McDonald's Corporation

Hello and welcome to McDonald's first quarter 2019 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 Isiplek, Investor Relations Officer for McDonald's Corporation. Mr. Isiplek, you may begin.

Good morning everyone and thank you for joining us. With me on the call this morning 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 AK filing also apply to our comments. Both documents are available on .mcdonalds.com as there are reconciliations of any non-GAP financial measures mentioned on today's call with their corresponding GAP measures. And now I'll turn it over to Steve.

We're off to a strong start for 2019. Our broad-based momentum around the world continues as we further execute on our velocity growth plan. Global comparable sales increased 5.4%. That's over $1 billion of growth across the system for the quarter. This marks our 15th consecutive quarter of positive global comp sales despite some of the continuing macroeconomic uncertainties around the world. We also grew global guest counts for the quarter. In the US, we're pleased with our performance to start the year. The market continues to execute against the most ambitious plan in our history. And whilst we recognize we have a lot of hard work ahead of us, we are encouraged with our progress and improved franchisee cash flow to start the year. Our customer satisfaction scores are improving as more guests are able to enjoy McDonald's in our modernized experience of the future restaurants. For the first time since we've begun our EOTF rollout, we are seeing a benefit to our overall US sales comp. Where 2018 focused on considerable transformation and building a foundation for growth, our 2019 focus is on operation execution in our restaurants and optimizing the experience for our customers. Additionally, our international operated segment continues to show strong performance. Every market in the segment grew comparable sales for the quarter. Their continued success is built on plans that have proven to be effective in delivering sustained growth by offering customers their favorite core menu food, drinks, compelling value offerings, a continued emphasis on running great restaurants, and strong franchisee alignment. For example, the UK has now achieved a remarkable 13 consecutive years of comparable sales growth. The market's focus on value, menu innovation, and book delivery is resulting in balanced growth in both average check and guest counts, including record high guest counts for the month of March. We are also seeing strong performance in Australia. I visited Sydney and Melbourne last month and continue to be impressed with how the team is successfully driving growth across all day paths. The market has now grown comparable sales for the past 20 consecutive quarters. With strong leadership and franchisee alignment, the market is excelling at the fundamentals of running great restaurants, growing their delivery business, and leveraging the investments we've made in digital. Our customers in Australia are also taking notice of the effort we are putting in to delivering delicious, feel-good moments. Today, more customers are using our global mobile app and book delivery to order delicious McDonald's food on their terms. An increasing number of customers are choosing to use our self-order kiosks to place their orders. The Australia team has more than doubled McDelivery awareness through our strong partnership with UberEats. And, with our Barista trained crew executing at a high level both in restaurant and in the drive-through, coffee has become the most frequently ordered item on our McDonald's app. The progress we are seeing in the US, UK, and Australia demonstrates how our velocity growth plan is working and enabling us to deliver broad-based growth across our segments. With that, I'll turn it over to Kevin to share more about our top-line performance.

Thanks, Steve. With global comp sales up .4% for the quarter, each of our operating segments contributed meaningfully to our growth. As a reminder, in January we evolved our organizational structure to support our more heavily franchised business model, enabling even more sharing and scaling of best practices and innovations across markets. Not only does our new structure provide operational benefits, it also increases visibility into the contributions made to our overall business by both our wholly owned markets and our developmental licensee markets. First quarter for the US was strong, with comparable sales growth of .5% and all day parts contributing to the growth. While comp guest counts were negative for the quarter, the US continues to experience strong average check growth driven by balanced contributions from both product mix and strategic pricing. Consumer relevant national promotions, such as the bacon event and the 2 for $5 mix and match deal, which included our fresh beef quarter pounders for the first time, performed well in the quarter. We also introduced donut sticks at the breakfast day part, and this new item resonated with our customers. Throughout 2019, we'll continue to pulse in national deals, like the 2 for $5 mix and match that was relaunched yesterday. These deals will complement local value at both breakfast and on the -2-3 menu, as individual co-ops decide which menu items resonate best with their customers. As we continue on our EOTF journey in the US, and as Steve mentioned earlier, we are now seeing an overall net positive contribution to comp sales from our aggressive modernization efforts. This means that the sales lifts from completed projects now exceed the downtime impact from current projects under construction. During the quarter, we converted an additional 400 restaurants to EOTF. We have now completed over 8,000 EOTF restaurants, or about 60% of our estate in the US. We still expect to complete approximately 2,000 projects this year. Turning to the international operated segment, comp sales were up 6%. The largest contributors in the segment were our big five international markets, Australia, Canada, France, Germany, and the UK, with the UK and France leading the way. France experienced its highest comp sales increase since 2011, along with its highest ever market share. The market is successfully optimizing products such as the Big Tasty and Big Mac Bacon, along with new promotional offerings. And last month, France also began serving our iconic Egg McMuffin all day. Finally, comp sales in the international developmental license segment were also up 6% for the quarter, with each geographic region in the segment growing both comp sales and guest counts. China continues to be a competitive market. Late in the quarter, we introduced a new everyday value offering, which complements our extra value meal launch in late 2018. We also opened more than 90 new restaurants in the quarter in China, driving growth in system-wide sales and a gain in market share, and we're well on our way to opening about 400 restaurants for the year. Now I'll turn it back to Steve to expand on the accelerators which are enabling our global growth. Thanks Kevin.

Since the launch of the Velocity Growth Plan, we've been increasingly focused on using technology to make our customers' experience easier and more convenient when they visit our restaurants. From our global mobile app to our self-order kiosks to our digital menu boards, we've established our digital foundation. We've created an ecosystem that more and more of our customers are using to order, pay and receive their delicious McDonald's food on their terms. Now we're building on that foundation with our recent acquisition of DynamicYield, a leader in personalization and decision logic technology. DynamicYield's technology varies suggested offers by time of day, weather and trending menu items. Over time, using data from the millions of customers that we serve daily, the technology will get smarter and smarter through machine learning. And using the data collected based on current restaurant traffic at the drive-thru, the technology will begin to suggest items that can make peak times easier on our restaurant operations and crew. We've already begun our rollout and now have the technology up and running in 700 drive-thru's across the US. Long term, this technology will work across all of our digital platforms, including our self-order kiosks and our global mobile app. When our technology ecosystem is linked, it will provide a seamless ordering experience for our customers and will leverage our size and scale to take advantage of being one of the first brick and mortar companies to integrate decision logic into the customer ordering process. By acquiring DynamicYield, we also have access to strong data science and engineering talent who will help us stay ahead of the curve when it comes to connecting with our customers in more personalized ways. This acquisition is just one tangible demonstration of the steps we're taking to leverage industry-leading, innovative technology to accelerate our growth and offer our customers an even easier, more enjoyable experience. In addition to using technology to create seamless experiences, we're also maintaining our focus on improving the fundamentals of running great restaurants. For example, drive-thru remains a popular way for many of our customers to order their Big Macs, Chicken McNuggets, French Fries and more. That's why we've never been more focused on improving the experience of the drive-thru, in particular the speed of service. Many of the improvements we're exploring at scale are taken from best practices we've seen in markets around the world. In Italy, having a disciplined daily focus on running great restaurants has helped the market deliver some of the strongest sales performance in its history. As part of their overall effort to strengthen operations, they identified an opportunity to improve speed of service by running multiple drive-thru competitions in the restaurants. With our crew fully engaged, they're able to make meaningful reductions in drive-thru service times, and customers are noticing. Our customer satisfaction scores have increased across all categories, from speed of service to friendliness to accuracy. And in the US, our restaurants participated in an incentive program where they competed against each other to deliver the best drive-thru service times in a fun and engaging way. We introduced the competition in the middle of Q1 and it made a difference with lower service times whilst improving guest counts in many of our restaurants. I'd like to personally congratulate our Boise, Twin Falls, Idaho Falls co-op for winning our first quarter drive-thru challenge, but more importantly, for serving our guests faster at the critical breakfast day part. As our customers' expectations for service keep evolving, we'll continue to share our best learnings like these across the globe. The work we're doing to improve drive-thru service times is only one way we're ensuring we run great restaurants. We're also finding new ways to create more excitement around our customers' favorite core menu items by using existing ingredients which ensures we do not add complexity for our restaurant operations and crew. For example, after a successful, limited-time offering of Big Mac bacon burgers in Canada, we launched campaigns to connect with consumers' love for bacon during the quarter with similar offerings in the UK, France and Russia. And in the US, we enticed customers to add bacon not only to their Big Macs, but also to our fresh beef quarter pounders. The US market even stole shamelessly from our friends in Australia by introducing cheesy bacon fries. This kind of smart menu innovation is a great example of how we're able to surprise and delight our customers whilst balancing their demands for speed of service with the complexity of operating at the scale of McDonald's. We're pleased with the enhancements we're making to the experience guests have when they visit our restaurants, but we also know how important it is to continue meeting our customers' increasing demands for convenience, especially through delivery. Delivery remains a key part of our Velocity Growth Plan. It has been one of our most successful accelerators from the start, likely due to the speed at which we began to implement it and because we began scaling our delivery offering at a time when customers are eating out less. Delivery has grown to a $3 billion business for both McDonald's Company and franchise restaurants globally, and we believe there's a lot more opportunity to grow. We now offer McDelivery in over 20,000 restaurants across more than 75 countries, which is more than half of all McDonald's restaurants globally. Our ability to continue expanding our delivery reach further demonstrates how our size, scale, and convenient locations close to customers gives us a tremendous advantage. We're seeing solid growth in delivery and it continues to be a meaningful contributor to comp sales in a number of markets. Awareness remains one of our greatest opportunities with delivery, so we're committed to making sure more and more customers are aware of McDelivery and the opportunity that exists for them to enjoy McDonald's wherever they are. Now I'll turn it over to Kevin for our financial highlights of the quarter.

Earnings per share was $1.72 for the quarter, a 5% increase in constant currencies. Our results benefited from strong operating performance, despite lapping higher gains on sales of restaurants due to our heavier refranchising activity in first quarter 2018. While we still have some ongoing refranchising of restaurants, our major refranchising efforts are winding down. We grew revenue 2% in constant currencies for the quarter, marking our first quarter of growth since our refranchising strategy began in earnest in 2016. Given our strong comp sales performance, overall margin dollars increased in all segments and grew more than $100 million in constant currencies on a consolidated basis. This contributed to our operating margin for the quarter of 42.3%, reflecting growth of 60 basis points versus last year. Our franchise margin dollars grew 7% in constant currencies. Due to a change in presentation of sublease income and expense within franchise margins, as a result of the new lease accounting standard, our franchise margin percent was negatively impacted 70 basis points. To be clear, there is no impact to our franchise margin dollars as a result of the new standard, but this reset of the franchise margin percent will be ongoing. Our overall franchise margin percent declined 120 basis points due to this accounting change as well as depreciation expense related to EOTF in the U.S. Turning to our company operated restaurants, consolidated margins declined 20 basis points to .8% for the quarter. IOM segment company operated margins increased 40 basis points as our strong sales performance more than offset higher labor and occupancy costs. U.S. company operated margins were challenged due to continuing labor pressures along with higher commodity costs and EOTF related depreciation. In the U.S., first quarter pricing was up about 2%, while commodity costs for the quarter increased approximately 3%. While we expect commodity pressures to ease somewhat throughout the year, we now anticipate our U.S. grocery basket will be up -3% for the full year. Across the big five markets in the IOM segment, menu prices averaged about 2% higher and commodity costs were up about .5% for the quarter. We still expect commodities to be up about 2% for the full year. G&A for the quarter was down 4% in constant currencies at .1% of system-wide sales. Steve talked earlier about the strategic purchase of dynamic yield to advance our digital capabilities. As a result of this acquisition, along with some R&D investments in other areas of technology, we now expect full year G&A spend to be relatively flat in constant currencies versus last year. Our effective tax rate was .5% for the quarter as we finalized the application of new regulations issued in the first quarter related to U.S. tax reform. We still expect our full year tax rate to be in the range of 24-26%. Foreign currency translation hurt our first quarter results by 9 cents per share. At current exchange rates, we expect the impact of foreign currency to be slightly less for Q2 and then even the back half of the year, with an estimated full year headwind of 18-20 cents. As usual, this is directional guidance only because rates will change as we move through the year. Now I'll turn it back to Steve.

In addition to our intense focus on driving performance, as one of the world's largest restaurant companies and most recognizable brands, we know we have the responsibility and opportunity to take action on some of the most pressing social and environmental challenges in the world today. Last year, we announced priorities where we felt we could use our scale for good to make the biggest difference in areas that intersect directly with our business operations. These areas include climate action, sustainable beef, packaging and recycling, our commitment to families and youth opportunity. We have continued to make progress in these areas and other parts of our food supply chain by collaborating with millions of customers, employees, franchisees, suppliers and other partners. For example, prior to our scale for good campaign, we set a bold target to source 100% cage-free eggs by 2025 in the US. Now, just three and a half years into the 10-year plan, we're proud to announce that the US is already one-third of the way towards fulfilling our goal. This means that over 725 million cage-free eggs will be served in our US restaurants in 2019. And many of our other global markets are also in the process of transitioning to cage-free eggs. In addition to using our scale for good, we're continuing to make a broader set of investments in people across the entire McDonald's system. Together with our franchisees, we provide jobs for almost 2 million people across the world and are one of the world's largest employers of women. Whilst women have strong representation in leadership positions throughout our organisation and in the US, make up 60% of all restaurant managers, we're committed to making even more progress. That's why, by 2023, we will improve the representation of women at all levels of the company, achieve gender equality and career advancement, and champion the impact of women on the business. We recently announced this commitment on International Women's Day as we launched Better Together, a sweeping initiative to improve gender balance and diversity. As part of this, we'll put training and systems in place to enhance equality in career advancement for women. And we'll be encouraging our franchisees and suppliers worldwide to deliver strategies that promote gender balance and diversity. Just before I wrap up my prepared remarks, I did want to take a moment to acknowledge the passing of someone who played a pivotal role in McDonald's. Last week, Jeff Stratton, former president of McDonald's USA, passed away. Jeff was with McDonald's for over 40 years and in that time also ran our global restaurant solutions group, our innovation centre, and at one time our food improvement teams around the world. He had an unwavering passion for running great restaurants and there was no greater brand ambassador than him. Jeff truly made us better. We always say that McDonald's is an organisation built on people and Jeff's contribution to McDonald's will always be remembered. As I close, despite any uncertainties, we have one of the world's most iconic brands, we're leveraging technology to improve and modernise the way we connect with our customers, we have a dynamic menu of delicious, affordable food offerings that our customers value and enjoy, we have great suppliers who partner with us to deliver at the scale of McDonald's, we have the most dedicated franchisees who are committed to running great restaurants, and we have the world's best and hardest working crew striving every day to delight our customers. When we bring all these elements together, we are confident about the road ahead and we are well positioned to win for the long term. And now, we'll open it up for Q&A.

Thank you. And as a reminder, if you are an investor and would like to ask a question, please press star followed by the number one on your telephone keypad. We ask that you limit yourself to one question and re-queue for any additional questions.

Our first question is from Eric Gonzalez with KeyBank.

Hey, thanks for taking my question. My question is related to traffic trends in the US. I was wondering how US traffic trended through the quarter and specifically to what extent the Speed of Service competition introduced mid-quarter helped improve the traffic trajectory. And is the benefit from drive-through competition sustainable or does it fall off when the incentive goes away? Thanks.

Yeah, Eric, I'll start with traffic. So we said traffic was negative in the US. You know, I guess I'd say it's in line with kind of where it's been the last few quarters. No significant change in trend as far as the overall traffic number. And now, Stephen, do you want to talk about the competitions and the drive-through?

Yeah, absolutely. I think just to put the context around why we're focusing on this, as you can imagine, the last probably 12 to 18 months there had been the majority of the focus had been on the in-restaurant dining experience as we were rapidly rolling out Experience the Future. We're focusing on kitchen procedures. We rolled out fresh beef, quarter pounders, for example. And we just thought this was the right time. Given a lot of that disruptive activity, we've worked our way through that now. We can get back to the basics of focusing on running better restaurants. So we decided to kick off with a focus on drive-through during the peak hours of breakfast, which was clearly an opportunity for us. And we managed to reduce service times, which was really encouraging. It was a later start in the quarter, but certainly the enthusiasm in the kind of co-op to co-op competitions was great. So we're going to continue with a series of these throughout this year. And certainly having been in the field, I was in Miami and Fort Myers towards the end of the quarter. I was in Atlanta and Baton Rouge, Indiana, at the start of the quarter. Certainly the conversation amongst our field leadership and owner-operators is they're excited about having a clean run at 2019 because we can really just focus the managers, the crew, and all of our attention on just the fundamentals of running great restaurants. So encouraged by the start. I want to see some drive-through service time decreases. We did see decreases in service time in the U.S. in the quarter. And it's not just the U.S., by the way. This is a global focus that we had a start of year meeting with all of the managing directors of our major markets. We're seeing some remarkable results in countries like Germany, Italy, Poland, Spain. Anywhere between 20 and 40 seconds taken off the drive-through service times. Literally just within that quarter. So I just really want to express there is an organizational enthusiasm around this. And it's great that we can get into these sorts of conversations with each other because this is what we enjoy and this is what we are

good at but we want to get better at. Our next question is from Andrew Charles with Cowan.

Great. Thank you. I have two separate questions. Steve, it's been very clear since the February Franchisee Leadership Council election there's better alignment in the U.S. system between you and the operators and that's definitely evidenced in part by 1Q's improvement in sales. After the EOTF capex contribution of 55% was extended in November by one year from 2019 to 2020, how sacrosanct is keeping that 2020 deadline for the elevated capex contribution to help build on the momentum of improved relations? And then Kevin, a separate question from you. You previously guided that the EOTF benefit to comps was more likely to be a second half 2019 benefit. Kudos obviously for the benefit in 1Q. But can you talk about why the first quarter did in fact benefit from net remodels beyond conservators and the guidance? And if you also quantify the 1Q contribution from EOTF, that would be helpful as well. Thanks.

I'll take the first couple of those questions because I think there was a third and a fourth one. I'm not very sensitive, but it's been a really constructive quarter. Again, just to provide the context, I think there are four differentiating advantages that McDonald's has over anyone else in our sector. Geographic spread, I think is one of those which makes it incredibly resilient. The iconic brand is a differentiator for us. Our financial strength, both at a restaurant level and an organizational level as well. And the fourth is our owner-operators. And just having constructive relations with the owner-operators and our market leadership is always in a stronger position. So with the newly elected leadership, the National Franchisee Leadership Alliance, there's been really constructive dialogue about how do we remove any barriers to growth so we can all get after what we want to, which is serving more customers more often. So it's been a good quarter. I think there's been really constructive dialogue, everything from unlocking one or two of the opportunities that we could get after the delivery opportunity more so, as well as now the local co-ops are beginning to invest a little bit more of our marketing spend on a local basis rather than national. And again, to put that into context, certainly the vast majority of our marketing spend in quarter one last year was national as we launched the $1, $2, $3 menu. We've actually now swung to a little bit more of an equal balance, certainly in this first quarter, as we've got behind local value and local breakfast support as well. So I think all these things are helping just get the right balance in how we leverage our scale but also recognize the local differences as you go around the country. With regards to EOTF, we did want to ease just some of the financial, and any of the concerns operators had around the financial burden of the rapid rollout. So we offered an extra couple of years at a slightly lower supported level, pretty much more our typical support level, but the heightened support in the US through 2020. That just gave each and every owner operator an opportunity just to what we would call level load their projects if they felt there's going to be too much of a pinch, too much pressure on their balance sheets through 2019 and 2020. I guess what's been interesting is the operators have really appreciated that option, but the majority are still choosing to complete the EOTF projects by 2020. So I would say that we would still expect to be substantially complete by the end of 2020, but those who felt they need a little bit longer have appreciated that opportunity and will support them with that as well. But it will be at the reduced level, partly because by the time we get to 2021 and 2022, we're going to have other ways to allocate our investment support that we think will be beneficial to our business.

And then I'll talk about the EOTF benefit that you mentioned, Andrew. We were saying we expected it to turn around mid-year 2019. I guess I'll say there was a little bit of conservatism in that, but we also have been able to reduce our downtime on projects as we've gotten into 2019. I think last year I talked about that there were a few things we were looking at. One, to be able to reduce downtime a little bit, and two, to be able to have kind of grander reopening plans so that when restaurants came back up, they were able to recover the sales quicker. And we've done a little bit better job on each of those. And so the fact that we had about 400 projects in the U.S. now in the first quarter and having all those projects that were completed in 2018, certainly made it a net positive as we got into the first quarter. We would expect that net positive to continue now, ongoing for the rest of the year. We don't want to quantify each quarter's benefit because we don't want to get into a -by-quarter benefit effectively built into now our ongoing business, but we do expect that to continue for the rest of the year now.

And just to add on to, again, just to emphasize, the remarkable speed with which we completed projects in 2018 was clearly incredibly hard work, but what it means is now as we've turned into this year, you've got more than 50-50 chance of visiting a modern-looking McDonald's that represents the direction we're heading into as opposed to reflecting on the past. So we're over the halfway mark, which is we have noticed from other markets around the world, once you cross that kind of 50%, as I say, just from an everyday customer experience, you're going to be going to a great-looking McDonald's restaurant where the service experience is smoother, the technology is more supportive in helping you through all that. So we feel good about where we're at, and we still completed 400 projects this quarter, so I still feel like we're off to a good start this year.

Our next question is from John Glass with Morgan Stanley.

Thanks, and thanks for sharing the news on Jeff as sad as it is. My question is a couple things. One is, Kevin, is there a way to think about margins in the U.S. and how they progressed? Last year, margins stepped down the back half due to some of the EOTF impacts. Should we think about it as that pressure eases in the back half, or do you think about this is the new run rate for U.S. margins? That's question number one. And then two, you did pick up your G&A, and I understand why this year. Is this the right new base level to run G&A at then, and it kind of grows from this new, I don't know, whatever it is, $2.2 billion level, if that's where it ends up in 2016? Or 2019?

Okay, John, I'll take both of those. I assume when you say margins, we're talking about the company-operated margins on the U.S. side, so I'll talk about, I guess, well, maybe I'll talk about both since I wasn't sure, actually. On the company-operated side, we have a few things going on, as you know. Commodity costs were up about 3% in the first quarter. We've said that'll be about 2% to 3% for the first quarter. So that should get a little bit better as the year goes on, but not easing, I'll say, a ton. The other things that we do have, as we went into this year, we talked about depreciation from the company-operated EOTF projects as being about $15 million for the year. So obviously, about a quarter of that is going to hit each quarter. And then certainly, kind of wage pressures are going to continue to impact us. I'd say the one piece where there is some opportunity going forward is on labor productivity side. There are two things right now that are negatively impacting or have been negatively impacting labor productivity, one being the EOTF projects that we've had. And so as those company-operated projects start winding down, that should help some of our productivity. We'll finish all of the company-operated EOTF projects this year. So that will be a help as we move forward. And the other is the fact that guest counts are still negative. With negative guest counts, that does create a challenge just from the labor productivity side. And so I think once we're able to turn guest counts positive, that will help the labor productivity side also. The other thing I would just note, I guess, is the company-operated comp sales are a little bit lower than our overall comp sales. And so the 4.5 that we reported for the U.S., based on where we run our company-operated restaurants and the challenging geographies there, we didn't achieve that 4.5 on the company-operated side. That put a little bit more pressure on the company-operated margins also. The plus of that is I know you guys often look at company-operated margins as a proxy, if you will, for how the franchisees are doing. The franchisees' cash flow has been up every month for the last five months through March. So that's a big positive from our franchisee side. And as you know, with us running about 95% franchise in the U.S., that's really important for our business. And so that's a big positive. On the franchise margin side, there's two things that impacted our franchise margin percentage this quarter. One is the EOTF depreciation. Again, we talked about it as we entered the year. There's about $100 million of pressure from EOTF depreciation on the franchise margins. So again, about a quarter of that hits each quarter. Second is this change in the way we present sublease income and expense as a result of the new lease standard. So that impacted U.S. franchise margins by about 130 basis points. It doesn't impact the dollars because the offset to that is revenue. So effectively, there's about $20 million or so that we now just gross up revenue and gross up franchise costs. But it does reduce that franchise margin percentage if you work through the math. So those are the margins. On the G&A side, we talked about, and I mentioned in my script obviously, two things are impacting G&A this year. The biggest one obviously is the acquisition of dynamic yield. Along with that though, we've also started investing in some R&D and a few others of technology. And the combination of those is what has caused our revision and guidance. The plus is over the last few years, we have saved on a gross basis over $600 million. And so we've reduced the amount of kind of maintenance run the -to-day business G&A. And now we're investing a bigger percentage of our G&A in growth-based G&A. Moving forward, the way we think about G&A is it should be roughly around 2% of system-wide sales or so. So that's the way we think of it on a go-forward basis.

And John, I just want to thank you for your comments on Jeff. I know many of you on this call have had time with Jeff. I was honored to attend the funeral mass yesterday for Jeff. The occasion was an absolute testament to the memory and the celebration of all that Jeff contributed to life in general. And just as a reflection on just the way that we believe in the uniqueness of the McDonald's family, the turnout of owner-operators, suppliers, and colleagues past and present was just absolutely enormous yesterday. And again, speaks to the three-legged stall in the impact Jeff had. So thank you for your comment on that. Appreciate it.

Our next question is from Matt DeFrisco with Guggenheim.

Thank you. Can you guys speak to a little bit on the delivery side? I'm just looking at how much perhaps was from that $3 billion incremental stemming from the U.S.? I'm trying to figure out the percentage that you're doing in delivery now. I know last time you spoke I think it was still coming in around 70% incremental. I'm wondering if that rate has come down a little bit because obviously the comp was very strong. I'm just curious though if it's around that almost 10% level or so or a billion dollars of your system sales, that perhaps that's the majority of the comp and is the incrementality maybe slowing a little bit from that 70% level?

Thanks, Matt. Again, broader commentary on delivery. We certainly have been finding in these initial first couple of years that the majority of that business is incremental and that the growth and even the -on-year growth once we've got it established is really driven by raising consumer awareness and in just getting more people familiar with the fact that we offer delivery in the first place. That incrementality stays strong. It's probably fair to say that we got a quicker leap on delivery in many of our international and mature international markets, the likes of UK, Australia, France, Canada, and a number of our mid-sized markets, doing some pretty strong numbers as well, whether that's Netherlands and Belgium and Spain and Italy. They're now actually beginning to comp themselves and not only are we adding new restaurants as the third-party operators expand their networks, but we're also beginning to get the -on-year comp on delivery as well. We can track that and we're getting some really, really encouraging numbers as we get into that second year. Even those that came out of the traps really, really strong, we're getting comp delivery growth as well as adding new incremental restaurants, which is great. It's fair to say we had a slightly slower start in the US, so it begun to contribute to the comp as we worked our way through 2018, but not in a particularly significant fashion. But as we've been working with UberEats in particular on coverage and trying to get as competitive a deal that both supports the partnership with UberEats but also helps the unit economics for our own operators, we believe we're on the verge of unlocking some of that delivery potential more within the US. So, while we have a good number of restaurants up on delivery in the US, the actual guest counts per restaurant per day is still some way behind elsewhere in the world, but we're confident that we're going to more rapidly pick up the pace. I think you can expect to see, as we get a critical mass on our system, more marketing support behind it so that we can raise consumer awareness, and certainly the owner operator support will be noticeable because I know they feel we have a great series of conversations through this quarter and we've made it more economically exciting for them to go to delivery business as well as their traditional business. So, we feel we're in a good place. From a $3 billion business today, we still think there is substantial growth opportunity ahead and I can assure you from a global perspective as well as drive-through service times being one of the KPIs I've personally chosen to lead through this year, really maximizing this delivery opportunity is another one as well. We've got great global focus on it and certainly excited that the US system has got a renewed figure behind it as well.

So, just to confirm, delivery was not the majority of the comp in the US.

Our next question is from Brian Bittner with Oppenheimer.

Thank you. Steve, in previous quarters you've talked about how your breakfast business in the US has been a drag on the US comp. The question is did this day part show a meaningful improvement as we went into the first quarter? Did it contribute meaningfully to the overall improving trends in the US? So, any color on breakfast would be great. And Kevin, you talked about the cost on the food basket in the US going from 1 to 2 to 2 to 3. Can you just give us some more color on what drove that change in your expectations?

So, breakfast was a meaningful contributor. I wouldn't say it was a majority contributor, but it was a meaningful positive contribution to -for-like sales in the quarter, which was clearly an encouraging reversal of the previous trends that we'd acknowledged. We're still in a market share fight overall, because there are more and more people offering breakfast as a competitive place, but certainly to get back onto that growth trajectory was encouraging. The other piece I would say is it really wasn't until the back end of the quarter that the shift from national to local marketing dollars really begun to take effect, because that was a decision that was made towards the end of quarter four, so it takes certainly a couple of months to adjust media buying plans, marketing plans as well. So, I think we feel encouraged. I know that the focus on just the restaurant operation, and in particular the drive-through, played a positive role in that, introducing new menu item news like the donut sticks, further supporting them at cafe investments we've made. They all started to contribute to that, so operations, menu items, and media strike marketing. So, I think it was a strong start to the year, but we still got more work to do if we really want to be taking share back at that important day part for

us. And then Brian, related to the change in commodity guidance for the year from one to two to two to three, the biggest change is due to an increase, expected increase in pork prices, a little bit on beef being a little bit higher than we originally anticipated, but most of it relates to pork prices.

Our next question is from David Tarantino with Baird.

Hi, good morning and congrats on a great start to the year. My question is on the U.S. comp and the average check growth in the U.S. I think if I heard Kevin correctly, the traffic trend didn't change much from Q4 to Q1, which suggests the check growth did accelerate. So, I guess the two parts of my question are, one, do I have that right? And then secondly, what drove that and what do you think the sustainability of that high check growth is in the U.S.?

I'll have the first stab at that one, David. So, yes, average check growth helps cover up still the continuing decline that we recognize in guest counts. So, the average check growth was strong. Clearly, what we do is drill into that and see where is that growth coming from. And it's a combination between product mix shifts and pricing. And what I think is encouraging for us is that the product mix shifts, which is how many items in the bundle and also what people are choosing to buy, outweighed the pricing impact. You don't want the pricing to get too far away and Kevin may want to talk about our pricing levels. But if you think about the product mix shifts, whether that was... As we grow the delivery business, for example, the average check is one and a half to two times that of a traditional in-restaurant average check. So that will naturally help to skew the average check higher. As we continue to build customers using the self-order kiosks, we tend to get a higher average check because people dwell a little longer in the self-order kiosk. And then you've got some of the menu items, what we've done in terms of maybe simple things, just like adding bacon, the bacon promotion through Big Mac and on the quarter pounders. That helps just grow average check a little as well. So all of these activities that we've invested in or that we've built have helped grow the product mix shift overall. So I'm encouraged because you don't want the pricing element to be overly dominant in this, particularly when customers are still feeling the pinch a little bit. But I believe it's a combination of many of the actions that we've taken that have actually started to produce a healthy growth in average check. And that is what I think we feel common and can be more sustainable.

That covered everything I was going to say, so I don't have anything

else to add. All right, next question is from Jeff Bernstein with Barclays.

Great. Thank you very much. Maybe a two-part question on U.S. profitability. The first on the labor inflation, wondering if you can give any kind of color similar to what you give on commodities in terms of the basket and how much of it is statutory versus market pressure and how you suggest in the French that you absorb that. Which kind of feeds into the other question, which is just you mentioned franchisee profitability is now up five, I believe, consecutive months. Just wondering if you'd opine on what you think the outlook is for 2019 and whether there's any initiatives you've offered in terms of how to better protect against that labor inflation and the rising cogs you just mentioned. Thank you.

Yeah, I'll start. You know, there were 20 or 21 states that increased wages, I think, at the beginning of the year, so that certainly has an impact on wage rates throughout the year. As you know, we set wages for the company-operated, obviously, the franchisees, each of their, they make their own decisions related to wage rates. It depends where in the country as far as what the rates are and how competitive it is with other key competitors around there. So, but it is fair to say that I think labor inflation is going to continue to be a challenge. We will continue to look for ways to be as efficient as we can in our restaurant operations to try and help mitigate any of that inflation. But I think that's going to be a continuing challenge for us in the industry. So I guess I'd leave it at that.

The only thing I would add that clearly, I mean, our average starting wage now in company-owned restaurants is now more than $10 an hour. So once we don't collect that data for our operators, I think it's reasonable to believe it would be a similar-ish number, and clearly both of those are well above the federal minimum. So as Kevin says, this is, you know, the labor cost is going up certainly far higher than any typical rate of inflation. So that's something we're very mindful of, and we work with the owner-operators to help each other just to run the business as efficiently and effectively as we can. The best thing we can possibly do is grow the top line. And that's the best way of resolving any of these cost increases and just make sure that we don't pass any of the impact of that in a negative way through the customers. We still want to just start the restaurants fully and appropriately so we can offer the experience that customers expect from us.

Our next question is from Nicole Miller-Reagan with Piper Jeffery.

Thank you. Good morning. I want to ask about driving delivery orders to McDonald's app and where are you at in that process and how's it going and what are you learning? And I was curious about the economics of it. So clearly there's value in getting the customer data and owning that customer more or less versus the marketplace. But is that more of a value customer in that the economics are similar or are the economics still superior just because you don't have to pay the fees to the marketplace? Thank you.

Hi Nicole. So yes, we ultimately really want to be able to offer customers two ways of ordering a meal through McDelivery. One would be through directly through the third party operator which is currently how they do. The other opportunity we do is integrate it into our global mobile app. We believe we're making good progress. Obviously there's a fair bit of technology work that has to go on to integrate it. We believe we're going to be in a position where customers in the US will be able to access it through back end of quarter three this year. And as you say part of what's important in that is that whilst protecting all necessary privacy concerns, clearly we will be able to gather more customer data and begin to build up a better understanding of customers' behaviours. We've kind of sort of segues into part of what we're trying to do with our technology foundation here overall. If you think about a lot of the investment we and our own operators have made the last two or three years, whether it's in developing the app, self order kiosks, digital menu boards both in store and drive through, we're now beginning to be at the earlier stages of connecting that technology ecosystem. And why that's important is because it will allow us to better understand our customers and how they choose to experience McDonald's. And that's where introducing dynamic yield for example will provide us with a great opportunity to smooth the experience for customers in the drive through regardless of whether we know you or not. But certainly as we start to build on this platform, customers who choose to actually share their identity with us, we can be even more useful to pulling up their favourites, maybe building some form of loyalty and reward for it. So there's a number of different things that we can do that will further, not just modernise the experience but personalise the experience for customers. Certainly with McDelivery being something that we can only ever see grow, integrating that into our own technology ecosystem is an important move forward. And we're certainly having really healthy and constructive discussions with Uber about how we can get that done and making sure that we still protect the privacy of customers who choose to share their identity with us. Because we know how important that is for people.

Our next question is from Jake Bartlett with SunTrust.

Great, thanks for taking the question. Steve, I'm wondering how the promotions in the first quarter in the US, and how they did inform your approach going forward. It looks like the Bacon event was successful, driving some more premium traffic or driving some check. But you also had the negative traffic, and that's something you've wanted to avoid, or you talked about avoiding. So going forward, is the switch back to the -for-five, is that an indication that you want to refocus more on traffic? How much does the success of the Bacon event give you confidence in premium innovation for the remainder of the year?

Good question, Jake. This is the continual balancing act or juggling act that we always have in McDonald's, and the US is no different to any other market in the world. How do you create new news to continue to be top of mind for customers, however not make it so complex that it starts to be a challenge for our teams in the restaurants and therefore inadvertently impact customers? What we've enjoyed about the success of the activity in the US was it was building upon our core menu. When you can start to use ingredients we already have in the restaurants, on menu items that our crew and managers are very familiar with preparing, it really is a seamless activity. It doesn't mean we're always in a state of that, because I think new menu news, and every now and then you've probably read the occasional leak about one or two things we have got planned in the US in the coming months, there will be new menu news for maybe limited time offers just to create a bit of a buzz and a bit of excitement. Our regular customers like trying something different every now and then, but then typically revert back to what they know and what they like. So we're kind of trying to get that balance right between further simplifying the restaurant operation. Again you've probably read a couple of things we're doing to help make it easy for our teams to get things right in the restaurants. We're taking a good look at the overnight menu and whether that was overly complex. Most of our restaurants were already running a somewhat more limited menu overnight. For us formalizing that, putting some guardrails around it I think is smart and will benefit our customers that time of day. But we'll also look at the premium items we have like the signature crafted and see whether the additional complexity of preparing and some of the unique SKUs that we have in the kitchens, is it really worthy of that complexity or can we offer a better experience for customers by plussing up our more core and traditional menu. So it's always a juggling act. I don't think that will ever disappear in McDonald's. We've lived with it for 60 odd years and certainly every single market we look at around the world does the same thing. It's where I would also just like to speak to some of the facilities we have here which actually helps our teams in the markets. We have the Innovation Center here which as you know is effectively a very sophisticated test kitchen where we can run our marketing programs through those kitchens and actually almost do a role play as to what would happen at the peak hours given a particular type of customer arrival rate in any market in the world and actually see whether the complexity starts to derail the operation. I can tell you that facility has never been used as widely and fully as it is now. We've probably got 20, 30 markets that will go through there each and every year to validate that operationally we can cope with the exciting marketing and promotional plans that are being built. We'll continue to stay close to it. I just feel good about the conversation in the US. A lot of the focus is on running the restaurants and just trying to get better day in, day out and more consistent and I think customers will notice the difference.

As we near the top of the hour we have time for one more question from Greg Frankfurt with Bank of America Merrill Lynch.

Hey guys, thanks for the question. I think you guys usually give your gap to competitors in the US. I'm curious what that was during the quarter. And then maybe a bigger picture question. One of your biggest competitors is implementing a plant-based product and from what we hear it's gone pretty well. I'm curious how you think about plant-based products fitting into McDonald's offerings and whether or not that would be too much complexity to add. I'm just curious what your overall thoughts are on that sort of sleeve of products and outfits in McDonald's.

I'll cover the comp gap and then I'll let Steve talk about the plant-based protein. I think we've made a decision not to keep talking about the comp gap every quarter. We feel really good about our start to the year in our first quarter. Some of the competition has obviously reported their comps are ready. Others will do so over the next several days. But we'll talk to our performance and let others talk to the overall industry. So we won't be sharing that core. I will tell you it was certainly positive this quarter. So we're not ceasing it or stopping because there was any issue or because it was negative. It was clearly positive this quarter but we've just decided not to give that number every quarter going forward. And on the

plant-based question, many teams are clearly paying close attention to it. So the key for us is to identify the sustaining consumer trends. So whether you look at veganism, whether you look at the plant-based protein opportunities, what we do have to weigh up, and you just mentioned it there, is there an additional complexity? And if there is, is that complexity worth it? So we'll stay close to consumer demand. I certainly know our teams are paying close attention and discussing this amongst each other and with some of the options that are out there. So maybe more to come but nothing much to say about it at the moment.

Okay, thank you, Steve and Kevin, and thank you everyone for joining our call today. Have a good day.

This concludes the McDonald's Corporation Investor Conference Call.