麥當勞 (MCD) 2017 Q1 法說會逐字稿

Hello, and welcome to McDonald's April 25, 2017, 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. Mike Flores, Investor Relations Officer for McDonald's Corporation.

Mr. Flores, 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.

Now 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 we -- as are the reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.

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

Steve?

Thanks, Mike.

Good morning, everyone.

We delivered a strong first quarter with global comparable sales of 4%, marking our seventh consecutive quarter of positive global comparable sales.

Globally, guest counts were up 0.6% as customers visit McDonald's more in the first quarter of 2017 from same period in 2016.

And our borderline performance was also strong.

Diluted earnings per share increased 19% for the quarter in constant currencies.

At our Investor Day, we talked about how we fortified our foundation and how we're now fit for purpose.

Today, we are running better restaurants, maintaining focus on operations excellence and on the fundamentals of quality, service, cleanliness and value, and it's making a difference for customers.

Our various opportunities are at the core of our business, and we're continuing to gain momentum as we build a better McDonald's, one that delights customers with the taste and quality of our food, offers the highest level of convenience and provides great value.

And as we shift from revitalizing the business to strengthening and growing it, we're going to talk about the moves we are making within the context of our velocity growth plan.

This will enable us to provide more texture on how the long-term plans we share during our Investor Day in March are driving everything we're doing.

So let's start by going deeper in our performance.

And as we do that, we're going to change things up a little.

Our leadership team has a great rapport, and I'm especially grateful for the partnership of our Chief Financial Officer, Kevin Ozan.

And with that, (inaudible) to partner on this call, like we do on a daily basis.

So now I'm going to toss it over to him.

Thanks, Steve.

2017 is off to a good start.

We've built upon strong prior year results that benefited from the launch of All Day Breakfast in the U.S. and Leap Day, which created a 1% hurdle for this year's comparable sales across all segments.

Our top line performance is also starting to reflect the emphasis that we're placing and growing guest counts, which continues to be our top priority.

During the quarter, we saw varying degrees of success with strong sales in guest count contributions from Japan, the U.K. and Canada.

Guest traffic is beginning to strengthen in other markets, such as the U.S. and Germany, though their guest counts remain negative for the quarter.

So before Steve walks through the steps we're taking to continue building momentum, let's take a look at first quarter sales highlights in each of our segments, starting in the U.S. We're in a stronger position in the U.S. today, a cumulative impact of the moves we've made the past couple of years.

Comparable sales grew 1.7% for the quarter, fueled by ongoing customer enthusiasm for All Day Breakfast; the Big Mac promotion, featuring the Grand Mac and Mac Jr.; and our beverage value offerings.

We also delivered a positive comp GAAP of 2.1% versus QSR sandwich competitors.

In the International Lead segment, comparable sales increased 2.8% for the quarter, driven primarily by continued momentum in the U.K. and Canada's successful launch of All Day Breakfast.

In the High Growth segment, comparable sales grew 3.8% with positive results across all markets for the second consecutive quarter.

China's continued momentum was the strongest driver of segment performance.

And the foundational markets grew comparable sales 10.7% for the quarter with solid results across the entire segment.

Japan was the biggest contributor with double-digit comparable sales on top of double-digit performance in the first quarter of 2016.

So thanks for that, Kevin.

Driving the -- post to driving the top line momentum in the quarter, I'd now like to turn to our strategy and the actions we're taking to sustain that momentum for the long term, which we shared on our March Investor Day.

Our velocity growth (inaudible) is designed to grow guest counts by retaining customers who visit us today, regaining lost customers and converting casual customers to committed customers, giving each of them more reasons to visit McDonald's more often.

At the same time, we are creating the best experience for customers, leveraging our size and scale.

We are prioritizing 3 velocity accelerators designed to drive growth on top of everything else we're doing, and those 3 are: digital, delivery and Experience of the Future, or as we call it, EOTF.

Taken together, these actions enable us to bring the biggest benefit to the most customers in the shortest possible time.

So today, I want to talk about the steps we are taking to regain customers by focusing on food quality, convenience and value.

First, food quality.

We know consumers place high value on taste; serving delicious food is imperative.

As good taste and quality are so closely interrelated, we also continue to build on the moves we've made with cage-free eggs and sustainable beef to improve the quality of our food.

Last month, we announced that we will serve fresh quarter pound beef patties, prepared when ordered, in U.S. restaurants by mid-2018.

I had a chance to taste the burgers and talk with customers and franchisees in Dallas, and Kevin did the same in Tulsa.

We both left convinced the customers will appreciate the improvement as we bring fresh beef around the U.S.

As we expand our menu to offer premium burgers in markets around the world, we're tapping into our restaurant operations expertise to serve customers quickly and efficiently.

We recently launched Gourmet Creations in Australia, and we'll launch the Signature Crafted platform in U.S. restaurants next week.

We're taking significant steps forward on what matters most to customers, and I'm confident we'll make a difference for our business and our brand.

Second, convenience.

Convenience is not making our customers' lives easier but providing a more accessible and personalized experience, with a welcoming crew in a modern and inviting environment.

In Canada, customers have come to rely on the hospitality provided by our guest experience leaders who welcome them in the restaurants and offer to guide them through in the kiosk ordering process.

Customers appreciate ordering in their own pace and customizing their order just the way they like it.

And since their introduction in Canada, kiosk usage has more than doubled year-on-year.

In the U.K., we're providing greater convenience with increased access to McDonald's.

More than 650 restaurants are now open 24 hours a day, 7 days a week.

This is such a huge benefit to consumers, matching shifting work patterns and lives that are getting increasingly hectic and complex.

We continue to highlight our extensive hours through We are Awake overnight campaign, showing customers we're available on their schedule.

Our leaner operating structure has improved our ability to spread our best ideas from one market to another.

In markets around the world, we continue to see a collective lift from all the actions we're taking to make McDonald's more accessible and easier for customers to visit.

Third, value.

When value is customer-focused and locally relevant, it drives guest counts, period.

We're committed to providing great value where the customers have a couple of bucks in their pockets or a few more than that.

In the U.S., the predictability of our national beverage value program with $1 any size coffee was well received by customers.

In Russia, we've seen increased traffic with our recently launched all for RUB 50 value platform, which is a great value and highly competitive in that marketplace.

And in Germany, our taste of McDonald's campaign provides an everyday affordable mid-tier sandwich and is resonating with price-conscious consumers.

We continue to tap into our unmatched scale and unparalleled operations to ensure customers feel good about what they get for what they pay.

As I mentioned earlier, we're not stopping there.

The world in which we and our customers live demands new approaches and an evolved mindset.

Our 3 velocity accelerators: digital, delivery and EOTF, will drive incremental profitable growth.

They create more satisfying and lasting relationships with customers, transforms convenience, expands our day parts and collectively help us become a better McDonald's.

On digital, we are reshaping our interaction with customers, whether they eat in, take out or drive thru.

We'll bring mobile order and pay to 20,000 restaurants around the world by the end of this year.

In the U.S. alone, mobile order and pay will be in 14,000 restaurants by the end of the year.

Whilst we're still in the early days in our (inaudible) markets, we're moving aggressively with multiple mobile order and pay tests already underway.

We're already in 400-plus restaurants across the U.S., including Chicago, Monterey, Salinas, Spokane and Washington, D.C. Globally, developed -- deployment is underway in markets, including the U.K., Australia and China.

Through delivery we'll bring the McDonald's experience to more customers, whether it's in their homes, their dorm rooms to their workplace and beyond.

We're encouraged by the results in Florida and are expanding to additional cities in the U.S. this quarter.

At the same time, we're accelerating Experience of the Future in the U.S., pruning on our learnings from markets around the world.

As we mentioned in March, EOTF will be in roughly 2,500 U.S. restaurants by the end of 2017 with the goal of converting most of the traditional restaurants in the U.S. system by 2020.

Markets in the U.K. and Canada have reached the critical mass with Experience of the Future are seeing growth in both guest counts and average check size, leading sales lifts in the mid-single digits.

And now Kevin will share how our global growth plans are fueling the financial performance we've outlined for 2017.

I talked about the strength of our top line results earlier.

As Steve mentioned at the beginning of our call, our bottom line performance was also strong.

Operating income grew by more than $250 million or 16% in constant currencies, and earnings per share was up 19% in constant currencies.

Let's dive into the performance drivers for the quarter and their impact on our financials.

The increase in first quarter operating income reflects broad-based strength across all segments, a testament to our ongoing strategic initiatives.

Over the last 2 years, we've enhanced the strength and stability of our business as we've evolved to a more heavily franchised organization with more restaurants now in the hands of our outstanding local Owner/Operators.

This shift in our ownership structure also has reduced our capital and G&A needs going forward, and we are very focused on growing top line sales and profitable guest counts that directly support our critical revenue stream as well as Owner/Operator cash flows.

For first quarter, franchise revenues increased 7% in constant currencies, reflecting strong top line growth as well as the impact of expansion in refranchising.

Franchise margin dollars reached $1.8 billion for the quarter, a 7% increase in constant currencies and contributed over 40% of the growth in consolidated operating income, led by results in the U.S. and the International Lead segment.

Looking next to our company-operated margins.

As we've said before, margins are a top line gain.

Positive comparable sales in the first quarter were a key contributor to our global company-operated margin growth.

These margin results also reflect the benefit of lower depreciation expense of roughly $42 million, primarily in China and Hong Kong.

As we indicated in our year-end report, in accordance with accounting rules, these markets were classified as held-for-sale effective December 31.

Accordingly, we stopped recording depreciation beginning January 1. We expect a similar benefit at least through the second quarter.

Looking at the business drivers of our company-operated margins, we continue to glean insight from analytics to improve the effectiveness of our pricing models.

Our intent is to optimize growth in guest counts, revenue and restaurant-level cash flows.

At the end of the first quarter, our U.S. menu reflected a 2% price increase, which was below food-away-from-home inflation for the period of 2.4%.

Menu price increases for our International Lead Markets averaged about 1.5%.

As Steve has said, we have made substantial progress resetting our foundation and rightsizing our structure in Q1, our G&A was down by more than $55 million, 9% in constant currencies, reflecting both the impact of our restructuring and refranchising as well as our ongoing spend discipline.

We will continue challenging our G&A spend and optimizing our valuable resources to prioritize the funding of initiatives that grow the business.

The last item I want to call out for first quarter is foreign currency translation, which negatively impacted earnings per share by $0.02.

At current exchange rates, we expect a negative impact of $0.02 to $0.04 in the second quarter and $0.05 to $0.07 for the full year.

As usual, please take this as directional guidance only because rates will change as we progress through the year.

We ultimately measure our financial efficiency by our operating margin as it serves as the most comprehensive gauge of our overall performance.

As we move through 2017 and beyond, the execution of our refranchising initiative will yield significant benefits to our operating margin as we transition to a more streamlined and efficient model.

At the end of first quarter, we successfully completed the refranchising of our Nordic markets.

The regulatory processes to complete the previously announced refranchising trident actions in Asia are proceeding, with the China-Hong Kong transaction expected to close in the second half of the year.

And we recently completed a review of our ownership stake in McDonald's Japan and have made the decision to not proceed with the transaction at this time.

Given our current ownership, McDonald's Japan restaurants are already classified as franchised.

So this decision does not impact our current refranchising target or our intent to evolve to 95% franchised over the longer term.

It also does not impact our long-term financial targets that we introduced last month.

Most importantly, we're confident that we have the right capabilities and customer-focused plans to grow our business in Japan, and we believe the market is poised to maintain its strong momentum.

While our operating margin grew to nearly 36% for the quarter, items like the completion of the China-Hong Kong transaction and the related depreciation benefit that I mentioned earlier will create some choppiness in our operating margin over the next few quarters.

So the near-term trend line for our operating margin won't be linear.

Collectively, our refranchising and G&A efforts, along with diligence in investing our capital to grow sales and income, will deliver increases to our operating margin and contribute to our goal of enhancing long-term financial value for our system and our shareholders.

Thanks, Kevin.

I want to build on what you shared by providing some additional context around why we've never been more sure of our ability to see the potential that we see.

My confidence stands from the success we've already achieved and the world-class management team we now have in place to build upon the success.

We've talked about our intent to blend individuals with deep McDonald's experience with new executives who have valuable experience outside of McDonald's and bring fresh perspectives and innovative thinking.

With that in mind, we've recently brought on Bob Rupczynksi as Global VP of Customer Relationship Management.

Bob joins us from Mondelez International where he was Head of Global Media and Digital.

He previously led data-driven marketing strategies at Kraft; Linda VanGosen as Head of U.S. Menu.

Most recently, Linda was at Starbucks where she was responsible for the overall vision and strategic growth plans for Starbucks Evenings; and Morgan Flatley as U.S. Chief Marketing Officer.

She comes to us from PepsiCo where she was CMO of Global Nutrition and previously returned Gatorade to growth as CMO of that brand.

We're continuing to see great talents step into important roles.

And I know that together, we'll be successful in accelerating the growth of the business.

The conversations I've had with franchisees, suppliers and most importantly, customers have further bolstered my confidence.

I've visited franchisees in the Middle East.

We've embraced the powerful potential of Experience of the Future and seeing the impact it makes on the customer experience and their bottom lines.

This is also an existing delivery market, so it's great to experience that first hand.

I've met with suppliers, including an Irish farmer, participating in a national sustainability program in raising high-quality beef with a smaller carbon footprint and at a greater profit.

Our leadership team has talked with nearly 4,000 Owner/Operators, company employees, suppliers, agency partners and bankers from around the world who have visited the State of Chicago where we announced our long-term growth strategy in March.

In fact, Chris Kempczinski and his team have taken groups in 20 of our 22 U.S. regions through the space, working through the series of experiences we set up to bring our future to life.

They will take groups in remaining 2 regions through next week.

The feedback from franchisees has been overwhelmingly positive with over 90% approval for the U.S. plans.

And last but certainly not least, (inaudible) customers, recently in the Bay Area, as they tried, and I tried, mobile order and pay for the first time, and committed to use it time and again to order more of the delicious McDonald's food and drinks they love.

I have no doubt the moves we're making are the right ones to build a better McDonald's, one that serves more customers more often.

We're keen to continue strengthening the foundation that drove our strong first quarter results and at the same time, pick up velocity and fuel long-term growth by focusing on those actions that bring the biggest benefit to the most customers in the shortest possible time.

So thanks, everyone.

And now I'll turn it over to Mike to lead the Q&A.

Thanks, Steve.

(Operator Instructions) Now the first question is from David Palmer with RBC.

Quick question on the non-U.

S. business, particularly leadership markets.

Some of the informal eating out trends in those markets, you mentioned Germany, had some down traffic.

But how does it look in markets like the U.K.?

Some consumer companies have talked about weakness since Brexit there.

And in some of these markets, what is the outlook that you see in terms of your ability to change trajectory, like in Germany, where it seems like you've had an on and off again value message?

David, that's a good question.

I'll do a quick run around all 5 markets, the lead markets, just to give you a flavor.

Certainly, from what we've seen in the U.K., our business had not missed a beat since Brexit.

Now that's not to say that as the process works its way through over a couple of years, that may translate to a consumer confidence.

But certainly, for now, we've not seen the business miss a beat.

And frankly, whilst others are slightly more hesitant, our Owner/Operators in the company are investing very aggressively in the Experience of the Future and are getting extremely strong performance, I've got to say.

So I feel really good about where the U.K. is at.

At France, a very different situation.

The macroeconomic situation there has been challenging for a while.

We've struggled to get like-for-like sales growth.

What I would say is green shoots of encouragement and credit to the team there.

They have grown guest count the last couple of quarters, so they're in a bit of market share fight.

The consumer is nervous, given some unfortunate and terrible terrorist activity, and now we're going through the presidential elections there.

So there's a little bit of uncertainty there, but we're fighting hard to stand still at the moment, but I feel really good about where the business is at as the tailwinds return.

Australia is a market where we've been very aggressive the last 2 or 3 years with great results.

The competition has woken up a little bit, so they're competing a little more, competing a little harder in the near term.

So we're having just to adjust a little to that, but we're still getting solid growth.

And again, given the great -- first of all, the alignment between a very aggressive, positive-minded Owner/Operator group and a strong leadership team puts us in good place, but also, we've invested really well in our restaurant estate, and some of the modern elements have Experience of the Future.

So again, we're in good shape to go, but we're into a little bit more street fight than we have been over the previous couple of years.

Canada is doing -- their momentum just continues.

They're doing a great job up there.

And again, very steady, consistent planning year-in, year-out to driving both strong guest count and a strong sales growth.

They are further down the expense of the future rollouts, so a little like Australia, Canada and the U.K. We've got so many valuable learnings from how we built the growth plans there that we can bring back to the U.S. So the U.S. is very beneficial.

It's very open to that.

And finally, Germany.

Germany has always been a real tricky market.

I mean, it's -- it exports things of high value, but the consumer in Germany is very value-oriented.

And you've seen that across the grocery sector as well as the broader informal eating out sector.

So that -- whenever you come off value, you feel it immediately.

So we've got a much more solid platform has been developed for every day value, which I know the team are feeling a lot more confident about.

We had a slow start to the year, and obviously, in January, February and March, certainly, got stronger.

And we feel a lot better entering quarter 2 there in Germany.

That's -- we're in good shape.

So it's a good question.

That sector is about 40% of our income, and the dollars we earn there are just as valuable as the dollars we earn in the U.S., which is a similar type number.

So I feel great about the -- I like to think of them as being our engine room and as well as innovation have for us as well.

So I feel really good about the lead markets, and we're in good shape.

Our next question comes from Matt DiFrisco with Guggenheim.

I just have 2 bookkeeping questions and then no question.

So the D&A, you said it was going to continue at this level for 2Q.

Is that going to be also sort for the full year?

Should we look at this as a proxy?

Matt, that depreciation benefit keeps occurring until the transaction closes, until that China-Hong Kong closes.

So we don't know exactly when it'll close.

That's already saying at least through the second quarter.

Depending on when it closes, you may see some or all of that benefit in the third quarter, also depending on the actual close date of the China-Hong Kong transaction.

Okay.

And then the GAAP you said within the U.S. with your QSR peers, that was 2.1%.

I'm assuming you are outpacing the peers by 2.1%?

Or are you lagging the peers by 2.1%?

No, we're outpacing the peers by 2.1%.

Thanks for clarifying.

It's -- that wasn't clear.

Yes, we definitely outpaced in the first quarter the QSR sandwich peers by 2.1%.

Thanks, Matt.

Next question is from Brian Bittner with Oppenheimer.

With the Experience of the Future, you've talked about the mid-single-digit comp lifts based on the markets that you've already implemented this.

And as the store transforms and you install the kiosk, I guess the question is, how quickly do these benefits materialize on the sales side?

And when you do look at Canada, you actually mentioned that kiosk usage double year-over-year in the Canadian market.

Is that like the dynamic at play here with the EOTF that drives the most incrementality?

Is it mostly within the kiosk usage?

Brian, it's a fantastic question.

I'm trying to do a better job at painting the picture of why we feel so confident and excited about Experience of the Future.

And I'll give you a comparison.

If we have a new menu item launched or something like and All Day Breakfast, our history will tell us that you end up with a good surge, initially, the first handful of months, and then it settles down to a steady run rate.

And yes, we've seen that at All Day Breakfast, and we're happy.

With the 3 accelerators that we've identified: delivery, the digital and the technology side and Experience the Future, they start well but have year upon year upon year upon growth.

And let me give you an example.

If we take kiosk, and that's why I really wanted to call out in the comments earlier.

First of all, it takes time for consumers' behaviors to change.

So we need to get our hospitality programs very well established in the restaurant and customers have got to see a benefit.

So initially, is it easier to order?

Can it be easier to pay?

Can you move away from the stress of the front counter?

Now think 1 year's time, 2 years’ time, when we've got mobile order pay, it can go in like scan their favorites.

We'll have a better-developed CRM, customer relationship management, program, with some form of loyalty and reward that comes with that.

You'll be able to call out your personal profile on the kiosk.

You can redeem points or redeem offers, for example.

So to me, the basic functionality already helps customers.

They appreciate it.

It's a much more modern and less stressful experience.

But actually, there is incremental improvement year upon year upon year.

And again, the best reference we have for this is what we've only got out there in the system.

Self-order kiosks, for example, I've been in the French market.

I remember going there when I was back in the U.K. 7 or 8 years ago.

Then, I was seeing way over half in restaurant transactions go through the self-order kiosk.

Peak hours is almost all the transitions because people move away from the hustle-bustle front counter.

So I think there's -- and your point is very, very appropriate.

And as we build out -- this is why all these things are so important collectively.

So as we build out our digital platform, build out the functionality of the mobile app, introduce mobile order and pay, then that interacts with the kiosk, who then contracts with our kitchen, it's actually a pretty complex program that seems we'd be working through the last couple of years.

But to me, (inaudible) it grows transactions, it grows average check.

Actually, the beauty of it is it will keep on providing a platform of growth.

So thanks for the question.

Our next question is from Brett Levy with Deutsche Bank.

How should we be thinking about the U.S. menu and the changes and the progression as you look to refine the value messaging?

You talked about the rollout of Signature Crafted, and you've also recently discussed innovation.

What should -- how should we be thinking about that from the modeling standpoint and from just your implementation as you run through net simplification?

Yes.

Thanks, Brett.

I'm going to try and -- you're thinking about it from a modeling perspective.

I'll leave that to you, guys.

But the one thing we know, we have to be competitive on that.

So Chris Kempczinski, the Owner/Operators are fully embracing that.

It doesn't mean you have to wait in it but be competitive certainly at the entry level.

So if you've already got a buck or 2 in your pocket, there's something good for you at McDonald's.

So that is always important.

But then we want to reinforce and support the core menu.

And don't underestimate the value of the core menu to us.

Here, we've got half a dozen multi-billion dollar brands within just the core menu.

Most recently, we've seen the success we can have by supporting a Big Mac, having some extensions of that to create some fun.

We have some fun with the Big Mac sauce, for example and that creates familiarity with kind of our traditional menu.

Then as we get better as a business, as the brands resonate, increasing the customers, we can explore more of the premium ends, and our credibility grows with that.

We feel good about Signature Crafted.

This gives a variety of taste, different types of flavor profiles or premium ingredients, so unusual ingredients, here and choosing guacamole, for example.

And customers, as we know, are willing to pay a premium for that at certain times.

Then you also want to think about what is the role that the local [ color ] plays versus national.

So that's another dynamic in the U.S. that's different to other any market around the world, so -- that we may want to compete high with more local flavors and taste in certain areas of the country.

The Southwest will have a different flavor profile for commercial items in the Pacific Northwest, for example, or the Northeast.

So that gives you sort of a little bit of opportunity to create variety and just stay interesting to customers at a more local level.

So to me, this is all about balance.

Yes, we want to have a strong value program.

Yes, we want to play strong in the premium ends.

But also, our heartland is where us and our overall base earn most of that cash flow.

So I'm feeling good that we will have menu innovation.

But it won't be reckless.

We cannot have too many items too often.

So that gets to your file point, which is simplification.

And one of the things I have really enjoyed or hopefully, it's contributing, too, but just witnessing across the U.S. team is they're getting increasingly confident about making fewer, bigger decisions.

And that really helps the restaurant managers run restaurants better because there is less complexity.

So all these dynamics play with each other, but menu fairly fundamentally is a big part of our future.

Our next question comes from Will Slabaugh of Stephens.

I wonder if you could talk about the shift within your U.S. comp of traffic and average ticket over the past couple of quarters.

I know you pushed $1 coffee and then the Mac Jr.

seemed to resonate pretty well among the guests here in the U.S. So I'm curious if you saw that transaction pick up quite a bit and if you feel like that's something that's sustainable throughout the year.

I'll kick off, and then maybe Kevin wants to talk about the price increase versus food-away-from-home.

I mean, the one thing that's been really part of the honest conversations we have around the business, and you would have probably seen that at the Investor Day, was basic knowledge, the level of guest counts or transactions that we've lost because frankly, we want those back.

And an element of that is on the value side.

But also, an element of that is on the broader experience.

We just make ourselves more inviting.

So I would say, we have worked harder on the value side the last 3 to 4 months.

I know U.S. team -- I know all our teams are operating some aggressive value programs going forward as well.

And that has helped to narrow the GAAP between sales and guest counts.

We think quite squeeze a positive guest count in the U.S. in the quarter.

That said, we were up against a 1% hurdle.

But frankly, ultimately, our measure of success is 4 percentage points of guest count, though some are really worried about the 10s here and the 10s there because that will underpin a long-term sustaining growth.

So we have a very honest appreciation of what it is we're looking to achieve there, and competing on value and broadening and enhancing our experience we know will drive customer behavior.

Yes.

The only thing I'd add is certainly, our intent is to grow both traffic and check.

What you would have seen in the first quarter is average check grew partly from price.

As I mentioned, we grew price less than food-away-from-home, which is our long-term goal to make sure that we're kind of in that range in order to help drive guest count.

But the other benefit we also had in the first quarter was from a mix perspective.

Certainly, things like the Big Mac promotion drove a better product mix than the year before, which helped drive that average check also.

Thanks.

Our next question comes from Andrew Charles with Cowen.

Steve, you mentioned franchisees are making the round through Chicago to take the Experience of the Future tour after we get in early March, and that the overall feedback is very positive with a 90% approval around the plan.

Just curious, though, for the franchisees who need further convincing, what reasons are they citing besides the cost of the program?

Well, it's a good question, Andrew, because it gets to the core dynamics of what makes us different, and we believe may differentiate us in a positive way.

Our Owner/Operator, these are -- remember, these are 20-year commitments.

So the vast majority of Owner/Operator will have a long-term perspective, and that gives them the confidence, the encouragement to reinvest 2 to 3x around that cycle to keep their business contemporary and in line.

So I guess, clearly and totally understandably, whenever you build bold, confident plan that requires an investment, that comes with an element of nervousness.

I get that, and we all do.

So therefore, we try and demonstrate that we have the business case to support it.

And also, given we've got company-owned restaurants, we have skin in the game, and we see that as well.

I guess, to give you an example, there may be someone who's year 16 or 17 of that who'll be wondering if they put that money in now, will they see that back in the remaining years or will they get that back if they sell their restaurants?

So each and every individual has a slightly different perspective on it.

But I would say, as an overall basis, significant enthusiasm.

They love the idea of the U.S. going together on this.

Because the one thing that makes us powerful is whilst we respect and really cultivate the local Owner/Operator in their local markets and communities, and just that resonates strongly, we know the brand looked strongest with 14,000 restaurants go together.

And I think the confidence and the boldness of the plan that being drawn up.

Yes, a little bit of nervousness, but that's just a normal human reaction.

I think the excitement exceeds the nervousness by quite some way.

So we feel we're in really interesting and fun place at the moment.

Our next question comes from Jeff Bernstein with Barclays.

The question centers around the U.S. comps and one particular driver.

But just on the comp in general, it seems like a lot of investors use the 2- and 3-year trends as they gauge to try and forecast, and I know there's a lot of concerns going into the fourth quarter and first quarter of the All Day Breakfast.

But with the compares now easing seemingly meaningfully in comings quarters, just wondering, what's the -- is it not reasonable to assume a nice acceleration in the U.S. comp from that 1.7% level in the first quarter?

Is that something we're missing maybe to temper the enthusiasm, just to try and kind of manage expectations as those compares ease?

And separately, I just want to know if you could give any color on the delivery as an aside.

I know you gave a lot of color on the mobile order and pay with digital and the Experience of the Future.

But I don't think they have much in a way of the timing of the ramp of delivery and the potential contribution on that front.

Yes.

Thanks, Jeff.

In all honestly, I'm not going to give any forward-looking ratio.

You know that's not the way we tend to do things.

I don't want to break that now.

What we have tried to do is give you visibility into our plans, and that's what marks the first was all about, to demonstrate to you why we are confident in the long-term growth of the business.

So we're doing a good job on the fundamentals.

Let me give you another piece of texture around the U.S. and what I believe is underlying, helping to underpin some of our performance.

Along with building exciting plans becomes a greater accountability for all of us who run restaurants where there's Owner/Operators of the company.

We have been much more mindful, the U.S. team has been much more mindful about addressing the broader quartile of performance -- of operational performance.

We're helping support, encourage and expect them to improve performance, but that hasn't meant that some of that system (inaudible) move into the hands of better Owner/Operators.

So as you can imagine, that better helps underpin just core baseline momentum as well.

So I just wanted to get that piece in there about accountability, day to day running great restaurants.

And whilst we have great relationships, we're not scared at the honest conversations, neither.

It's not important to stress.

With delivery, we -- our interesting stage -- I mean, as you know, we featured it at the Investor Day.

So that was very mindfully done, which is one of our accelerators.

We have 200-plus restaurants in Florida (inaudible), and we're encouraged about the stop we've had.

I would say, similar to the Experience of the Future, it will start slightly lower and grow over time as we get better at it as awareness grows and we put more marketing muscle behind it and customers begin to respond and change their behaviors.

But that said, also, it'd be fair to say we are not in test mode.

We're expanding, and we're going to be expanding to a number of U.S. cities this quarter.

But we're learning as we go.

We're learning on delivery rate as with -- on the in-store dynamic, on how we can capture the order better and prepare the order fresher, et cetera.

So we are continuously learning.

But yes, we feel good about the way we are interacting with UberEATS that proven to be a great partner for us, and hopefully, we are for them.

So we'll be expanding into a number of U.S. cities with UberEATS this quarter and demonstrating why we believe this is a velocity accelerator.

Next question is from David Tarantino with Baird.

Just one quick clarification on the U.S. traffic.

I know you mentioned it was negative.

But I was wondering if it was negative, if you adjust for that Leap Day drag.

And then my real question is on the initiative to roll out fresh beef in the Quarter Pounder in the U.S. And I understand the consumer proposition.

But can you talk a bit about the operational complexity or risk that, that might add from a service feed or however you think about executing that initiative?

And then secondly, do you think this is a precursor for rolling out fresh proteins across the menu longer term?

Yes.

I'll take the quick U.S. guest count clarification, and then Steve can talk about the fresh beef.

As we mentioned, the U.S. was negative in the first quarter.

To your point, if you adjust for the Leap Day effect from last year, it'd be relatively flat.

And then on fresh beef, David.

So we've been in the market, particularly in Dallas, for a little over a year before we made the decision.

We made the decision maybe 3, maybe 4 weeks ago, to say yes and to go with this.

So yes, we entered this with a very, I would say, a very open mind.

We were excited about the opportunities from a customer perspective but mindful of complexity, costs, operational impact, et cetera.

So I would say we've been very well supported by the Owner/Operator groups in particularly Tulsa and Dallas.

We have worked through a lot of the kinks in this.

So we believe this is, I mean, very little incremental from a cost perspective.

We did, initially in the early restaurant, see service slow down a little in the drive-thru, but we have found ways to get around some of those operational computations and brought that right back down to negligible impacts.

From a -- there's a different food handling required, clearly, when you're dealing with fresh product and with frozen.

But again, we've made that with help from our suppliers.

We've made the packaging very simple, the storage very simple, the food handling very simple.

So there was an overriding call.

Others getting letters from the Owner/Operators pleading for us to go with this.

They believe they've overcome any in-restaurant issues that they and their teams had, but they were getting such an encouraging response from customers because it tastes juicier.

It's just (inaudible) and juice.

It's a great-tasting product.

So we feel good that we have invested that time, that 1-year, well to overcome any of the potential.

I think this is a good indication to change a mindset that we have around McDonald's.

There's plenty of yes-but conversations around how you could have nice idea, but we've come to yes that.

How can we overcome it?

And how can we make a difference?

And so whether this signals the future, absolutely no idea.

At a moment, we feel good about where our Quarter Pounder, given the volumes of Quarter Pounders we handle, and the fact that, that is our biggest pattie, therefore, the biggest benefit transfers to the customers, that's where the juiciness and the heat really comes from, we feel good about that.

We're going to roll the Quarter Pounder out over the next year or so, and we just look forward to seeing our results.

Our next question comes from Sara Senatore with Bernstein.

I just wanted to follow up on the food-away-from-home and pricing topic, which is to say, historically, I think when we've seen inflation, McDonald's has actually done better at this, about widening this GAAP.

And I guess, trying to anticipate if we look forward and we do see a bit more inflation, could you anticipating -- anticipate having maybe even -- relative to the market, maybe again, a little bit wider gap than even what you've already seen this quarter in a good way?

And have you thought a little bit about what the implications might be for traffic versus margin with respect to your franchisees' businesses?

So that's my first question.

And then just quick follow-up, could you give the comp for China, please?

All right.

Let me start with the pricing.

As you mentioned, there are several things we keep an eye on as we think and look at pricing.

Food-away-from-home is one of the metrics we look at over the longer term to generally try and be below that metric.

But as you know, we also look at food-at-home.

And most recently, there's been a pretty big gap between food-at-home, food-away-from-home.

I think that gap is starting to narrow a little bit from the highs that we saw in 2016.

But our philosophy on pricing really is to help it drive -- to make sure that we're focused on pricing that will help drive traffic as well as margins and operator cash flow.

So the operators certainly are concerned about increasing profitability as are we.

But we also want to make sure that we're not taking too much pricing that discourages guests from coming in.

We have a lot of models that look at the dynamics of this pricing, both within our menu and against competitors.

And I think we're getting better with our analytics at looking at some of those metrics.

But historically, as you mentioned, I think we have done fairly well with what I'll call some reasonable inflation, whether that's 1% to 2%.

We've certainly shown an ability to adjust our cost base to address inflationary pressures.

But I feel pretty good about where we are right now from the pricing standpoint.

We were a little bit ahead last year of food-away-from-home, and I think now we've adjusted appropriately.

Regarding China, I guess, what I would say is while we're in the midst of this pending transaction with our strategic partners, I think, out of respect to them and the process, we won't talk about a specific number.

What I would say is our comparable sales were clearly higher than our nearing competitor in China, and I'll leave it at that.

The next question comes from John Glass with Morgan Stanley.

Yes, Steve, my question has to do with just complexity around Experience of the Future as you walk through all the different elements of it.

It seemed like this is a great consumer proposition, but it's a significantly more complex operation for the employees.

Meaning, they've got to do delivery out to the curve.

They've got to take orders from multiple plates.

What has been your experience early on in rolling that out?

Do you have to add additional labor to the restaurants in order to or training to the restaurants to get people over that hump of sort of dealing to this different aspects?

And do you have to think about who you recruit and how you recruit employees to tight labor market but maybe you need a different employee to interact with a consumer given all the complexities?

That's great question of you, John.

So stripping down the 2 or 3 different areas, I think you kind of hit the areas that are important.

So yes, as we deploy Experience of the Future, there's a comprehensive training program that goes with that.

And that's one of the things I think we're typically pretty good at.

Let me get into rolled out mode, we do -- with the talent we have in the field, the operations experience, we do roll out these programs be pretty well.

But yes, there's absolutely a training element to this.

Additional labor, no, we're not seeing additional labor.

What we are seeing is a reallocating of labor positions in the restaurant.

I mean, we need less people behind the front counter taking orders.

And on the significant benefit, both for us and to the customer, is we can repurpose them into the dining area.

Now that doesn't necessarily mean the same people can do both roles.

So what we're also seeing, and (inaudible) from Canada in particular, Australia, U.K. more recently, is there is a new role in McDonald's, and that's kind of the hospitality service person.

So we have a very -- we have a dedicated job description for that.

We hire specifically for that because it does require different skill sets.

Those social interactions are different.

And clearly, we're going to get -- they would end up being busy in not just helping customers in and around the kiosks but actually as we roll out table service as well.

That actually be delivering food to customers' tables as well.

So no additional labor, but repurposed in their training on rollout, absolutely yes because that's -- that gives us the best shot of landing as well and making it smooth.

Our next question comes from Jeff Farmer with Wells Fargo.

I heard a response to Jeff's earlier question.

And I recognize that mobile order and pay has been in test for only something like 5 to 6 weeks.

But what is the plan for sharing performance updates on these test markets in coming quarters?

Meaning, when this is a little bit more in seat.

At least from my perspective, do you think investors are very focused on this?

And I'm curious how much information you guys will provide as we move through 2017.

Actually, that's a fair question, Jeff.

On the mobile, we haven't thought about share, and it is in early stages, but it is an accelerator for us.

We want to give you some visibility both in terms of, say, the number of restaurants and the types of customer behaviors.

Whether we give a precise number each and every time, I doubt that's where we head.

But we want to give you an indication of whether this is not to get excited about.

But we have identified great accelerators.

We do see them as changing the momentum of our business.

So these are fringe things -- these are platforms that we believe will grow and then grow year-on-year.

So I think you will be getting more disclosure as we build out some critical mass and we can start to help you interpret the numbers that are projected forward.

Our next question comes from Matt McGinley with Evercore.

I have a question.

At the March Investor Day, you outlined the plan in U.S. to regain -- retain and convert customers, and that was built around quality, value and convenience message that, I think, you already discussed in this call.

But as you look at that inflection and the trend that you have, I know it may not be very easy to quantify, I'm curious, who do you think you're actually bringing back or who you brought back this year in this inflection trend you've seen in the past few months or even few quarters?

I think if we went to -- if we just talk about the U.S. specific, and I'm guessing that may be where the question is.

Yes, yes, the U.S.

I think the return -- the regain is really largely around value.

I mean, we saw that we lost -- we were losing customers, the value end of our menu for a period of time.

I mean, retaining our stronghold is something that's clearly, we'll do core menu and ongoing value and experience and convenience.

We certainly saw some seepage of guest counts, if you like, on -- at the value end.

So I think the more competitive position we've taken, our Owner/Operators have taken and embraced has helped us recover some of that as well.

Early days, very difficult to diagnose precisely.

But as we saw the market share gains that Kevin outlined, the 2.1% outperformance of our QSR peers, we know that combination of core menu, Big Mac extensions, $1 coffee and then as we exited the quarter, becomes a move $1 any size drinks.

And we know that combination resonated well.

We have time for one more question, and that will be John Ivankoe with JPMorgan.

I was just hoping we could get just a view of the current labor market in the United States as it stands.

Obviously, we're 7-plus years into an economic recovery, and this far in sometimes, the restaurant industry begins to see stress in terms of quality and availability and cost of employees, especially as turnover goes up.

So how is the system kind of faring with that?

Are there any plans, specifically in '17 and '18, for you to become even more of an employer of choice for this type of worker than you've been in the past and just how are you feeling about things overall?

Yes, John, it's really astute point.

I would say compared to 3, 4, 5 years ago, the general labor market is tightening a little bit, and clearly, that is something we are mindful of.

It hasn't really taken us by surprise because we've seen economic cycles before.

We know what that means to us.

What you may have seen, for example, in part of our response to this, as well as we modernize our restaurants, as we introduce technology, we've become a more appealing place for people to work.

We believe that people in the service sector are more tempted to and more to McDonald's today than perhaps they would have done to a type of McDonald's of yesterday.

But the other piece you may have seen is we worked hard above the life on employee reputation, on jobs, on training, on skills, on education.

So we talked about here in the U.S. in particular being America's best first job.

And that's something that we believe we can substantiate for opportunity, flexibility, pay and rewards, but also under the arch ways opportunity programs you would have heard us talk about where we can help with high school diplomas and get our people into further education where not only are we a job and not only do we help to pay the bills, but actually, we help them progress in life and go to the next stage and build careers either with, within or beyond McDonald's.

So I think you're going to see the labor market further tighten.

That's an expectation we certainly have.

And you will also see us going increasingly hard.

And even, this is recently or just this last week, when you've seen about the new uniforms we're rolling out, here, we're looking at every aspect of the employment proposition here because we do see it getting tighter.

And we just believe the more attractive we can make ourselves, that puts us in a better chance of being a winner in this marketplace.

All right.

We're near the top of the hour.

So with that, I will turn it over to Steve who has a few closing remarks.

Thanks very much, Mike.

I hope we become across, we believe today, we're a bit above us, and we're building a better McDonald's.

The velocity growth plan is guiding our focus and execution on the opportunities that will improve the experience of our customers.

I am very confident in our ability to harness our unmatched competitive advantages to satisfy customers, drive profitable growth and deliver value to our shareholders.

So with that said, thanks to all of you for dialing in, and have a great day.

This concludes McDonald's Corporation Investor Conference Call.