麥當勞 (MCD) 2017 Q3 法說會逐字稿

Hello, and welcome to McDonald's October 24, 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; Chief Financial Officer, Kevin Ozan; and President of McDonald's USA, Chris Kempczinski.

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 the 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.

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

Thank you, Mike.

Good morning, everyone.

Our momentum continue to build across the business in the third quarter.

Across all our operating segments, we serve more customers more often, driving global comparable sales up 6% and comparable guest count up 2.4%.

This marks 9 consecutive quarters of global comparable sales growth and our third consecutive quarter of comparable guest count growth.

We're building a better McDonald's and winning back customers with great-tasting food, compelling value and an enhanced experience.

In each of these areas, our markets have built sustainable platforms, integrated and grounded in deep local insights.

They have enabled us to move at greater speed, efficiency and impact to meet the evolving needs of our customers.

Whilst we've been building momentum across the McDonald's system and our performance is globally broad-based, I'm particularly pleased that the U.S. business has regained its stride.

As Mike mentioned at the top of the call, we have Chris Kempczinski, President of McDonald's USA, joining us today.

Later in the call, Chris will provide insight into the drivers of U.S. performance.

But to get us started, Kevin will provide texture on our financial results for the quarter.

Thanks, Steve.

As Steve mentioned, our positive comparable sales and guest counts in all segments reflect the momentum that continues to build across our system.

I want to provide a little more context on how each segment contributed to our global performance for the third quarter.

U.S. comp sales increased 4.1% for the quarter with a positive comp sales GAAP versus our QSR sandwich competitors.

Chris will provide more details on the drivers of this performance in a few minutes.

Comparable sales for the International Lead Market segment were up 5.7%, led by continued strong momentum in the U.K. and Canada and positive performance across the rest of the segment.

High Growth segment comp sales increased 6.2%, with China continuing its strong performance as the most significant contributor and the segment European market's delivering strong comps as well.

And comparable sales for the Foundational markets rose 10.2%, led by Japan's double-digit comp performance along with positive results in each of the segment's geographic regions.

Our Velocity Growth Plan is not only driving top line growth, it's also benefiting our operating performance.

Earnings per share for the quarter grew more than 50% to $2.32.

This included $0.56 of special items consisting of a gain on the sale of our businesses in China and Hong Kong and unrelated noncash impairment charges.

Excluding these items and prior year's strategic charges, our EPS was $1.76, up 9% or 7% in constant currencies over third quarter last year.

Moving on to pricing and commodities.

Our third quarter pricing in the U.S. year-over-year was up 2.2%, which was slightly below food-away-from-home inflation of 2.4%, as we continue to have a disciplined approach to menu pricing and provide our great-tasting food at an affordable price.

Commodity cost in the U.S. for the third quarter were up 1.5% versus last year.

We continue to expect our U.S. grocery basket to increase about 1% for the full year, reflecting the anticipated commodity pressure in the back half of the year.

For the International Lead Markets, commodity costs were up more than 2.5% for the third quarter and menu prices were up about 1.5% year-over-year.

Moving down the P&L.

For the quarter, our positive comp sales, along with the combined impact of our major refranchising transactions, drove an increase in franchise margins of $219 million and a decline in company-operated margins of $148 million.

On a percentage basis, consolidated company-operated margins increased 70 basis points to 19.1% for the quarter.

About half of the improvement was due to the benefit of having no depreciation expense for China and Hong Kong as the assets were classified as held-for-sale until July 31.

For the High Growth segment, about 3/4 of the margin percent improvement can be attributed to the same benefit.

On a percentage basis, we expect fourth quarter margins for the remaining company-operated restaurants in the High Growth segment to be similar to results reported in fourth quarter 2016 as the segment will no longer have this depreciation benefit.

Regarding G&A.

At the beginning of the year, we indicated that we expected our G&A for the year to be down about 7% to 8% in constant currency with fluctuations between quarters due to the timing of spending.

For the third quarter, our G&A was down 4% in constant currencies, which resulted in total costing down 8% through the first 9 months of the year.

We now expect G&A cost to be down about 7% for the full year, which means fourth quarter G&A should be down a similar percentage to third quarter.

Third and fourth quarter G&A are higher than first and second quarter this year, primarily due to 2 main reasons: Higher technology spending in the back half of the year as we continue to develop, enhance and deploy technology solutions, like our global mobile app and kiosks; and higher spend in the U.S. in the back half of the year as they deploy Experience of the Future, mobile and delivery.

Our third quarter effective tax rate was 33.2% and the 9-month tax rate was 32.8%.

Given that, we now expect our tax rate for the full year to be 32% to 33%.

Turning to foreign currencies.

For the quarter, foreign currency translation benefited result by $0.02 per share.

At current exchange rates, we expect a positive impact from foreign currency of $0.04 to $0.06 for the fourth quarter and about $0.01 for the full year.

As usual, this is directional guidance only because rates will change as we move through the remainder of the year.

Finally, as we communicated last month, we increased our quarterly dividend by 7% to $1.01 per share, the equivalent of $4.04 annually.

This reinforces our confidence in the company's long-term strategy and our expectation to return $22 billion to $24 billion to shareholders for the 3-year period ending 2019.

Before I turn it back to Steve, I want to spend a minute on the achievement of a milestone in our strategic franchising initiative.

The sale of our China and Hong Kong markets in the third quarter caps off our goal to refranchise 4,000 company-owned restaurants, which will accelerate our growth in these markets while creating a more stable stream of revenue and earnings.

In just under 3 years, we've increased the percentage of franchised restaurants from 81% to 91% and franchise margins will now comprise more than 80% of our total restaurant margin dollars going forward.

We'll continue to optimize our ownership mix by refranchising restaurants in certain of our large mature markets like the U.S., using the same financial rigor and discipline that we began a couple of years ago.

And we'll continue to evaluate other markets to determine whether a developmental license model is the right model to efficiently grow in those markets.

As I said in our March 1st Investor Day, our refranchising activity will have a dilutive impact on our revenue, operating income and EPS growth rates in the near term, making year-over-year comparisons through 2018 choppy.

We received cash proceeds of about $1.6 billion from the China, Hong Kong transaction, which we plan to use to repurchase shares.

We expect the refranchising transactions completed over the last year will have a negative impact on EPS of a few cents per quarter until third quarter 2018.

Also, the depreciation benefit of about $100 million that we realized this year will not reoccur in 2018.

Going forward, our results for these markets include sales-based royalties along with a 20% equity pickup for China, Hong Kong.

The critical moves we've made through our refranchising efforts will benefit our business for years to come as our strategic partners unlock the growth potential in these markets without the use of our G&A and capital resources, while we receive a steady stream of royalty income.

And they will also lead to an increase in our operating margin on our way to our target of mid-40s under our new, more heavily franchised and efficient business model.

So in the near term, we're focused on growing comparable sales and guest counts, and we're pleased with our recent performance, which has benefited primarily from running better restaurants.

At the same time, we're confident that our velocity accelerators of Experience of the Future, digital and delivery will continue to grow the business.

Beginning in 2019, once we've lapped completion of the major refranchising transactions, we expect to return to revenue growth and also achieve the other long-term financial targets that we've established, including steady and reliable earnings growth.

Now I'll turn it back to Steve.

Thanks, Kevin.

At the top of the call, I talked about the growth platforms each market has built around menu, value and experience that is designed to grow guest counts by retaining the customers we have, regaining customer visits we've lost and converting casual customers to more committed customers.

During the quarter, each market executed with innovative and compelling approaches to menu, value and convenience that drove incremental customer traffic and higher average check.

Every major market now offers a range of premium chef-crafted beef burgers and chicken sandwiches with artisan ingredients and enticing flavor profiles.

In France, the signature beef and chicken line uses breads, meats, cheeses and sauces that capture the regional gastronomy of the country.

The U.K. is having great success in their modernized restaurants with their version of signature beef inspired by the English up burgers with thick, juicy beef and beechwood-smoked bacon, piled high with freshly prepared toppings on a brioche-style bun.

Canada's launch of the Seriously Chicken platform appeals to Canadians' preference for international flavors with local sourcing and provides a great complement to the market's popular Mighty Angus beef burgers.

Italy took note to the success that France and the U.S. had with Grand Mac, and Italians loved it.

We know that customers are motivated primarily by value and deals come more often and spend more.

During the quarter, our markets offer compelling value across the breadth of the menu.

For example, Japan, Italy, France and many other markets executed value programs and promotions that leverage the strength of our popular Minions Happy Meal to drive incremental family business with value bundles and dessert specials.

We are increasingly driving traffic and check growth with digital offers.

Redemption of mobile offers continues to grow month-on-month with a meaningful portion of the redemptions representing incremental visits.

Importantly, this is also building our base of digital users, increasing awareness and adoption as we deploy the mobile order pay functionality of our mobile app.

Although they did not have a material impact on our results for the quarter, we are making solid progress on a deployment of our Velocity Growth Plan accelerators.

We remain on track to deploy mobile order and pay to 20,000 restaurants by the end of the year, including all of our U.S. restaurants.

We continue to learn as we deploy rapidly implementing updates through challenges and opportunities as we expand in each successive market.

We made significant progress with expanding delivery of scale throughout our markets.

Over the course of the past 9 months, we've introduced delivery in over 5,000 restaurants across 20 countries.

Along with the 3,500 restaurants in existing delivery markets across Asia and the Middle East, we now offer delivery in over 20% of McDonald's restaurants around the world.

We continue to improve the model as we scale, remaining on track to offer delivery in 10,000 several restaurants by the end of the year.

We're taking learnings from our top performing delivery markets and spreading the best approaches around the world.

We remain confident that delivery will be a powerful accelerator for our business as we look at markets where it's gaining traction.

The third velocity accelerator is rolling out Experience of the Future or EOTF.

We are continuing with improvements inside our restaurants that make the customer expense more personal and less stressful.

EOTF now is being deployed with all elements in roughly 1/4 of the restaurants in the McDonald's System.

As they approach full deployment, the U.K. and Canada are proving how powerful EOTF can be for our customers.

And in France and Germany, where we rolled out EOTF to about 1/3 of the restaurants in both countries, we're seeing similar results.

And many of our other large international markets are not far behind.

Successful execution of our growth strategy and in particular, our digital delivery and Experience of the Future Initiatives, require the full support and commitment of our Owner/Operators.

Recently, I joined Chris on market visits to cities such as East St.

Louis, Detroit, Cleveland and Salt Lake City.

So many examples where we're successfully running better restaurants, which left me confident about the great alignment we enjoy with our Owner/Operators in the U.S. We share our vision for the future and they're committed to driving the operational excellence that will be key to our success.

Now we'll hear more about the progress of our U.S. business.

Thanks for joining us today, Chris.

Thank you, Steve.

I appreciate the opportunity to join the call today and update everyone on the state of our U.S. business.

The U.S. continued to demonstrate solid growth, and I'm proud of our system and the progress we're making.

As I look ahead to 2018, I'm excited about our pipeline of ideas and the growth potential they offer.

For us, the key will be to execute at a really high level across the number of initiatives, and we're investing a lot of time and effort right now to get that right.

Let me provide more insight into our Q3 performance and then I'll talk about how we're preparing for 2018.

During Q3, we grew comp sales 4.1%, resulting in a comp sales GAAP of 440 basis points versus the QSR sandwich competitors.

Importantly, our comp sales growth was supported by positive guest count growth.

This is our third consecutive quarter of positive comp sales growth and second consecutive quarter of positive comp guest count growth.

For the past 3 quarters, we have posted a favorable comp GAAP growth -- comp guest gap versus QSR.

We're particularly pleased with this performance because we had to overcome the headwinds of a sluggish, overall IEO market that currently offers limited traffic growth.

Our success can be attributed to several factors.

First, we offered compelling, consistent value programs across the number of tactics that clearly resonated with our customers.

We continued our $1 any size soft drinks program and supplemented it with the return of McPick 2 for $5 that offered some exciting food deals.

We're also starting to get real traction with the targeted mobile offers via our app that are tailored to customers' unique buying preferences.

Second, we've been able to capitalize on this increased traffic in our restaurants with menu news that drove customers to trade up to premium, higher-margin products.

In Q2, we launched our signature crafted sandwich line available either in beef or chicken with 3 flavor combinations, beef guacamole, sweet barbecue bacon and maple bacon dijon.

In August, we rotated in a new sriracha flavor that gave the sandwich crafted line an extra kick.

In September, we also reintroduce McCafé to the U.S. This meant a new, or modern look to the McCafé brand and new choices, including the reintroduction of our McCafé espresso line after a significant equipment upgrade across our system.

The McCafé expresso products performed very well, reaffirming our system's confident that McCafé can be a significant growth platform for us in the future.

As we've seen with both Signature Crafted and McCafé, when we improve the taste and quality of our products to meet customers' rising expectations, they reward us with more business.

Finally, we're seeing encouraging response to our Velocity accelerators, including delivery, digital and Experience of the Future.

Through our partnership with UberEATS, we now offer delivery in 3,700 restaurants and we're on track to reach 5,000 restaurants by year-end.

We're learning a lot about delivery and seeing particular success in dense urban metros with high penetration of younger customers like New York, Boston, Miami and Los Angeles.

I truly believe we're just beginning to scratch the surface on this opportunity.

We're also continuing to roll out mobile order and pay with a new curbside check in options.

I'm really excited about the potential of curbside to elevate the convenience at McDonald's to a whole new level for our customers.

We now have mobile order pay in over 6,000 restaurants and we expect to reach all 14,000 restaurants by the end of the year.

And last, we're making good progress with our Experience of the Future projects and we're seeing comp sales lift, consistent with our targets.

We currently have Experience of the Future deployed in 13% of restaurants, and that number will increase significantly over the next couple of years.

As the pace of activity in the U.S. accelerates, it's critical that our restaurants are properly staffed and trained to execute at a high level.

Our McOpCo and operator organizations are investing in labor right now to train for initiatives like hot off the grill, hospitality, curbside delivery.

This will have a temporary impact on margins for the next 6 to 12 months as we work through our deployment calendar.

We've seen this before in other markets like Canada, Australia and U.K. when they've launched similarly aggressive plans and we feel quite confident about our ability to manage through the short-term situation.

At the same time, were also ramping up our internal project management capabilities to prepare, deploy and maximize each initiatives.

We've created dedicated project management offices at both the national and regional levels to ensure we anticipate resource bottlenecks and flex organizational capacity if needed.

We aim to prove that size and speed do not need to be antithetical to one another.

2 years ago, Steve declared that McDonald's needed to run better restaurants and nowhere was that more evident than in the U.S. market.

As Steve mentioned, we recently visited a number of U.S. cities, including East St.

Louis, Cleveland, Detroit, Salt Lake, Houston, and it was really a proud moment for our Owner/Operators to showcase their progress.

On almost every dimension, the U.S. is running better restaurants, and that's showing up in the business results.

And at the same time, that pride and confidence in our performance is helping to energize the system to pursue an even more aggressive growth agenda.

Almost 100% of U.S. operators have now signed commitment letters in support of a holistic, multiyear growth strategy that will update the entire system to EOTF, make important equipment upgrades, deliver better food and ensure we remain competitive on value.

We're excited about what's to come in the U.S., and I look forward to updating you periodically on our progress.

Now back to you, Mike.

Thanks, Chris.

We'll now open the call for analyst and investor questions.

(Operator Instructions)

Now the first question is from David Palmer with RBC.

I could just do one question for Kevin.

You mentioned some facts speaking to this.

Obviously, your profit growth, excluding 1x, was very strong in the U.S. and in International Lead, but was held back by other, High Growth and foundation markets, and clearly, you're getting some refranchising and licensing actions, dragging on that.

I think, originally, you thought flat EBIT impact from these effects, these refranchising and licensing actions.

Is that still the expectation?

How much was the drag and should we expect an equal tailwind, perhaps, starting in the third quarter in '18?

Hey, David.

Yes, so let me try and explain.

As you mentioned, there's a lot of noise in this quarter and there will be for the next few quarters because of these refranchising transactions.

So what we've said is, once these -- once you kind of lap these franchising transactions -- so I'll say beginning in fourth quarter of 2018, that's when we get to what I'll call the new norm.

Until then, it's going to be a little rough on a comparison basis because you have 2 things going against you.

One is kind of the results of these markets as wholly owned in 2017 compared to them as developmental license markets in 2018.

And on top of that, you have this depreciation benefit that we received in 2017 that we won't have in 2018.

Once we get through all of that, what we've said is, essentially, on a EPS level at the beginning is we'll be relatively neutral because the proceeds we've gotten in, we will use to buy back shares.

And so at an EPS level, we'll be effectively relatively neutral once we're able to buy all those shares and have them built into the calculation.

Operating income in the near term will be down a little bit because the income we've given up as wholly owned is more in the near term than the income we'll get on a royalty basis, if you will, as a DL.

On a free cash flow basis, it will be immediately accretive because the capital that we're saving from DL-ing these markets effectively outweighs the operating income that I'm losing.

So it will be immediately accretive to free cash flow.

Our next question is from Sara Senatore with Bernstein.

This is actually Anna Papp representing Sara.

So in terms of delivery, do you now have a large-enough sample to draw some conclusions about the impact on comps?

And also, can you talk a little bit about profitability?

One of the things we hear from some of the private companies that we speak to is that it's difficult to make delivery profitable even when it's outsource to third parties, and therefore doesn't require as much in upfront investments.

Could you talk a little bit about what kinds of fixed and the variable costs your franchisees incur and what kind of profitability you anticipate?

All right.

I'll have a stab at that one.

So I mean, clearly, we're getting enough of an early read to be encouraged by delivery.

So we have been very -- we've pursued -- delivery have pursued a very aggressive rollout program, and our primary lead partner on this one has been UberEATS.

And effectively, we've looked to expand wherever UberEATS has coverage around the world.

And they've actually been doubling down on their expansion to help meet our ambition as well.

So it's been working well, the partnership between the 2, to serve us.

And yes, we're getting good early trading results.

What we are finding is not surprisingly, that the number of guest count per store per day does correlate pretty highly to awareness, consumer awareness of this.

So the markets that have been able to more effectively promote and raise the customer awareness are getting higher takeout per day.

But it's certainly, I'm not going to get into the actual comp buildup on this one, but it's a meaningful contributor in the restaurants that offer delivery.

As I say, I want to just make sure we've guided about what we're saying, were in 5,000 restaurants so far out of 37,000.

So it's meaningful in most that offer it, but clearly a lot in some ways to go to get the further scale across the global system.

It's also profitability.

It's important that it's -- that the vast majority of our business is incremental because the way that we're working with a third-party operator is, obviously, there's a commercial relationship between ourselves and the third-party operator that would take some of our margins.

So we need, certainly, more than half of this business, if not more than that to be incremental.

And we're certainly finding that we're well up that scale actually.

It's really, really encouraging for us.

And the part of the reason we know that is because we're beginning to track consumer data now as well, so we can actually get repeats per visit information, daypart information and the fact that more than 60% of our business comes in evening and overnight, we know is reinforcement practices and incremental business opportunity, revenue stream that we weren't previously tapping into.

But we're also getting very strong repeat business from those that use it as well, again, further encourages us.

And one of the things we're posting on internally is what is there that we can do to get the awareness of the fact that we're offering delivery higher up in consumer -- into consumers' minds.

So yes, it's profitable, it's incremental business and we're looking to continue to go hard at this and we certainly have our operators enthusiastic as are we as a corporation.

Our next question is from Karen Holthouse from Goldman Sachs.

Karen?

A question on U.S. margins where you talked about some of those upfront investments that you're making behind new initiatives.

Is that what we're seeing at store level and year-over-year margin pressure?

And then if so, when you talked about that sort of 6 to 9 months?

And then do you actually see cost go away or is it just the expectation that you would be able to leverage into kind of covering those costs?

Karen, it's Chris.

So certainly, what you're seeing in the trading results that we've just posted, you're seeing primarily labor related to the trading that I was talking about.

There is some commodity inflation but the biggest drag that we're facing right now is related to the labor investments that are being made.

In terms of going forward, I think one of the pieces that remains to be seen for us is just what does the long-term labor inflation look like in the U.S. And so we have seen with roughly 5% unemployment that labor inflation has been ticking up nationally.

In addition, there's local legislation that's going on as well, where minimum wage loss are increasing.

So that long term could be a headwind, which just would require a faster growth rate than what we've historically seen.

But I think, right now, it's unclear where that goes.

I think for us, certainly, in any investments that we're making right now on training, those are onetime investments that would abate in the next 6 to 12 months.

And I think the longer term is we just need to keep our eye on labor inflation across the U.S.

Karen, I'll just add on the -- back it up as well because Chris is right.

I guess the level -- the tone of the conversations we have, not with our management teams but with our Owner/Operators clearly is, we have a really solid plan -- I mean, Chris and the team, they have built an ambitious, very broad-based plan.

And having a plan is a great start, but you got to execute it.

And we've been very mindful that it's getting the restaurant level details right is more important than having the perfect plan.

And we've seen this wherever we have an execution gap between the stress and execution.

It catches it out.

It's the customers who get impacted.

And we've also got some great recent experiences with U.K. and Canada and Australia, who all deployed ambitious, multifaceted plans.

And we've seen this kind of the trend where you'll invest a little more in the shorter term on the P&L in order to get the execution right, but the payback then comes over that medium to longer term so I'm comfortable wherever we're at.

It doesn't mean we're blase about it, but this is not unexpected to us.

And as I say, getting the execution right is our primary focus.

Our next question is from Brian Bittner with Oppenheimer.

Brian?

Can you just talk a little bit more about your national value platform strategy launching in the United States in early '18?

Any details you're willing to provide on that strategy would be helpful to us.

And in addition to that, if you could just also address how you expect your U.S. franchisees are going to strategize, making incremental investments and value at the time when store level margins are declining from the labor investments and whatnot?

Sure.

Well, one of the things, that we have said to our franchisees in the U.S. is we don't have to win on value, but we can't lose on value.

And that means we have to be competitive with our investments against the value program.

And I think also, it's no surprise that over the last, call it, 3 or 4 years since we rolled out dollar menu, we weren't as competitive as we needed to be on value.

And so what you're going to see from us next year is us being really fully competitive with our nearing competitors with the value program there.

It's been written about and, I don't think it's any surprise that certainly, our value program is going to be focused on $1, $2 and $3 price points for an everyday value piece of it.

And then there will also be deals that we'll pulse in and out throughout the year as a result of that.

When you talk about the investment that is being ask of Owner/Operators, one of the things that we talk about is that this plan has to be looked at holistically.

And so while there is an investment that's being made on the value side, there are also some significant efficiencies that are being captured on the other side around particularly, marketing and efficiencies that we're getting there, efficiencies that we're getting at the restaurant level.

And so when you look all of it on a blended basis, we think that this is a balanced plan.

And I think most importantly, the fact that our Owner/Operators were at almost 100% signing up for it is probably the best estimate that they felt comfortable with the value investments being offset by some of the other things in the P&L.

And I think it's also worth noteworthy, Chris, that the commitment is being signed up to is to have the national support so that the need for some of the local value initiatives is somewhat reduced because we're putting the national muscle to play here on to support the program, which I think is an exciting process to be in to 2018.

Next question is from Brett Levy with Deutsche Bank.

Brett?

You obviously started to talk more about coffee at your March Investor Day.

And once again, reiterated that it's doing well.

What can you share in terms of how faster it's growing than your overall comp?

What are you seeing in terms of daypart breakfasts, afternoon and attachments?

And if I could, how is that doing in terms of traditional in-store purchases versus your mobile order and the loyalty program?

Well, I think we're excited about offering in part because it's a huge category.

It's a $30 billion business in the U.S. and it's growing mid to high single-digit as a category.

So we're excited about the category.

It's high-margin and we're underpenetrated there.

So as we built the plan, it was really about us going after an opportunity where we think our McCafé brand has a lot of relevance.

We're not going to get into the specifics of by product line item, how did those compare versus the average comp.

But I would just say that, certainly, we saw the benefit in Q3, up really nice growth on our McCafé business.

And as we look out over the next few years, we're expecting to use McCafé as really a platform for us to get additional growth.

So we're excited about that.

We think we have a good opportunity to get after it.

It's really been a question of focus for us.

We haven't consistently focused on this in the past.

And going forward, it's going to be a key area for us.

I'd also, to say from a global perspective, when you look at the overall Velocity plan that we talked about, Brett, coffee in McCafé is at a different stage in different markets.

But if you actually looked at the key drivers behind the velocity plan, on the retained -- actually, that retaining customer, clearly, a strong compelling coffee goes really well alongside the food-led breakfast advances that we have.

When you look at regain then as we build our digital capabilities and loyalty and CRM, we think coffee will be such a habitual purchase or play well against those customers who we want to encourage back more often.

Then finally, when we talk about converting casual customers to committed coffee, we know coffee and snacking plays strongly against some of those more casual consumers.

So no, each of our major countries has a different stage of development of their McCafé programs.

But the one thing I would say is coffee plays a part in all those markets as we go forward.

Our next question is from John Glass with Morgan Stanley.

John?

Two cost-related questions.

One is just on the SG&A.

So as you've gotten further into technology, it sounds like there's maybe a little heavier spending this quarter.

Do you still have the same confidence that you're going to achieve the overall SG&A goals that you laid out earlier?

Or that this quarter make you think about you need to put more money into that in 2018?

Can you just reiterate what those goals are and if they've changed at all?

The other component of your business that's grown has been the gains on asset sales, excluding China.

It's been still a few $100 million a year.

Does that effectively go to nil over the next couple of years as refranchising is complete?

Or so that's still an ongoing piece like I should trade in and out of markets, for example?

Yes, John, thanks.

Let me start with the G&A.

What I'd say is, right now we're completely on track with where we expected to be this year.

As I said in my remarks, we expected to be down about 7% to 8% in constant currencies.

We still expect to be down about 7% for the year.

Having said that, it's probably is a little more back loaded this year than we probably thought at the beginning of the year.

So the timing of it is a little bit more backloaded.

But what we're seeing is we're achieving significant savings from our refranchising and we're also seeing significant savings in our maintenance or running the business G&A.

That's being partly offset by significant increase in technology spending.

So we're achieving net G&A savings and at the same time, we're shifting more of our existing spend from maintenance, G&A to what I'll call investment G&A focused on growing the business.

So I think, overall, we feel a lot better today about the where we're spending our G&A, but we are on track with kind of all of our original plans at this point.

Regarding the gains, it's a good point.

I think you'll probably still see gains in 2018 as we continue to refranchise in some of our conventional license markets, the U.S. and some of the International Lead.

After that, that will likely go down a little bit.

We won't have as much of the refranchising transaction.

We will still have restaurants that exchange hand and kind of normal course of business.

So there will always be some restaurants that just as we always optimize our mix, will have some.

But it probably won't be to the level that we've seen the last couple of years and maybe in '18.

After that, it will likely go down a little bit.

Our next question is from Peter Saleh with BTIG.

Peter?

Great.

Just curious if you could comment a little bit on the speed of service in the U.S. and how the Experience of the Future restaurants are comparing on speed of service, ticket times versus the rest of the system?

Are they moving faster?

Are they moving slower?

Any sort of color would be helpful.

Yes, well, so I'd say what we typically see is as we're deploying whether it's EOTF, some of the menus, et cetera, we typically do see a slight uptick in service times, call it on the order of 5 seconds or so.

And then certainly, as the crew and our restaurants get more experienced in whatever the initiative is, we expect to claw most if not all of that back, over time.

I think it's, for us, when you look at the Experience of the Future, one of the things that makes it difficult to really do the from 2 1, that is, because as we bring in Experience of the Future with curbside, you start introducing all sorts of new ways for the customer to interact with the brand.

And so maybe in the past, they would just go through the drive-thru because, frankly, they didn't see going into the restaurant as a great experience.

Now they want to go into the restaurants because it's an updated, modernized experience where you can get table service there.

And so it's really, I think, what we're seeing with Experience of the Future is that customers are choosing new ways to interact with the brand that makes it difficult for us to compare.

I think the more relevant metric really for us is we look at customer satisfaction.

We look at customer satisfaction prior to EOTF and after EOTF, and what we're seeing there are significant improvements on the order of 3 to 5-point improvements in overall customer satisfaction.

So for us, that gives us reassurance that they are enjoying the initiatives that we're deploying with EOTF and they're having a better experience.

I think -- I'm mean, Chris is absolutely right.

I think part of our broader philosophy around Experience of the Future is putting that choice and control in the hands of customers versus how they order, what they order, how they choose to pay and how they're served.

And we want to be providing faster service for those customers that really want fast service.

At the same time, not everyone wants to be rushed and therefore, we're providing more alternatives.

Chris' example of curbside is absolutely spot on.

Or maybe you're entering a restaurant and you got a family with you and you just want to dwell a little more on the kiosk and just take some time ordering, since it's a much more enjoyable experience.

So I guess this is allowing the customers to have that range of choices and then they can therefore, if you like, self-select the way they experience McDonald's.

And as I say, where we are more events in the rollout of Experience of the Future, the customer satisfaction is noticeably higher and Chris is already beginning to see that in the U.S., which is encouraging, but again, not surprising.

We're confident in the plans we have.

Our next question comes from Jeff Farmer with Wells Fargo.

Jeff?

Just following up on value quickly.

So on recent calls, you noted that a few of the 22 U.S. regions have already been more aggressively pursuing.

I think it was a McPick options and in combinations of $1 and $2 beverages.

So I'm just curious how those 3 to 4 regions how performed on a same-store sales basis relative to the rest of the system?

And at that magnitude of outperformance can sort of tell us anything about potentially what we could be seen from value as we get into '18?

Yes, I think, as you know, with McPick, certainly, this year, there was a heavy local element to it.

So we had different regions pursuing different McPick strategies, both the price points that they would hit.

But frankly, also the items that they would be selling for.

And so it's difficult to do the comparison that you're talking about because it's not just what item at what price point, but it's also where is the starting price point for that.

In general, I think the point that you're making that was an accurate one, which is we think that we still had an opportunity to get more competitive on value.

Again, we're not trying to win on value, but we can't lose on value.

And so I think what you're going to be seeing from us going forward is really for us consistently to stay competitive on value, and I think the other thing, as I mentioned earlier, in the call is more of that investment now going forward is going to be done and driven at the national level than at the local level, which I think plays to our strength from a marketing communication standpoint where we can really drive that message.

Our next question is from Will Slabaugh with Stephens.

Will?

I had a question on the U.S. franchisee base.

It seems there's been a fairly aggressive push to both improve as you reference earlier and the naturally consolidate that franchisee base as a result of some meaningful investments required to get to an EOTF format or otherwise.

So can you give us an update on how you're thinking about the current domestic franchisee base and how that may change in the coming years as some of those consolidation will likely first?

Sure.

Well, so one, I think being relatively new to McDonald's, I'd say one of the things that has really been a highlight for me is getting to know our U.S. Owner/Operators.

And I'd tell you there, it's in a very impressive group in terms of what they're able to drive.

And so you're seeing that in the results here.

Our point of view and certainly, all of my discussions with the Owner/Operators in the U.S. has been I would love for every single one of them who's currently in the system today to remain in the system.

And so there is no, from our vantage point, concerted effort to try to change the franchisee base or have it look different.

But that said, we do have expectations around performance.

And as you said, as we said earlier, running better restaurants is the foundation.

And we were not consistently running the type of restaurants in the U.S. that we're expecting to.

And so Step 1 has been -- we have really level set what the standard is or performance in the U.S. At the same time, we've outlined a pretty what we think is exciting and ambitions growth plan but it is one that's going to require investment.

And so as you put those 2 together, as you put together our performance expectation, along with an investment expectation, we are seeing some Owner/Operators are deciding now is a good time to exit the system.

And I think for us, we're -- while we certainly are starting to see folks go, we would rather have that conversation where we're all operating from in a very transparent set of expectations.

So I think over the next couple of years, we're probably going to continue to see some evolution of this.

But by and large, I think the U.S. franchise system as you see it today is going to be the same one that we're going to be talking about in a few years.

Next question is from Alton Stump with Longbow Research.

Alton?

If we go back to delivery, it's absolutely early on with the rule here in the U.S. But can you walk through, what you're finding is a percentage sort of categories, where there's cash or it's a piece or otherwise that you guys think are gaining share from as a result of delivery?

Delivery is already a significant market.

And I guess the reason we've addressed this with such urgency is apart from in certain Asian and Middle Eastern market, we just love participating and given societal trends, given consumer trends, we fairly see it growing.

So for us, we were a little late to enter but I think we've entered with more muscle and intense that probably most other competitors could possibly match.

I mean, you may have heard me say before, but across our top 5 or 6 markets around the world, 75% of our customers live within 3 miles of a McDonald's.

So frankly, there is no other restaurant business on the planet that's closer to more global population than we are.

And we think that therefore that lends itself really well to not just visiting their local McDonald's but also having delivery from their local McDonald's.

What are the sort of trends that we see?

We're certainly seeing an appeal to the younger consumer.

We're seeing some great results around college towns.

As I say from a daypart perspective, we see it skews lightly later so into evenings and overnights.

There tends to be more group orders.

So we see the average checks averaging 1.5x to 2x a typical average check in a restaurant.

So I think it's really is beginning to clearly demonstrate to us that this is an incremental business for us.

It's an incremental revenue stream for us, but we're learning with every day and every week and every market we bring on board.

Each month we bring on board now just a little wiser than the previous 1 because we're building up the experience and the knowledge.

And we've also got an opportunity ahead of us that we've yet to be innovating around packaging, innovating around bundling different menu items and other potential business opportunities further down the line.

I think our view was, let's get into the game, let's show our intent, let's learn really quickly and then we'll continue this kind of progress over perfection mentality where we can fine-tune as the time goes on.

But it's encouraging to us.

And as I said, really, you can expect to just move from about 8,500 restaurants to hit probably north of 10,000 by the end of this year and expect to see the trend continue.

Our next question is from Matt DiFrisco with Guggenheim.

Matt?

I just have a follow-up question with respect to the margin comment in the U.S. I'm just curious, as far as when I look at digital, when I look at the Experience of the Future, it seems like some international markets regions have been a little bit faster to roll it out, yet we didn't see that type of margin pressure or labor pressure.

Can you talk about the dynamics in the U.S. that are now manifesting sort of this labor pressure?

Is it with things that are already introduced into the store?

Or you -- is this a market that you have to invest in front of the curve, where it's waiting then for the same-store sales leverage to flow through beyond sort of the 6- to 9-month period that you said you're going to experience labor -- with the level.

Yes, Matt, I'll start and then Chris can add more texture, again back to the U.S. But I guess one thing that's just fair to call out is when we went to the new segment structure, we did so because we wanted to increase the transparency and accountability of what's driving our business.

So when we look, for example, at the International Lead Markets, not all 5 markets rolled out at the same time.

So therefore, if 1 or 2 markets was feeling a little more margin pressured because they were at the front end, there was a couple of markets that hadn't really embarked on it, but who were still had strong margins.

So as you can see, that kind of impact got blended into a 5-market segment results.

Here, clearly, with the U.S., it's a segment of its own and therefore, there's no other market to blend it into.

But part of the way we're looking to manage this business is that we've set our geographic spread is one of our, we believe, competitive advantages of us as a business.

We can have certain markets do some of the heavy lifting while some are investing through this cycle.

And ultimately, we are running this business in the long term and if there's a shorter-term impact, we are -- I would like to think we've demonstrated ourselves as being basically responsible as leaders of this business.

But if that's the investment required to get the job done properly, then that's what we're going to keep doing.

But Chris, if there's anything more you want to...

Yes, I think, just to maybe give a concrete example.

I mean, as we laid out 2018, we have a number of initiatives that are going to be hitting the market in 2018.

One of the biggest ones, the first one that's going to be coming out is we call it hot off the grill, sometimes referred to as fresh beef.

But right now, we're actually bringing on a number of regions on to this platform as we convert over our supply chain.

When we bring on hot off the grill or fresh beef into a market, we actually have a 6-week training curriculum that the entire restaurant goes through.

And it's a very intensive training curriculum that they have to go through.

Actually starting with the operator, the operator first goes through training.

And then we literally take every single one of those crew members with both an offsite and then an in-store training experience.

All the time that's spent on training for hot off the grill implementation, all of that counts against your labor and none of it is revenue producing, but it's the sort of thing that we think is required to really make sure that when we do roll out hot off the grill that we executed at a really high standard.

So that's just one example, but we have a number of other initiatives that have a similar type of training and preparation curriculum that's going with it that obviously puts a short-term burden on what needs to be done at the restaurant.

Our next question is from Greg Francfort with Bank of America Merrill Lynch.

Greg?

Can you just talk a little bit more about the European consumer?

I know we've heard from some of your suppliers and also, just generally the industry strength out of Europe.

And I'm wondering what do you think is driving that and maybe how sustainable that is?

Yes, thanks, Greg.

I guess it's mix picture and I'm certain of the metrics that we see are somewhat contradictory to a certain degree.

I mean, you there's -- depending on which country you're talking, there's a little bit of nervousness in terms of consumer confidence.

We're seeing consumer confidence in the U.K. get a little weaker as the uncertainty over Brexit continues.

I think one thing we do see more consistently, which is a positive, certainly, for society and putting money in people's pockets, is unemployment is typically declining across all of our major markets.

I mean, there's better stability and growing consumer confidence in France and we're seeing the same in Italy as well.

Germany continues to be a somewhat more mixed picture.

But overall, it -- we're not seeing as a significant -- any of these measures as a significant tailwind nor do we think we're kind of having to cycle through into a strong headwind indeed.

I guess the reality for us, our mental approach in every single one of these markets is let's assume there's going to be very modest market growth overall and therefore let's take the attitude this is a market share find.

And you're going to be either winning or losing customers, just make sure we're on the right end on that battle.

Our next question is from Jeff Bernstein with Barclays.

Jeff?

I guess, Steve or Chris, and then the U.S. QSR burger category, it seems like the largest players have most recently been sustaining or even accelerating momentum.

And I know if you look back over the past decade or so, it has been historically very difficult to maintain that for sustainable periods.

I'm just wondering maybe what you think has changed in QSR or maybe the dynamic that's changed meaningfully?

Or where do you think maybe the share is coming from that's led to this most recent resurgence across broader QSR?

And Kevin, could you just clarify what you said earlier, just from an accounting standpoint, I want to make sure I understood.

You said 20% equity pickup with the China-Hong Kong shift.

Just want to make sure that's going to flow through the equity and earnings line, and just how much you might think that's going to be starting this quarter or what we should think of as a run rate?

I think 3 of us will have a go at that.

Jeff has a multifaceted -- if I give a broader perspective on the way that we're looking to grow our business is I'm not interested in the comp cycle.

And you hear people talk about it and you get next quarter's comp [go] depends on what the same comp was a year ago.

I think, ultimately, what we're looking at and we've seen this successful in a couple of our more mature market is build the platforms of growth that give you long-term sustaining growth.

So you're not in that short-term cycle and you don't get dragged into it.

So I think there is certainly a -- and Chris can talk to the QSR industry in the U.S. But certainly, as we've built our Experience of the Future, our digital platforms delivery convert the consumers to somewhat more casual to our brand.

And we think that we're building sustaining platforms that are important for us.

But Chris, maybe the U.S.?

Yes.

And so I think just to build on that.

It is a relatively flat market, but I think what we're seeing is that when you're really sharp with your proposition that you're offering the customer, the food that you're offering at the value that you're doing or the experience, when you've really got a compelling proposition to put forth, you can gain significant share.

And so certainly, the comp gap that we've been seeing, and our comp gap has been widening over the last 3 quarters.

And I'm very excited about what we've got in the pipeline going forward.

I think as I said at the opening of my comments, the absolute key for us is going to be to execute.

But I think if we execute and again, we stay really sharp with the proposition that we're offering customers, I don't see any reason why we couldn't sustain that performance.

But it's on us to demonstrate it.

And then, Jeff, regarding your question on kind of China, Hong Kong going forward.

It'll be accounted for similar to how we account for Japan today, which is we'll get a royalty up in franchise revenues and then we'll pick up 20% of their net earnings, down in the line called equity and earnings of unconsolidated affiliates within our other operating income.

So that's what it will be beginning, I guess, a little bit beginning this quarter but really beginning more next quarter.

And then regarding size of it, I guess, what I would remind you of is, remember that China and Hong Kong in total were less than 5% of our consolidated operating income.

So we have time for one more question, and that will be David Tarantino with Baird.

David?

My question is on your digital strategy.

And Chris, maybe you can comment.

I think you mentioned that there's a building database of digital users.

I wonder if there's any metrics you can share around that and where you expect that to go over time.

And then lastly, on the mobile order and pay adoption specifically, I know it's early days, but can you talk about the adoption rates you're seeing in the restaurants you've had at the longest and what you're planning to do to drive adoption as you move through next year.

Yes.

Well, so I'd say we're still in the early innings in honor of the World Series -- in the early innings of digital.

But we're seeing, I think, a really nice start, so we've had almost 30 million downloads.

I would say we're roughly 9 million active users, meaning who were in it on a monthly basis that we're seeing there.

And we're seeing strong offer momentum, which is really currently the primary benefit that we're delivering through the app.

As we're rolling out now mobile order pay, the power is going to be to then bringing together the offer with the ability to do mobile order pay.

Right now, what we're doing mostly in our restaurants with the rollout of mobile order pay, is we're really, at this point, focused on getting the operations right.

So getting, for example, the crew to understand when a curbside order comes up, how did they take that order?

How did they go out and bring the food to the customers?

So right now, I'd say, we're spending a lot of time on mobile order pay, the actions we're deploying it.

But really make sure we've got the operational multiple there because what will happen then in 2018 is we're going to flip the marketing switch on it and start to drive really much more increased usage.

But certainly, we've learned from some of the other activity out there.

We want to make sure that we're ready when we do flip on the marketing switch that we're ready to handle the business with it.

But still early innings, we do you think that it's a significant opportunity for us.

And we would expect in the future it becomes a more significant part of the comp.

So we've reached the top of the hour.

And now I'd like to turn it over to Steve who has a few closing remarks.

Yes, very briefly.

Our velocity growth strategy is working and you can see the proof in our performance.

Even as we've made a lot of progress, we know we still have a lot more to do.

We'll continue focusing our energy on aligning our entire organization around disciplined execution that'll allow us to deliver on the full potential of our plans.

And with that, thank you for dialing in, and wish you a good day.

Thank you.

This concludes McDonald's Corporation Investor Conference Call.

You are now free to disconnect.