McDonald's Corporation

Hello and welcome to McDonald's Fourth Quarter 2018 Investor Conference Call. At the request of McDonald's Corporation, this conference is being recorded. Following today's presentation, there will be a question and answer session for investors. At that time, investors only may ask a question by pressing star 1 on their touchtone phone. I would now like to turn the conference over to Mr. Mike Seabrook, Investor Relations Officer for McDonald's Corporation. Mr. Seplock, you may begin.

Good morning, 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 is also being recorded for replay on our website. Before I turn it over to Steve, I want to remind everyone that the forward-looking statements in our earnings release and 8K filing also apply to our comments. Both documents are available on www.investor.mcdonalds.com and are the reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures. And now I'll turn it over to Steve. Thanks, Mike. We're pleased with our strong performance in 2018. Global comparable sales increased 4.5% for the year, reflecting our broad-based momentum across the McDonald's system. This was a year when we bought our customers greater convenience, choice, and value as we continued aggressively transforming our business. Customers rewarded us with more visits again last year, resulting in back-to-back years of global guest account growth for the first time since 2012. This achievement is even more notable at a time when informal eating out traffic growth has been muted. Most of our top markets excelled in 2018 and outperformed our competitors. The UK, for example, now has 51 consecutive quarters of like-for-like sales growth that continue to gain share in a shrinking market. Canada grew comparable sales and guest accounts for the quarter and the year, extending its 10-year run of success. With 19 consecutive quarters and comparable sales growth, Australia continued their momentum with offerings such as the successful all-day favourites and the benefit of rising delivery sales. Germany is outperforming competitors as customers enjoy modernized restaurants and the benefits of one of the most effective digital engagement programs in the McDonald's system. The market now has seven consecutive quarters of comparable sales growth and posted its best annual comparable sales growth percentage in 25 years. Italy continues to be one of our best performing markets. The foundation of their success starts with a great leadership team executing a solid growth plan. The market is also seeing positive results from investing in experience of the future and maximizing the business impact of other velocity growth plan initiatives such as digital and delivery. McDonald's is the out strong 2017 and forward that with an even better year in 2018. In the US, we're in the middle of the most ambitious program the market has ever undertaken. the U.S. is executing a significant number of initiatives at the same time. Still, in 2018, we grew sales while continuing to invest billions of dollars in the restaurants, making foundational changes in our business and staying focused on our customers. While we have much ahead of us, we made significant progress with a lot of hard work in 2018. The U.S. is a much more nimble organization today than it was at the start of 2018. We reduced the number of co-ops from nearly 200 to fewer than 60 and halved the number of field offices. The market trimmed down the number of local agencies it works with from dozens to fewer than 10. The most significant changes in the market resulted in giving our customers better tasting food, greater convenience and a better overall experience. One example in the U.S. is last year's national launch of cooked right when you order fresh beef quarter pound burgers, giving customers hotter and juicier burgers which they crave. In 2018, the U.S. converted about 4,500 restaurants to experience the future. That meant we reopened more than 10 new restaurants every day throughout the year, introducing local communities across the country to a dramatically different McDonald's. This is an aggressive pace with an ambitious agenda at a time when the U.S. market is experiencing intense competitive pressures. Chris Kempczynski and the U.S. leadership team remain engaged in collaborative and constructive dialogue with franchisees. At the end of 2018, they met face-to-face with franchisees in all 10 field offices across the country. Whilst we've made some tactical and timely adjustments to our plan, collectively we remain committed to the growth strategy. It gives McDonald's the best opportunity to win in what is becoming an increasingly competitive market share fight. I also meet regularly with franchisees throughout the U.S., and earlier this month I had the chance to visit with several of them in Louisiana and Georgia. I heard firsthand how much they appreciate the flexibility and our continued willingness to work with them in carrying out the plan. This is the right strategy for our business, and we're committed to driving shared success. When visiting our modernized restaurants, it's easy to see how the new ordering options, refreshed decor, and overall enhanced hospitality make a difference for our customers. We established a solid foundation in the US last year that will serve us well in 2019. Now Kevin will discuss our financial results for the fourth quarter and full year. Thanks, Steve. With a relentless focus on our growth strategy, we continued our strong sales momentum across most of our top markets, with global comp sales of 4.4% for the quarter. This marks our 14th consecutive quarter of global comp sales increases, with each segment once again contributing to the growth. We also grew global guest counts for the quarter. Our top-line performance given the muted informal eating out environment in most of our major markets that Steve mentioned earlier. Looking across the segments, the international lead markets continue to outperform the competition, with comp sales up 5.2% for the quarter, led by the UK, Germany, and Australia. For the full year, every market in the ILM segment delivered both sales and guest count growth. something these markets haven't achieved since 2011. High-growth segment comp sales were up 4.8% for the quarter, with Italy, the Netherlands, and Poland delivering double-digit comp sales growth and positive comps across most of the segments. In the foundational markets, geographic regions. Turning to the U.S., comp sales were up 2.3% for the quarter, while comp guest counts remained negative. In 2018, the QSR environment in the U.S. proved challenging with aggressive promotional activity throughout the industry. Despite this, we achieved a positive comp sales gap of 100 basis points for the full year versus our QSR sandwich competitors. In the fourth quarter, U.S. sales continued to benefit from healthy average check increases from favorable product mix shifts and menu price increases. Value in deal offerings like the four for $6 classic meal deal, limited time offers like the glazed tenders and triple contributed to a higher average check. As I discussed on last quarter's earnings call, construction downtime and slower sales recovery related to the aggressive pace of modernization in the U.S. was a headwind in 2018. We've implemented processes to shorten project downtime and accelerate recovery to minimize the impact to the business as we continue our EOTF deployment. Turning to bottom line results, earnings per share was $1.97 for the quarter, an 18% increase in constant currencies after excluding current year impairment charges and tax reform related items in both the current and prior year. In addition to strong comp sales performance, EPF benefited from a lower than normal 19% effective tax rate for the quarter. setting pressure of $0.05 per share. Franchise margin dollars grew 6% in constant currencies for the quarter, reflecting sales-driven performance and conventional re-franchising. Franchise margin percent declined by 90 basis points as franchise revenue growth was more than offset, primarily by higher depreciation costs related to EOTF modernization in the U.S. Despite cost pressures around the world, like rising labor costs, sales growth and re-franchising benefits drove a 20 basis point increase in consolidated company-operated margins. 2018 was the first full year we began operating under our streamlined and more heavily franchised business model, and the benefits are reflected in our results. Our business continues to generate significant cash flows. In 2018, free cash flow was $4.2 billion, an increase of 14% over 2017. Our full-year restaurant margin dollars grew by over $100 million in constant currencies. And excluding current year and prior year special items, our 2018 operating margin was 43%, up over 4 percentage points from the prior year. In the U.S., Company-operated margins declined 190 basis points for the quarter. Wage pressures and continued investments in deployment of our key initiatives contributed to both higher labor costs and depreciation expense. Commodity costs were up about 2.5% for both the quarter and full year. Menu price increases were around 2% for the quarter as we looked to strategically balance For the international lead markets, commodity pressures eased for the quarter, up 1%, while the full year was up 2%. Menu prices increased about 2% year-over-year. G&A for the year was down 2% in constant currencies. I'll put our G&A savings into perspective in a few minutes when I review our outlook for 2019. Now I'll turn it back to Steve. Nearly two full years into executing the Velocity Growth Plan, our strategy remains focused on reigniting guest count momentum and regaining customer visits. We're visibly demonstrating to our customers how we're becoming a better McDonald's with a robust range of initiatives. With our focus on improving the taste of our delicious food, enhancing convenience, offering compelling value, and upholding the trust consumers place in our brand, and encourage more visits. We continuously strive to improve the taste of the iconic sandwiches at the core of our menu and introduce new items appealing to customers. During the quarter we had many examples in market that found success in encouraging visits and sales with many changes. Canada extended the successful launch of bagels earlier in the year by introducing all-day breakfast bagel sandwiches with fresh cracked eggs. In Spain, loaded fries were popular with customers seeking a snack, and many also enjoyed adding them onto a meal. Last year, Canada had a successful promotion introducing bacon on some of our classic sandwiches, and this week the U.S. launched a similar campaign to encourage more visits to our restaurants. We were pleased to see the attention generated with yesterday's Bacon Hour events, and the U.S. is following up by offering bacon on Big Macs and quarter powders, as well as cheesy bacon fries. Time and again, we see the importance customers place on getting their food hot and fresh with fast, friendly service. Customers notice a difference when we run great restaurants, so we continue to focus on improving the operations of our restaurants to provide customers with great all-round experience. I'm encouraged by the greater discipline we're demonstrating in many of our markets as they simplify menus, take other actions that reduce complexity and improve our ability to provide exceptional experiences for our customers. Serving delicious food and offering great service are vital. They're not the only requirements for maintaining strong trust with consumers. Public expectations of leading companies like McDonald's have never been higher. In December, we announced that we are partnering with suppliers and beef producers to reduce the overall use of antibiotics in our beef supply chain. This was the latest in a series of announcements throughout 2018 where we detailed bold targets for using our scale for good in addressing some of the world's most pressing challenges. In committing our resources, attention, and significant convening power and influence, we are demonstrating to our customers, employees, and other stakeholders that McDonald's is worthy of their trust. 2018 also marked a year of significant progress with each of our velocity-accelerated delivery, experience of the future, and digital. We will take action in 2019 to capture additional growth opportunities within the velocity strategy. Delivery momentum continues and is now available to over 19,000 restaurants, more than half of our global system. It took us almost 20 years to grow our annual delivery business in the Middle East and Asia to $1 billion. Over the past two years, delivery has become a $3 billion business for both McDonald's Company and franchise restaurants globally. Delivery continues to grow rapidly as we expand through additional restaurants and third-party providers, as well as benefiting from strong same-store sales momentum. Many of our major markets such as the US, France and the UK achieved delivery sales growth in the high double digits in restaurants offering the service for more than 12 months. And other markets such as Canada, Italy and Russia grew even more. We're confident that delivery offers additional growth potential for our business. Even with the momentum we already have established, we know we have an opportunity to let more customers know that McDonald's will bring meals to their homes, offices, and college dorm rooms. Driving awareness begins with encouraging more customers to try delivery. We talked before about the high satisfaction among our delivery customers and their willingness to reorder, and we continue to see those trends hold steady throughout 2018. We've placed a high priority on identifying the winning ideas developed by individual markets and spreading them elsewhere within the McDonald's system. UK, Canada, and Australia are leaders within McDonald's and are developing innovative approaches to help restaurants with high order volumes. In Australia, awareness more than doubled through a major campaign that promoted delivery within restaurant sites, engaging social media outreach, PR activity, and advertising. And in its own awareness campaign, Uber Eats in Australia featured McDonald's demonstrating the strength of our partnership. We also continue to bring learnings from China, our most developed delivery market, to help our newer delivery markets, especially related to restaurant operations. As we've said previously, our commitment to everything we do with this growth accelerator is our commitment to make delivery easy and convenient for our customers, which will help us maximize the competitive advantage of our business. Now I'll turn to another one of our Velocity Accelerators, Experience of the Future. With refresh decor, new ordering options, and an enhanced focus on providing a more enjoyable visit to our restaurants, we're introducing a new hospitality experience to McDonald's customers. Our guest experience leaders have been key to a better customer experience, which we've seen drive high customer satisfaction in sales and ultimately strong business results. With about half of our restaurants around the world converted to EOTF, we have many more customers experience modernized restaurants and enhanced hospitality. We've identified an opportunity to be more consistent in ensuring restaurants adopt proven best practices for engaging with customers in our updated restaurants. We've made significant progress, for example, in the U.S. in training 10 assist the customer with kiosk orders, or bring trays of Big Macs and fries to a customer's table. We're encouraged by the impact on our business as we continue to enhance hospitality and complete more projects. Restaurants that have introduced experience to the future elements continue to perform in line with our expectations for higher sales and customer satisfaction. Customer expectations for the way they interact with brands continue to rise. We have made additional progress in 2018 holding up digital platforms, making the McDonald's experience simpler and more personalized for our customers. In the years ahead, we will continue making strides through digital channels to reward customers with good value and relevant offers, as well as incorporating fun experiences they appreciate from our brand. These opportunities are possible because of the extensive work we've completed in deploying technology throughout the McDonald's system. including self-order kiosks in nearly 17,000 restaurants, digital menu boards in more than 21,000 restaurants, and new capabilities for mobile order and pay that's available in over 22,000 restaurants. Now Kevin will discuss our outlook for 2019. Over the last several years, we've fundamentally enhanced the strength and stability of our business. In anticipation of being substantially complete with our re-franchising efforts, we established long-term average annual financial targets set to begin this year. These targets reflect our confidence in our ability over the long term to increase system-wide sales 3% to 5%, maintain our operating margin in the mid-40% range, deliver earnings per share growth in the high single digits, capital in the mid-20% range. The strength and reliability of our significant and growing cash flow enables us to return about $25 billion to shareholders over the three-year period ending this year, including our 15% dividend increase announced last September. Over the last two years, we've returned over $16 billion toward this target through share repurchases and dividends. Looking at 2019, we anticipate some headwinds this year around labor costs, EOTF-related depreciation in the U.S., commodities, and foreign currency translation, which will put some pressure on EPS growth this year. Higher depreciation expense in the U.S. will continue to impact both franchise and company-operated margins over the next couple years. Franchise-related depreciation expense will increase by about $100 million year-over-year in 2019. And depreciation on company-owned restaurants will also increase about $15 million, both driven by the accelerated pace of the OTF. We expect commodity increases in the U.S. of 1% to 2% for the year, and an increase of about 2% in our key markets outside the U.S. Based on current exchange rates, we also anticipate currency pressures to continue for the first half of this year. At today's rates, we expect currency to negatively impact EPS by 8 to 10 cents in the first quarter and 13 to 15 cents for the full year. As usual, this is directional guidance only because rates will change as we move through the year. We continue to exercise strong financial disciplines. and we expect about a 4% G&A reduction in constant currencies for the year. At current exchange rates, this will result in total G&A of roughly $2.1 billion. Since the beginning of 2015, we will have achieved gross G&A savings of over $600 million. After reinvesting some of this back into areas to drive growth, like technology, we'll be down net about $500 million. We've mentioned that most of our major re-franchising transactions are complete. We will continue to re-franchise some restaurants to conventional licensees across markets such as the UK and US, but to a much lesser extent. As a result, we expect gains on restaurant sales this year to be about $200 million less than 2018. Moving on to capital, we ended 2018 with capital expenditures of $2.7 billion. Although this was slightly higher than initially planned for the year, we completed about 4,500 EOTM projects in the U.S., well exceeding our original plan of 4,000 projects. As we've also noted, inflation in the overall construction industry has also been a pressure on EOTM project costs. We currently expect to spend roughly $2.3 billion of capital in 2019. Nearly a billion of that capital will be dedicated to completing approximately 2,000 EOTF projects in the U.S. Our recent adjustments to the U.S. plan now provide the ability to more evenly balance remaining EOTF projects between 2019 and 2020. While we have provided an option for franchisees to extend projects beyond 2020 at a reduced partnering level, most franchisees are choosing to complete their projects over the next couple of years. So we expect to be substantially complete with the OTF by the end of 2020. New restaurant development continues to be an important component of our growth equation. We plan to open roughly 1,200 new restaurants this year. We will spend approximately $600 million of our capital to open about 300 restaurants in our wholly owned markets. Our developmental licensees and affiliates will spend their capital for the remaining 900 openings, nearly half of which are planned in China. This is a demonstration of how the financial resources and capabilities brought by our opportunities for accelerated expansion. As we enter 2019, I'm confident that we're well-positioned to deliver sustained, long-term profitable growth for the system and our shareholders. With our strong performance in 2018, you can see why we're confident in our strategy. We have a lot of growth potential remaining in the core of the Velocity Growth Plan and the accelerators. provides a solid foundation guiding our business as we begin 2019. We also recognise there are significant challenges as we enter the new year. Kevin shared several of the financial headwinds to growth that we're facing, and as you've seen, consumer uncertainty is growing from France to China to the UK and elsewhere across the globe in response to tightening economies and shifting political environments. Still, we remain optimistic The investments we've already made in modernizing thousands of our restaurants have placed us in a strong position. We will continue to prioritize investments in our restaurants and our business so we can keep advancing as a leading global brand in our dynamic consumer landscape. In the fight for market share, some will succeed and others won't. We intend to keep positioning McDonald's on the winning side. And now I'll hand it over to Mike who can lead Q&A. Thanks, Steve. We will now open a call for analyst and investor questions. As a reminder, please press star 1 if you have a question and pound 1 to remove yourself from the queue. To give as many people as possible the opportunity to ask questions, please limit yourself to one question. Our first question is from Eric Gonzalez with KeyBank.

Hey, good morning. Hope you guys are staying warm out there. I have a few questions related to your capital spending plans. Based on your 19 guidance, it seems like you're expecting to spend roughly the same amount in the US business this year versus last year, yet you're expecting to complete roughly half the number of EOTF projects. I guess the question is, has the EOTF project cost materially increased or are there other areas of spending that you haven't previously considered? Also, how should we think about capital spending plans for the out years in 2020 and 2021? given some of the projects are being delayed and considering McDonald's co-investment rate will decline to 40%. Thanks.

Thanks, Eric. And, yes, we're trying to stay warm, but it's a little difficult these days. All right, so let me talk about capital both for 2018 and 2019. In 2018, we spent roughly $1.4 billion of our capital on EOTF projects in the U.S. In 2019, that number will be less than a billion. So it's going down by, I'll call it roughly half a billion dollars, the amount that we're spending on EOTF in the U.S. The other dynamic that's occurring, though, is there's a little bit different mix in the types of projects that are occurring in 2019 versus 2018 on a couple fronts. One is our company-operated restaurants. So we did about 200 company-operated restaurants in 2018, but that was only 4% of the total projects for that year. We'll do a similar number of company-operated projects to finish those off in 2019, so about 200 again, but that will be 10% of the total projects for 2018. little bit higher average costs. The other dynamic that's happening is in 2018, as we've talked about, some of the projects are what we call non-mods. These are the ones that hadn't been modernized and need the full modernization of the restaurant in addition to EOTF elements. Those were about a third of the projects in 2018. while what we call mods or restaurants that have already been modernized were about two-thirds. Those are lower costs than the non-mods, obviously. In 2019, that split is roughly half and half. So that also brings up that average cost from 2018. So our average cost per project is a little bit higher in 2019 than 2018 because of those couple dynamics. Regarding capital going forward, so we said we expect 2019 to be roughly $2.3 billion. 2020, you should expect to be relatively similar to 2019, maybe a little bit lower. And then beginning in 2021, that number should drop dramatically, probably the U.S. by the end of 2020. So hopefully that gives you some more information related to the capital. Our next question is from Andrew Charles with Collin.

Great, thanks. Kevin, I have two questions. Kevin, you called out the U.S. comps outpaced the benchmark by about 100 bits for the year. If my math is right, it sounds like you guys were flat against the benchmark in 4Q. So curious what incrementally changed from earlier in the year as the value environment was fierce throughout 2018 and And I guess specifically, did the 50 bits headwind you saw from remodel construction in the first nine months accelerate in 4Q with a greater than expected number of projects? And then separately, this one's for Kevin or Steve, can you talk about how you arrived at the guidance for 2000 U.S. remodels in 19? Just given the fluid nature of discussions with operators on the topic, is the guidance based on some form of binding commitment, or is the guidance based on a best-case estimate, if you will?

Okay, so let me start, and then I'll turn it to Steve to talk about kind of how we're going about process-wise in the U.S. Related to the comp gap, you're right. It was relatively flat in the fourth quarter to get us to that 100 basis points for the year. You know, I guess I would just say you saw the industry throughout the year certainly was competitive, both from a price and value perspective. So, yeah. I think we're pleased in that environment that we achieved the 100 basis point gap for the year, but to your point, it was relatively flat in the fourth quarter. Regarding the headwind, I'll say, that EOTF caused, the fourth quarter was relatively Roughly half a point, so that kind of in line with where we had been in third quarter, roughly half a point for the year. I think we expect as we progress into 2019, that will start dissipating so that by mid-year or so, that should turn to be a positive impact. So, again, partly because of the lower number of projects in 2019 and partly because of all the projects we did in 2018. The second part of the question, Andrew – We're confident in those numbers. We have, through the course of the 10 field office visits that Chris Kempczynski and the leadership team conducted, clearly we were keen to offer operators the chance to, what we've described, level load their commitments, depending on how many projects they had left, and just their own sort of cash flow management, obviously. We will really encourage and reassure that we still believe and know that the majority of the operators have come forward and they want to either retain the existing schedule or maybe level load across 19 and 20, but really want to take advantage of the partner that we have in place. And I think it reflects the confidence that they're beginning to see. I mean, once you start to look at the impact of EOTF, as you start to look at the Ample Digital Menu Board, as you start to introduce delivery alongside the self-water chaos, the enhanced hospitality, that combined suite of initiatives really is generating much stronger lifts. If you look at those that have completed, now we've got about 8,000 restaurants complete here in the U.S. We've got fact-based data to share with the operators, which I think just continues to build their confidence. So I think the operators appreciate the chance of flexibility. The vast majority will complete within the next two years. Just one last thing I'd add. Our 2000 estimate right now is based on conversations with the operators. So that could change a little bit as we get down to formally planning the exact timing over the next couple months. There hasn't been signed letters or anything like that yet, but based on the conversations we've had, that's where those numbers are coming from. Our next question is from Sarah Senator with Bernstein.

Thanks. A question and then just a quick follow-up on a comment Steve made in the prepared remarks I just wanted to clarify. The question is, again, on EOT. I was interested that most of the franchisees are sticking with the original schedule, but I guess to the extent that for the immediate impact, it's been somewhat mixed or at least less visible for those on the outside. Have you contemplated or had your point contemplated perhaps not co-investing as heavily and just allowing EOTF to roll out on its own, which may be returning more cash to shareholders? I mean, it sounds like it's sort of a done deal at this point, but to an outside observer, it can sometimes be hard to effectively calculate an ROI given relatively flash market share and some of the headwinds we've seen. And then My clarification was Steve characterized the market share fight as increasingly competitive, and I was just wondering if that meant you're seeing what you're seeing in terms of promotional activity. Is it just within QSR? Are you seeing any kind of trade-off or down?

Okay, I'll start with the first part, and then I'll let Steve come back and talk about market share stuff. Okay. Thanks for the question, Sarah. You know, related to EOTF and our kind of commitment and investment in that, we've seen it be really successful around the world consistently. It generally increases customer satisfaction. We've certainly seen sales increases around the world. And we are seeing that same dynamic in the restaurants in the U.S. that we've converted. So we're committed to investing. We believe that our ability and willingness to invest in our restaurants at a relatively quick pace helps kind of separate us a little bit from others in the industry. And so we believe it's an advantage for us to be able to use our financial strength and be able to invest at the right pace and the right time in the U.S. business. So that's why we're continuing to do that. And, sir, on the market share, I think – Probably both IEO and the broader informal eating out and then more specific to us, the QSR market share is incredibly muted. If there is any growth at all, it's going to be more likely in the QSR and largely a lot of that is down to new unit additions. So I guess what that means is any traffic gain you're going to get will be the expense of someone else. People are typically eating out a little less often, and we can respond to those sorts of trends with home delivery, for example. But frankly, we're not expecting any tailwinds from broader growth in either IEO or QSR. Now, if you want to choose to play in one of those, I'd much prefer to be in QSR, so I feel good about that. And there's a lot of discussion that we have with our markets. Absolute sales growth is always attractive. That top-line growth, like-for-like sales, is clearly always encouraging and a positive trend. But no matter what your markets and conditions are, as long as you're gaining share, you're going to end up in a better competitive position in the long term. So we look at market share very closely, and we have a pretty aggressive mindset to it. As I say, just to reiterate, we're not expecting any tailwinds, so our share gain will be someone else's pain. Our next question is from David Palmer with RBC.

Thanks. Just looking ahead to 2019 and looking back to 2018, traffic obviously slowed down last year, particularly earlier in the year. When you look at the foundations you've created and the important changes that you're making heading into this year, what are the most important ones when it comes to accelerating traffic in the US in particular? And then with regard to the delivery business, I would imagine you'll start in-app ordering at some point and with some advertising support behind that. Is the consumer data available only for in-app orders and not through orders through Uber Eats? Thanks.

Let me take both of those. So I think the market where we really want to drive traffic momentum, which will help the overall globe So to be very specific, we continue to lose traffic at a greater level than we want at breakfast. We're doing well with average check growth, but we really want the customer counts back more often. So there's a number of initiatives that we're going to be deploying. Some of this real nuts and bolts stuff, just looking at our staffing levels across those key busy day paths, clearly menu innovation can always play a part. We believe the shift back into local breakfast value both drip coffee and premium coffee. And also we do believe more personalized digital engagement can also help drive our breakfast business, whether that's through having customers enjoy the experience and convenience of mobile order and pay, and also more personalized and tailored offers in the app. So that's just an example of the focus we have on breakfast, particularly across the U.S., and that was what I was hearing played back to me when I was in the field offices down in Louisiana and Georgia early in the year. Also, you know, we're continuing to fine-tune the value and deal promotions. I mean, you're familiar with the $4 for $6. We've had $2 for $5. And, of course, the $1, $2, $3 menu, so there's an entry-level platform and then deal combinations. We're going to continue working on product availability or product offers within those combinations and think we can get more competitive as we juice that up. Then, finally, the one which... Again, I'm excited about, and it's nuts and bolts McDonald's restaurant operations type discussion is a renewed focus on the drive-thru operation. And I'm just making sure that we can really meet the demand that we're seeing. So I think there's a number of areas where we believe we can get the guest account traffic growing. And all of that's within our control. So that feels good. With regard to the in-app, we can get certain consumer data. But clearly integrating into our app will give us a fuller data set. So we can clearly data privacy is foremost in our minds and we'll always respect that. But we are getting some useful information now but we're more optimistic that as we get into probably the third quarter of this year we'll be able to integrate more into our app Our next question is from Karen Holthaus with Goldman Sachs.

Hi. Thanks for taking the question. In some of the markets that have had experience in the future longer in the U.S., are there any metrics you can share around specifically kiosk usage? And then are you seeing any signs of greater app adoption or app usage in those areas when you sort of have the kiosks to pull customers into that digital ecosystem? Sure.

Yeah, so our most advanced market is probably France, for example, who really started adopting self-order kiosks earlier than anyone else. And then we have some fast followers, be that Australia, Canada, Italy, Netherlands, for example. What we're tending to see is significant year-on-year usage percentages for in-store customers. I guess what I'm trying to say is a greater percentage of customers that go into our restaurants are using the kiosk. They get more confident with it. They get more familiar with it. They enjoy just the time they're able to spend on it. And, you know, often they go in in groups and they have open group order, for example. So we are seeing some restaurants with as high as 80%, 90% of in-store guests using the kiosk. And particularly now, as we add the enhanced hospitality with it, they can just order, pay on credit, go straight to their table, and we'll bring the order out. So it really has transformed the experience. So we're actually seeing not just our own data, but we're seeing customer satisfaction measures dramatically increase. So we're using these learnings to actually help markets that are still in the process of rolling out the EOTF, whether that's the US and still some other emerging markets. Because the data is powerful. The data is... Our next question is from Jeff Bernstein with Barclays.

Great. Thank you very much. Two questions. One is on the U.S. franchise system. It seems like they're getting increased visibility with the formation of their kind of owner's association. And I guess we're seeing more reports talking about some frustration with things like delivery and investment and, you know, the EOTF, which you guys have talked about in the past. My guess is all QSRP are seemingly having a We have a small portion of franchisees that are disgruntled, so I'm just wondering, Steve, maybe whether you're concerned that these concerns of McDonald's are more on an escalating path that could damage the system, or maybe you can tell us what you think the biggest concerns of pushback are. And my follow-up was just for Kevin. I just wanted to clarify what you said about 2019 EPS. I know you said it would be pressured, but I wasn't sure whether that was benchmarking against where consensus is versus your high single-digit kind of long-term outlook, or how we should think about the reference to it being pressured. Thanks.

I'll take the first one. Around the U.S., our own operator sentiments and commitment to this bigger bolder vision plan. Again, let's just keep in context just quite how ambitious the plan that the operators and our leadership team built together. That was always going to be hard work. 2018 was a year of hard work. It was a year when we as a company and the owner-operators individually began to write more significant checks as they were committing to the plan. So the dialogue's always going to happen. The dialogue always does. Sometimes it's at a low level. Sometimes it just bubbles up a little. I think the good news is we're talking, and our teams and the owner-operator leadership are talking with one another to see how we can help maintain the confidence in the plan, maintain the commitment to the plan, If there's any adjustments or amendments that we need, then we can make those as we roll. So I wouldn't like to be great if everyone was happy, of course. Am I fundamentally concerned that it will derail us from the shared ambition we have? No, I'm not at all. And, you know, again, I could hear that firsthand from my market visits this year down in Baton Rouge and across to Atlanta. So, you know, the door is always open on that. And then, Jeff, regarding where I mentioned there will be some pressure on EPS growth this year, I'm not comparing versus consensus. I'm just talking about our internal – targets. As I mentioned, there are some one-time things like gains will be ratcheting down between 2018 and 2019. So that impacts that EPS growth rate. It's a one-time, I'll say, change, if you will. But we've always known or always talked about our re-franchising starting to roll off. Related to depreciation that I mentioned, there's obviously pressure on margins, if you will, in 19 relates to depreciation. Now, that won't impact cash flow or anything like that, but it obviously has an impact on just pure EPS growth rate. So that's all I was just trying to say. Our next question is from John Glass with Morgan Stanley.

Thanks very much, too, as well. Please go ahead. One, Steve, you mentioned consumer confidence and other sort of cautionary notes about 2019. Was that directed at maybe the year has been a little softer after a softer start than you thought, or is that just sort of standard, you know, there's always things in the world to worry about? And then specifically on EOTF, I suspect slowing the pace of the conversions probably helped sales in 2019. Maybe you can comment if there's a change or less burden on sales relative to that. And you also mentioned that you're level loading it, but I think at the end of 2019, you'll be 10,000 converted in the U.S., and so there's another 4,000 to go. Is that correct? and then the rest just don't have to get done? Or how do you think about level loading if you've got more to do still than the balance of 2,000?

Yeah, hi, John. I think Kevin will take the second one. Now, I was not looking to signal any short-termism in those comments. I just thought it was responsible just to acknowledge that as you enter 2019, as you look around just the global macro picture, it just appears a little less certain than than entering the last couple of years. And I mean, that's evident to all of us anyway. I thought it was worthy of note. But no, I don't want that to be read into any form of indication of how the year started. And then regarding two things, one kind of the EOTF impact, as you called it. Yes, by doing a little less projects in 2019, it actually will be a benefit, more of a benefit to sales than if we had done 4,000 projects in 2019. So that's when I mentioned where the EOTF impact, if you look at all the pieces, should start, I'll say, turning positive by midyear versus the drag that has been really all of this year. Regarding the number of restaurants or counts, if you will, of EOTF projects, Right now, through 2018, we're a little over 7,500 restaurants complete, if you will. If you then think about roughly 2,000 being done in 2019 and roughly 2,000 being done in 2020, and then likely another 1,000 or so remaining that would happen in 21 and 22, that gets us to roughly most of the estate, because at the same time, there are some that we are either relocating or we have rebuilt, and so you hit another thousand or so just of restaurants that either get relocated or rebuilt over all of those years. That gets you to roughly 13,500 or so of our 14-plus thousand estates. That's substantially all of them. There will be a few restaurants that we don't get to or won't deal with. I just want to hook on. All of our technology initiatives, whether it's the global mobile app, the work we've done for mobile order pay, introduction of self-order kiosks, the use of our outdoor digital menu boards. As we build the kind of customer relationship management, we're now creating this very, very powerful ecosystem that as we start to connect these technologies together, we'll offer our customers better experience, better value, more personalization. and we will get to understand our customers and their behavior so much better. So I wanted to acknowledge your point that, you know, as we start to be able to identify customers, once we start to unlock that at the cell phone or kiosk or as they put into a drive-through lane, I mean, our ability to smooth their experience, make it more convenient, recognize them individually, and also learn off them is incredibly powerful. So these are a lot of, foundational investments we're making to create what I think will be an incredibly powerful ecosystem, for want of a better word, that is going to provide a lot of knowledge, a lot of data for us, and a much better experience for our customers. Our next question is from Greg Frankfurt with Bank of America, Maryland.

Hey, guys, thanks. I just have one clarification to the earlier CapEx comments and then a question. I think in response to Eric's question, you were referring to 2021 CapEx in the $1.5 to $2 billion range, but I think previously you've said sort of low ones were the run rate. Is 2021 not a long-term number?

So 19 and 20 will be roughly the $2.3 billion. As I just mentioned, we'll have about $1,000. term run rate, if you will. It'll be substantially less than 19 and 20, but not quite yet all the way down to a normal ongoing run rate. Our next question is from David Tarantino with Baird.

Hi. Good morning. On the I had a question. I think, Steve, you referenced a couple times just sort of operational improvements and speed of service. And I know I've asked about this many times over the past few years, but just wondering if you could maybe share specific action steps you're taking to improve speed of service at the drive-through in the U.S. And I know you referenced some technology benefits. But is there going to be a greater push on that in 2019? And if so, how are you going to achieve progress there? Thanks.

Yeah, no, thanks, David. And I mean, this is the stuff we kind of really get into. So let me just give you a couple of examples of what we will be doing differently that we believe will help reduce complexity and, as a result, improve speed. Introduction of technology, we've got some new, we just call them Zoom boards, but these are little digital screens and a drive-through presenter window, so where we pass out the food, we can really start to provide real-time service times within the restaurant and where the little bottlenecks can be, whether it's at the ordering process, the payment, or whether we maybe don't have the food ready but haven't asked someone to park in one of the parking bays, for example. But getting that information real-time, setting up as a positive, competitive nature up against the local drive-thru restaurants or maybe all the other drive-thrus within an owner-operated group, for example. We've seen this operate really successfully in Canada. We've seen it operate really successfully in Australia. And it just provides that competitive spirit, also that kind of, bottleneck identification. If you're running that shift, you can see why is the payment process, we're not handling the cash as quickly as we possibly could do. Why is the ordering process taking slightly longer at the drive-thru? Maybe it's a training issue. Maybe it's a technology issue. So it just enables those issue identifications so much quicker that you can just address them quicker and keep things moving. So kind of real nuts and bolts stuff that we get into, but allowing technology to help make our restaurant managers and crews lives easier. A totally different one is that we've begun to build a much more sophisticated tool for assessing menu complexity, where we can understand the volume of certain menu items we sell, the difficulty that it is for us to prepare, the average normal production time, the type of gross margin contribution it makes to our operators, and that is helping us to better identify where and how we can simplify the menu with the minimum customer resistance for the user actually driving customer satisfaction and speed but also protect or enhance gross margins as well. So it's a much more sophisticated tool that we can run live product next data through and really start to give much more fact-based information to our teams in the field so they can make these decisions with a much higher level of confidence. So that's just a couple of examples, but yes, across all ten field offices, all ten of them have drive-through service, and clearly then with Chris Kaczynski and the national team have drive-through focus of service as a key initiative. As we near the top of the hour, we have time for one more question from John Ivanko with J.P. Morgan.

Hi, great, thank you. Just a few very quick ones. And first was actually the follow-up on drive-thru service times. Have you seen those peak? I mean, in other words, are they continuing to get worse? Are they stabilizing? And if they're not stabilizing, when might you see those stabilizing is the first question. Secondly, what is the experience of delivery for the McDonald's stores in the United States that have had it the longest? not just as a percentage of sales basis, but are they happy with incrementality in sales? Are they happy with profitability? Are there any changes that you could potentially see in that program to expand franchisee profitability of delivery? And then the third question, if I can, is a technical one. Notes receivable and accounts receivable, you've kind of been bumping up actually for some time. I think it goes around $2.4 billion in the fourth quarter. Is there anything around... EOTF related to that, maybe in terms of what you're doing with franchisees and might you expect those accounts to be drawn back down and be a source of cash for you in the relatively near term?

So I will happily kick the technical one over to Kevin, but let me have a go at the first two. Drive-through service times have increased year on year for about the last five years. We collectively have called that to a halt. So times across 2019, starting immediately with activities in quarter one of this year, actually in the restaurants currently. So there is a collective resolve that service times have to have peaked. We will not accept them for getting any longer and therefore we're looking to address those. So hopefully that responds to that question. We're seeing just great growth in year-on-year for those that have been offering delivery for more than 12 months. So part of the measurement system we have here is not only just we add new restaurants, not only we want to grow the organic business, if you like. We're now into lapping like-for-likes on delivery. Incrementality still remains encouraging in that kind of 70%-ish range. Average checks still remain around two times the normal average in store. We note in the day part analysis as well that helps support our belief and confidence in incrementality because it's peaking at day part that we wouldn't ordinarily be seeing those sort of business peaks. So we believe we're well set up to do more. I think the piece that we are collectively still trying to fathom out is how do we drive the awareness? Because we know as soon as customers try it, they stick with it, they enjoy it, and they stick with it. So awareness here in the US, typically we would want to have a critical mass of our restaurants here. social media campaign, but I also know that local co-ops are getting after it as and when a critical mass of their restaurants in that co-op now start to offer as we start to expand with Uber Eats. And elsewhere around the world with Uber and other third party operators, getting the awareness is one of the key priorities we have. So we feel good about that. And now I'll hand over to Kevin on the final question. Related to accounts receivable, so really most of that, most of the increase certainly is related to U.S. EOTF projects. The way it works is we generally manage those projects. And so we'll project manage all of it, and then we'll collect from the operators. And so you are seeing that those balances are up because they've been focused on getting the projects done. Mechanically, we need to... go through some closing of jobs and collecting the money from the operators. It isn't uncollectible money. It's a timing issue of when we'll actually just receive it, go through the logistics of closing out projects and collecting the money from the franchisees. So, yes, it will be a cash-in flow as we continue on. I would expect that receivable number to go down now that there will be some pressure off of the number of projects. If you think about 2018, everyone was just driving hard toward getting all the projects done. Now we can get some of the kind of other stuff associated with that done, like collecting the money. So that's exactly right, Jeff. Thank you, Steve and Kevin, and thank you for everyone that joined our call today. Have a good day.

This concludes McDonald's Corporation Investor Conference Call.