly enjoying what it's doing for our business in Japan at the moment.

Regarding labor cost, minimum wage, et cetera, you should expect to see not a big bang like you would have seen in 2015 related to one significant effort, if you will, to raise wages at one time.

We certainly are mindful of wage increases in various states throughout the country.

One of the pluses that we've seen from the efforts that we've taken, as Steve mentioned, both on the wage side as well as the benefits side is that our crew turnover is down year over year.

We've seen some benefits on the labor availability side, if you will, from the actions we've taken.

I think it's fair to say labor pressures will likely continue in a lot of countries around the world including the US, but there aren't any specific plans to have a one point in time where we significantly increase.

Jason West, Credit Suisse.

Thanks.

A technical question and a bigger picture question.

On the pricing that you guys quote, the 3% in the US, is that net of the discount that you're offering on McPick 2, like say when it's 2 for 5 for things like Big Macs, or is that just a gross pricing?

And bigger picture I guess, as you guys step back and look at the impact that McPick 2 has had on the business and All Day Breakfast, do you get a feeling that there's an initial trial there that's difficult to sustain, which is somewhat the way it sounds on the outside a little bit, or are you not really seeing that sort of dynamic playing out as much?

Thanks.

I'll take the second one, Jason.

So McPick 2 and All Day Breakfast, they have both followed pretty much the curve that we would have expected.

Whenever you launch anything and put national support behind it you have a launch volume, and then you tend to settle into a more ongoing run rate.

I want to say we're pretty happy with how both of those have played out, and they have continued into the out quarters, if you like.

From the All Day Breakfast launch in October of 2015, but now almost lapping that that time, and it's continuing to give us strong incremental sales, strong incremental margin and cash flows, and incremental business as well.

And the same with McPick 2. I think these are now platforms that are just going to continue to work hard for us at that kind of steady-state, ongoing level.

Jason, that 3% is a gross price increase.

Jeff Bernstein, Barclays.

Great.

Thank you very much.

Actually just two follow-ups to what was mentioned earlier.

One, Steve, you mentioned the market share gains, and it seems like it's stabilized in the US relative to last quarter.

Just wondering whether you could talk a little bit about the largest international markets, whether you'd say, based on whether you're looking at food at home or the info leading out market, however you look at it, trying to see whether there's any big winners or losers in your largest international markets?

And the other follow up was just for -- Kevin, you mentioned the return of cash, and I think we're all well-versed in the bump in leverage and the big bump in the repo that you've done over the last 12 months.

But with this three year period being close to done, and as we look out over the next presumably three-year period, is there any reason at least directionally to assume any meaningful change in that $30 billion, whether up or down, or maybe what metrics would lead you to make that decision?

Thanks.

Hi, Jeff.

When we look at market share, certainly across our major markets, we look at both IEO but also then QSR.

And depending on your competitive set they have different merits depending on which country you are looking at.

But if I was to take IEO, we have made really strong gains -- or strong gains I'd say across in the UK, Australia, China, and Canada.

And we feel good about opposition within the broader marketplace.

Even more encouraging is in the nearing competition, the QSR market share, where we have made some substantial gains in UK, Australia, China, and Canada.

And I think as part of the turnaround we have really focused on making sure that we win in the most immediate competitive set we are.

This is part of the modern progressive burger company ambition, which is make sure we are strong and dominant in our immediate sector, and then we start to take IEO share as we broaden the experience.

I believe the experience of the future will have us fight increasingly into an increasingly strong position in the broader IEO.

In the immediate term it's getting the basics of the business, right, as we win QSR market share.

I've shared over a number of these calls and meetings we've had about some of the successes in Australia and Canada, for instance.

The customer experience is noticeably different than it was three to four years ago, both from the designs of the restaurant, the introduction of technology, the substantially enhanced front of house hospitality that we now offer, all the way through to providing more options to customize your food, buy or sell from a kiosk, for example, in the dining areas.

And now we are extending that to table service.

If a customer is to walk in now versus two, three, four years ago it would be a noticeably different experience, and I believe that's both winning QSR share and IEO share.

And those are the sorts of ideas that with the new structure we have we're looking to move and are moving very, very quickly between markets.

And then Jeff, related to your cash return question, as you indicate, obviously over the last year or so we've had an adjustment of our capital structure by taking out some more leverage and returning that via share buyback to shareholders.

Going forward we haven't stated any target, but certainly our overall capital allocation philosophy hasn't changed.

Which means you should expect that over the long term we would return all free cash flow to shareholders.

That's a combination of dividends and share repurchase while still maintaining that BBB plus credit rating, which is where we are right now.

Jeff Farmer, Wells Fargo.

Thank you.

Just a question on your longer-term operating income margin opportunities.

So, it looks like your guidance points to franchise restaurant ownership moving to -- I think it's almost 95% by the end of 2018.

I think you stand at roughly 83% today.

You've seen dramatic margin expansion in the past, following some of these aggressive refranchising efforts.

Going back and looking at the model looks like in 2007 and 2008 you did see some really, really impressive margin expansion.

Again, I think after you develop [these] license and refranchise more than a couple thousand restaurants.

So with that precedent, what operating income margin level -- and again, I realize you're not going to give me a specific number or even a tight range -- but when you guys move to a 95% franchise mix, how different do you think the operating income margin of McDonald's will look in 2018 as compared to what it looks like today?

Yes, Jeff, it's Kevin.

A couple things.

One, I believe we expect to be 93% by the end of 2018 with 95% longer terms.

I just want to make sure we get that.

As you know, the way it works when we refranchise, we'll pick up franchise margin dollars, effectively we're swapping Company operated margin dollars for franchise margin dollars, and certainly then spending less G&A and capital to generate those franchise margin dollars.

So as you state, that was certainly accretive to operating margin back historically when we've done that.

We would expect similar, that we would also be able to improve operating margins going forward based on the activity.

As you indicate, we're certainly not going to throw a number out there, but generally one of the main reasons we're doing that is because of the stability of both the cash flows and the operating performance going forward.

So we've got a stable revenue stream that we will collect, and a predictable model that allows us to manage the business pretty effectively.

Certainly on a free cash flow basis you should expect that it would be accretive because, as I said, we're generating more income, more cash flow, and not spending as much capital.

I'd say just as a broader philosophy on the fundamentals of not just a turnaround plan but our gross (inaudible), Jeff, is that with the ownership strategy, this is around us being able to focus our time and our attention and our resource on the areas and the markets that make the largest contributions.

And also our talent.

So we are going to place our talent in the areas that drive growth.

We can place our capital in the markets whether it turns off stronger, and at the same time liberates one of the fundamental G&As which is also just to have 100-plus of our 120 markets owned and operated by our franchisees and development licensees because they are closer to the customer and closer to their local cultures.

So we believe we are going to get that balance right which will certainly enhance our efficiency and effectiveness not just as an operating business and drive long-term growth, but also our financial returns as well.

John Ivankoe, JPMorgan.

Hi.

Thank you very much.

It may be a little bit of a follow-up or maybe good timing from the previous question.

It does look like you guys are choosing developmental licensing perhaps even over conventional franchising as we read what we've read in the press and how you've discussed the Business.

With that being said, there were a few different references to G&A by both Steve and Kevin in your prepared remarks.

Maybe there's some commentary coming on the third quarter.

The first G&A cut announced I think was $300 million and then it was $200 million.

Is your mindset that there could be another type of G&A tranche to come out perhaps as significant as the first two that you've discussed?

And secondly, as we start to focus on free cash flow especially as we get into 2018, are you prepared to help us think about what the long-term CapEx of a post refranchised McDonald's would look like?

Yes, John.

Let me talk about the whole DL -- developmental licensing versus conventional.

As we talked about last year, we effectively took a restaurant by restaurant and market by market approach to look at the best way of franchising in our minds.

And what you'll see is in generally in our major, significant, mature markets, that is the US and the International Lead markets, you'll see more of the conventional franchising which is what we do in the US.

So you would've seen some more conventional franchising certainly in this quarter, and there will likely be further franchising like that.

In countries, certainly in certain parts of Asia and Europe, where either it's a little bit more volatile from the economic and political standpoint, and/or a partner can help us accelerate growth and grow faster than maybe we're willing to put in capital right now, those situations you will likely see us using that developmental license model that we've used successfully for many years in a lot of the countries.

All of the transactions that we have planned right now were taken into consideration when we came up with that $500 million of G&A reductions.

The $500 million contemplated all of the transactions that we have in our plans at this point.

So none of those activities will in and of themselves drive further G&A reduction.

That doesn't mean that we're not going to continue to look for efficiencies and run the business in a disciplined manner.

But you shouldn't expect that because we complete a refranchising transaction or anything along those lines that that would trigger automatically a further or additional G&A cut in addition to the $500 million.

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

Thanks, Chris, and again thanks everyone for joining us this morning.

I want to reemphasize our focus on putting the customer at the center of everything we're doing, from the food we cook to the conveniences we offer to the service we provide.

That mindset ignited our turnaround last year and continues to guide our decision making.

The move in the right direction with four quarters of growth with growth across all four segments in each quarter.

But there is more work to do.

And that's precisely why we remain committed to executing our turnaround plan through the end of the year.

I'm encouraged by the way we're creating a better McDonald's, and excited about the opportunities ahead.

And I'm confident we will continue to aggressively take actions to strengthen our business and reassert our leadership position as the modern progressive burger Company in a global IEO industry.

Thanks to all of you and have a great day.

This concludes McDonald's Corporation investor conference call.

You may now disconnect.