McDonald's Corporation

Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer Chris Kempczynski and Chief Financial Officer Kevin Ozan. As a reminder, the forward-looking statements in our earnings release and 8 filing also apply to our comments on the call today. Both of those documents are available on our website, as are reconciliations of any non-GAAP financial measures mentioned on today's call, along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. Please limit yourself to one question and reenter the queue for any additional questions. Today's call is being webcast and is also being recorded for replay via our website. And now, I'll turn it over to Chris.

Thanks, Mike, and good morning, everyone. A few weeks ago, I had the privilege of welcoming more than 13,000 members of our global McDonald's family, franchisees, restaurant teams, suppliers, and company employees, to our first in-person worldwide convention in four years. The sense of optimism and pride in our brand, coupled with excitement for our future, was overwhelming. We celebrated how far we've come together and united around how much further we can go together in the years ahead. Through it all, the message has been singular and clear. There has never been a better time to be part of Brand McDonald's. This was reaffirmed on our road to convention as our senior leadership team participated in a series of market visits to meet with and hear from restaurant teams in person. I look forward to continuing to visit more teams around the world in the coming months to see how they are bringing our strategy to life in our restaurants. McDonald's entered 2022 from a position of strength, and I'm proud to share that we built on that momentum in Q1. Though we continue to monitor the latest developments in the pandemic, we've been pleased to see strong recovery in international markets in the first quarter. In fact, in an increasingly complex and unpredictable external environment, the past few years have demonstrated the resiliency of the McDonald's brand and our ability to drive historic growth. We believe we're well positioned to weather unprecedented macro pressures like inflation, supply chain issues, labor availability, and COVID resurgences. There's power in dialing up our execution and focusing on what's within our control during challenging times to maximize the impact of our strategic plan. Staying on the side of the consumer and executing our plan is and has always been our model for driving growth, regardless of the macro backdrop. Equally as important is our ongoing commitment to invest in our people. It starts with building a culture of care. The more we show restaurant teams we care, the more they show the same care for our customers. By creating the type of environment where people want to work, whether they're looking to develop skills that they can take to future jobs or planning to build a career with us, McDonald's provides a holistic employee value proposition. In turn, our people enable us to deliver an unequaled customer experience backed by the power of our brand. This is our winning formula. It's a formula we will continue to protect, especially as we work to raise our ambition and create the next great chapter of this legendary brand together. Before I turn it over to Kevin, I do want to acknowledge that our hearts and minds are with the Ukrainian people and all who have been impacted by this historic crisis that has brought new elements of uncertainty to communities around the world. Our restaurants in Ukraine and in Russia remain closed. In both countries, we have continued to pay employees and provide additional support to them and others in need. But it's clear that this crisis is far from over. With an ever-evolving situation, we are analyzing our options and expect to provide clear direction to investors and other stakeholders no later than the end of the second quarter. Now over to Kevin to walk us through our Q1 performance.

Thanks, Chris. Global comp sales were up nearly 12% in the first quarter, reflecting strong underlying performance across all segments. In most of our major markets, we sustained QSR traffic share gains by elevating our brand, accelerating digital channels, and showcasing our core equities of chicken and beef. We entered 2022 expecting it to be a year of continued recovery in our international operated markets. as several markets were still experiencing COVID-related stops and starts throughout 2021. In the first quarter, comp sales in our IOM segment increased over 20%, and average unit volumes have now surpassed pre-pandemic levels across the segment. The UK continues to be one of our strongest performing markets. In the first quarter, performance in the U.K. was fueled by sustained digital momentum and strong menu initiatives like the national rollout of McPlant and the extremely successful Chicken Big Mac promotion. In Australia, the Welcome to My World convenience campaign showcased how we make consumers' lives easier and help drive significant share gains in delivery. And the launch of My McDowell's Rewards in March has already increased app adoption among consumers. Canada also experienced strong digital growth, building on their successful fourth quarter launch of Loyalty. Over the past couple years, consumer mobility was particularly challenged in France and Germany, but we saw great improvement in both markets throughout the quarter. We highlighted our core menu in both markets with a successful QPC campaign in France and the launch of our new premium beef platform McDonald's Supreme in Germany. As Chris mentioned, the quarter also brought more macroeconomic challenges, including rising inflationary pressures and supply chain challenges, all of which were elevated by the crisis in Ukraine. All of our restaurants in Ukraine were closed at the end of February, and in early March, we made the decision to suspend operations in Russia. While these markets represented about 2% of system-wide sales in 2021, the closures had a negligible impact on consolidated sales results for the first quarter this year. In the U.S., comp sales were 3.5% for the first quarter. Higher average check, driven by strategic price increases, continued to be a significant growth driver. And strong marketing campaigns across loyalty, value bundles, and our crispy chicken sandwich delivered incremental sales and continued to drive digital adoption. Turning to the international developmental license markets, comp sales were up nearly 15 percent for the quarter. largely driven by positive comps in Japan and Latin America, partly offset by negative comps in China. In Japan, we focused on off-premise channels as a result of elevated COVID levels, meeting shifting consumer needs and continuing to grow market share. We also delivered strong growth at the dinner day part with limited-time offerings like the re-hit of the Samurai Mac and the launch of Spicy Chicken Nuggets. And in China, a surge in COVID cases and renewed government restrictions created challenging operating conditions in the quarter, resulting in temporary restaurant closures throughout the country that continue today. While comps were negative for the quarter, we expanded our app engagement with digital-only promotions, including delivery offers and subscription cards. And with that, I'll turn it back to Chris.

Thanks, Kevin. Back in 2020, we took a hard look at changing customer needs we were seeing emerging through the pandemic. Those insights led us to our Accelerating the Arches strategic plan and a focus on the MCDs, maximizing our marketing, committing to our core menu, and doubling down on the three Ds, digital, delivery, and drive-thru. The power of the MCDs are when they work together with the customer at the center. By doubling down on our 3Ds, digital delivery and drive-through, we continue to find new ways to reach our customers where they are and make their experience more seamless and personalized. Digital, in particular, is a tremendous opportunity for us. After all, in a world where the storefront of McDonald's restaurant can be the screen of a smartphone, we're building stronger relationships with our customers. Knowing what they like, how they like it, when they want it, it's all a critical piece of our digital strategy. And the results of our efforts speak for themselves. In our top six markets, digital sales, which include mobile app, kiosks, and delivery, made up more than 30% of system-wide sales in the first quarter. This equates to nearly 60% growth over the past year. We did over $2 billion of digital sales in the U.S. alone in the first quarter. One of the biggest drivers of our digital adoption is our global loyalty program, My McDonald's Rewards. It's helping us better meet our customers' needs as we build more authentic and personal relationships. Coming into this year, we had introduced My McDonald's rewards in over 40 markets, including France, the U.S., Germany, and Canada. Australia just launched in March, and the U.K. will go live later this year. Enrollment and participation are exceeding expectations. After just nine months in the U.S., for instance, there are more than 26 million loyalty members earning rewards. We're also seeing more frequent visits from loyalty customers, many of whom were very loyal to begin with. Some of our largest markets have seen record customer visit frequency driven by loyalty usage coupled with app-exclusive promotions. Those are the kind of results that make us eager to continue bringing myMcDonald's rewards to even more markets. And as customers return to our dining rooms, kiosk usage is coming back as a key order channel for customers. In Q1, kiosk sales made up more than half of in-restaurant sales in Australia, Germany, France, and the UK. At the same time, McDelivery has become the largest QSR delivery program in the world. We recently announced a global partnership with Just Eat Takeaway, Europe's largest online restaurant ordering service. This is in addition to the Uber Eats and DoorDash global partnerships we announced last year. These global partnerships support growth of the McDelivery business and allow us to continue expanding our delivery capabilities so our customers can get the food they crave and the convenience they've become accustomed to. In the UK, our customers can now order delivery directly on the McDonald's app. We plan to expand that capability to the US, Canada, and Australia later this year. This will let us better control the delivery experience for our most loyal customers. and to learn from the data they share, ultimately about how we create more seamless, memorable, and personalized experiences. Finally, the competitive strength of our 25,000-plus drive-thru locations around the world continues to provide unparalleled convenience to our customers as routines are reestablished with further opportunities to innovate. And because of our iconic brand, We're building customer affinity by elevating our creative risk-taking and social media to enhance our already strong connections to customers. Fan truths unlock this powerful connection. It created a common dialogue, tapping into what our fans already love about us, celebrating the rituals and memories that make our brand so special to them. The U.S. first brought this to life with famous orders, which harnessed the simple truth that everyone has their go-to order. This quarter, the menu hacks promotion and our Super Bowl commercial were prime examples of how we can find and identify fan truths and transform something people already love, our food, into cultural moments that drive conversation and connection. And because these promotions feature existing core menu items, there's no added complexity to restaurant operations. The concept of fan truth is coming to life all over the world. This quarter, China successfully activated the Famous Orders platform with their own local celebrity, featuring the McSpicy Chicken Sandwich. And Australia plans to launch their own Famous Order in the second quarter. Our food is at the heart of customers' relationship with our brand. In fact, our core menu accounts for the large majority of our business and our growth. That's why we continue to be innovative with our classics. This quarter, we featured a new blend of McCafe iced coffee in Australia with rave results, and we continue to celebrate our core while keeping things simple through innovative line extensions. In 2021 alone, we ran more than 100 core line extensions across the globe, and these drove significant sales growth. This quarter, the UK introduced the Chicken Big Mac as a limited time offer, and it quickly became the market's most successful food promotion ever, selling millions of sandwiches in the first two weeks. Australia and Sweden saw meaningful lifts in total Big Macs sold as they featured the bacon Big Mac as a limited time offer. These core line extensions offer fresh news on our beloved Big Mac and drive top line growth, reminds customers of why they love our core items like Big Mac, and it reminds us of a simple truth. Our menu should only consist of products that deserve to be there, nothing more, nothing less. Of course, we've also introduced new menu innovations to satisfy changing customer tastes and preferences, which is exactly what's happening now with McPlant. After a successful pilot in the UK beginning in January, we made it available across all restaurants in the UK and Ireland. As I've said before, when customers are ready for McPlant, we'll be ready for them. We're excited by the progress we've made this past quarter and are even more confident in our future. When we leverage our system's collective ingenuity, curiosity, and collaboration in service of getting better together, there's no limit to what we can achieve together. Now I'll turn it back to Kevin. Thanks.

Our strong performance for the quarter resulted in adjusted earnings per share of $2.28, an increase of over 20% in constant currencies. This excludes about $125 million of costs for employees, landlords, and suppliers in Russia and Ukraine while our restaurants are closed. It also excludes $500 million of non-operating expense to reserve for potential settlement related to an international tax matter. Adjusted operating margin for the quarter was 43.1%, reflecting improved sales performance partially offset by higher G&A costs. Total restaurant margin dollars grew by over $450 million in constant currencies, or 17% for the quarter, primarily driven by improvement in franchise margins. Our franchise margin in the IOM segment showed significant recovery over the prior year, reflecting strong sales performance across markets. As expected, our company-operated margins were hampered by significant commodity and labor inflation. Given macroeconomic conditions, we expect these elevated inflationary pressures to continue throughout this year. G&A for the quarter was up about 20 percent in constant currencies due to costs incurred for our worldwide convention earlier this month, higher long-term performance-based compensation, and higher depreciation related to investments in restaurant technology. And our adjusted effective tax rate was 21.3 percent for the quarter. Based on current exchange rates, we expect FX to reduce second quarter EPS by about 8 to 10 cents and full year EPS by 22 to 24 cents. As always, this is directional guidance only. as rates will likely change as we move through the year. And now I'll turn it back to Chris to close.

At our convention, we featured franchisee after franchisee leaving a legacy in their communities. They're doing more than serving delicious food to busy people. They're employers of choice, favorite destinations for local customers, and a local force for good. Their restaurants are places where people can bring their whole selves to work and put their whole hearts into treating their customers well. We know where that magic begins. We have the most valuable brand in the industry because we have the best people in the world. The belief that people come first is so fundamental to who we are as a brand that it's our very first core value. How we treat our people directly shapes how they treat our customers. It's no secret that in industry after industry, including ours, COVID-19 has transformed how people think about life and how they weigh these seemingly endless choices in front of them, including career choices. So at Convention, we reaffirmed our commitment to create a McDonald's that is as well known for its employee experience as it is for our Golden Arches. We've made a lot of progress the past few years, from raising wages at company-owned restaurants in the U.S., to our progress on closing global pay gaps, including gender equity, to the deep bench of talent we have that's allowing us to make strides and increase representation and leadership among women and historically underrepresented groups. And as we announced last year, we started 2022 by implementing our global brand standards, which were designed to create a culture of physical and psychological safety for both employees and customers in McDonald's restaurants around the world. Last week in the US we announced a new initiative called Thank you crew building off the concept we had created to support first responders and teachers throughout the pandemic. Now we're turning the tables to support our restaurant teams who keep the arches shining. we're inviting customers to participate as well, asking them to submit instances for crew and managers who go above and beyond their typical duties. The work of attracting, developing, and retaining the best people has always been central to McDonald's success, but has never been harder or more mission critical than it is today. Fred Turner used to say that where others see challenges, McDonald's sees opportunities. As we work to raise our ambition and accelerate the arches, we will continue to shape this opportunity in ways that help people and McDonald's achieve their full potential. With that, we'll begin Q&A.

Thank you. 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 please limit yourself to one question and re-queue for any additional questions.

Thank you.

As a reminder, if you're an investor and would like to ask a question, please press star followed by one on your touchtone telephone.

Now in the queue.

David Tarantino, your question, please.

Hi. Good morning. My question, Chris, is about the situation in Europe more broadly. And I was wondering if you could comment on what you've seen since the Russia-Ukraine incident began in terms of consumer behavior, not necessarily in those markets. I know you paused operations there. what the spillover effects might have been in the broader Europe region. Thank you.

Sure. Thanks, David. I think, as you know from our results, the business in the international markets, particularly in Europe, it performed very strongly during Q1. We saw great growth in UK and France, Germany, many of our large markets in Europe. So I would say that based on Q1 results, we didn't see a significant impact on it. I think what's obviously on everybody's mind is around sentiment, and what you're seeing is concern around consumer sentiment, probably most pronounced in Europe. But it's not yet showing up in business performance, but it's certainly something we're keeping an eye on.

Okay, our next question. Our next question is from David Palmer with Evercore.

Thanks. I was wondering if you could perhaps characterize the recovery to date in your IOM countries, and perhaps you could speak to the percent back versus pre-COVID levels in traffic or sales. And what is your general feeling about the path back to pre-COVID levels in these markets? of these? Do you anticipate coming back faster than others based on what you're seeing? Thanks.

Yeah, thanks, David. You know, we came into this year expecting that really certainly our large IOM markets, primarily Europe as well as Australia and Canada, would fully recover back to their 2019 levels. And we've seen that through first quarter. So all of those five big markets have now surpassed their 2019 sales levels. And really, as we've talked before, a couple of them like Australia, Canada, and UK had been doing really well all through the pandemic. And so they were just kind of continuing their strong performance. The two markets that were more impacted, I think, from lack of consumer mobility were France and Germany, and both of those countries had really strong performance in the first quarter this year. So we feel good about all of those markets as well as even the next tier of markets, the Spains, Italy, et cetera, as far as being recovered at least to 2019 levels. I think to Chris's point on the earlier question, there is a consumer sentiment concern with some of those European markets. just because of everything going on between inflation and the Russia-Ukraine crisis, et cetera. But from our business, we've seen really good performance and feel good about that segment.

Our next question is from Dennis Geiger with UBS.

Great. Thanks for the question. Wondering if you could talk a little bit more about what you're seeing from your customer, maybe in the U.S. in particular. You know, have behaviors changed at all of late and how consumers are using the brand or the menu and And just if you could kind of tie in just how well you think you're positioned currently if the consumer spending environment rolls over, maybe relative to how well you've done in historical periods. Thank you.

Sure. I'll start with that, and then Kevin can add on. But I think we're happy with how we performed in Q1, and we're also pleased with how we're entering into Q2. So I think overall we feel good about the U.S. business performance today. A big thing for us in the U.S., which is driving our growth and our success is digital, which for us has exceeded our expectations. So we feel really good about digital. We feel really good about chicken. And then we're also getting good growth continuing on delivery. To your point about what's changed and what's not changed, I think I'll start with what hasn't changed, which is delivery, despite things kind of reopening, delivery is still growing and a significant part of the business. And that's consistent with what we've seen in other markets elsewhere around the world that have reopened. Delivery continues to remain elevated. Digital also continues to be a growing and highly preferred means for our consumers to be interacting with the brand. I think the only thing that we are keeping an eye on is we've seen Average check come down a little bit as perhaps you're seeing, you know, those large groups that were going out and ordering in the pandemic. You might be seeing some of that splintering where it's breaking up into two transactions, which was maybe previously one transaction. And then we are seeing also that, you know, at certain parts of the business and in certain geographies, there is a little bit of a trade down that we're seeing. that we're just keeping an eye on there, but overall feel good about the business in the U.S. and confident about performance heading into Q2.

Yeah, the only other thing I'd say is what's important to us in our business is consumer mobility, and I think consumer mobility is still pretty good. Consumers are definitely worried about inflation. There's no doubt about that. They're concerned about energy and gas prices. But right now, and we are keeping certainly a close watch on lower-end consumers just to make sure that we're still providing the right value for our lower-end consumers. But one of the things that's probably helpful right now, as you know, is food at home has been increasing even more than food away from home. So that's probably been a little benefit also.

Our next question is from John Glass with Morgan Stanley.

Thanks very much. First, Kevin, I know you talked qualitatively about inflationary pressures, but can you update kind of where you think inflation is running now, both maybe commodities and labor in your key markets? And in the U.S., can you just talk about where your pricing stands now, and is there any reasonable way for us to kind of measure inflation? Transaction or growth in the business understanding that traffic may be a hard thing to measure But can you look to talk to like item counts being up? How should we think about the health of the US consumer in light of the fact that digital is going well deliveries going all etc But if you looked at the comp number you didn't backed out pricing you might still think transactions might be down your rear Sure Let me give a shot to try and cover a little of all of that And I'll try not to talk for the next 30 minutes I

So, let me start with inflation. In the US, I think last quarter, I mentioned that we thought commodities were going to be up roughly 8% or so for the US. That number is now more like 12 to 14% for the year. So, US commodities clearly have risen. That's our current estimate. Obviously, the landscape is changing. pretty rapidly, so we'll need to keep a close eye on that. But that's certainly increased substantially. Similarly, in our IOM markets, that number I think last quarter was more around 6 or so percent. That's now doubled and is similar to the U.S., kind of that 12 to 14 percent range. So the commodity side, food and paper inflation has definitely increased substantially. the Ukraine crisis. On the labor side, in the U.S., it's probably over 10% right now. Part of that is because you'll recall that we made adjustments to our wages in our company-owned restaurants mid-year last year, so we haven't lapped that. So part of it is due to that, and part of it is due to just continued wage inflation. So let me try and walk through the U.S. to help understand some of the dynamics you were talking about. Right now in the first quarter, year over year, our pricing is up, and these will all be rough numbers, so take them as round numbers, but our pricing is up roughly 8%. Again, that's first quarter this year over first quarter last year. We are still seeing similar flow through from the pricing we're taking to our comp. So kind of from a resistance standpoint, we haven't seen any substantial increase in consumer resistance from this pricing. So that flow through is roughly 70% or so. Again, not an exact science, but roughly 70%. So if you take that 8% pricing with a roughly 70% flow through, you're around 5.5% from pricing. Let's say that's hitting comp sales. Chris just mentioned that we're seeing a little bit of trade down in our product mix, and we're seeing a little bit lower items per transaction or smaller order sizes. Those order sizes are still much higher than pre-COVID, but on a year-over-year basis, it is a little bit lower. Those two impacts get us to our average check increase then of about 4.5%. So pricing gives me about 5.5%. My overall is 4.5%. That little bit of trade down and a little bit of lower items is taking me from 5.5% to 4.5%. The last piece is obviously guest counts or transactions. Those were roughly down 1% in the first quarter, which then gets you to our comp sales of around 3.5%. So hopefully that helps us lay out kind of the different pieces that are going on Again, a lot of changing dynamics, a lot of complex things going on, but roughly that's the way the business performed first quarter this year.

Next question is from Andrew Charles with Cowen.

Great. Thanks, Kevin. Hopefully a simpler question for you. How should we think about the next few years of CapEx relative to 2022's $2.2 to $2.4 billion as U.S. re-imaging winds down? restaurant development is ramping up. And within that as well, I know China's an asset-light market for you guys. Could you just comment on the 800 stores you previously planned to open there? Is that still on track, or is the COVID flare-up they're seeing there weighing on that? Thank you.

Yeah, so let me start with the CapEx. The CapEx, to your point, we've said for this year, it's 2.2 to 2.4. I think we expect a relatively similar range for the next few years. The The makeup of that 2.2 to 2.4 will be different to your point because we will be substantially complete with our remodeling in the U.S. at the end of this year. So more of the capex from a percentage standpoint and dollar standpoint will be on new units versus remodels. But the overall envelope will probably be relatively similar as this year in that 2.2 to 2.4 range. Regarding China, As you mentioned, we've indicated that right now we expect roughly 800 store openings this year. They opened about 250 or so in the first quarter. That's still on track, but we are keeping a close eye on that because of everything that's going on in China, as you mentioned, and we have, too. There's been major lockdowns in some large cities, certainly over the last couple months that even continue today. That could... impact openings this year. One, either from not being able to open, or two, from just our reevaluation of the timing of some openings. But right now, we're still on plan with those 800, but we are keeping a close eye on everything going on in China.

Our next question is from Eric Gonzalez with KeyBank.

Hey, thanks for the question. I think you mentioned you'd provide an update on your plans for Russia and Ukraine by the end of the second quarter. But maybe if you could tell us what options might be on the table at this point. And then if – so we're all on the same page, perhaps you could help us think through the model implications for this year, assuming those stores remain closed for the full year.

Sure. I'll start, and then Kevin can maybe talk modeling. But I think it's probably, as you would imagine, Beth, that we not get into the variety of different options that we're looking at. considerations for our people over there, lots of different constituencies. So I think it's probably best that we not go through that at this point. But we will be providing, as I said in my opening comments, we will be providing clarity on that by no later than the end of the second quarter. I would tell you that we are being exhaustive. So my guess is that there probably isn't a scenario that you could come up with on your own that we're not looking at. But I'll just leave it at that and leave it, Kevin, answer any of the modeling questions.

Yeah, I mean, just from near-term modeling, I think we've talked about kind of a right now we continue to pay our employees, our landlords, some supply chain costs, and that run rate is roughly $50 million. It's probably a little bit higher than that right now, partly because The Russian ruble has strengthened, so it could be $55 million or so. But that's kind of a monthly run rate right now for keeping the infrastructure going. To Chris's point and what we've said, by us making a decision by the end of the second quarter, something will likely happen after that that will either change infrastructure one way or the other of changing kind of the way we think about this going forward. So from a modeling perspective, you know, second quarter I think it's fair to use what we've said related to kind of these ongoing costs. Going forward after second quarter will certainly depend on where we end up and what option and what we announce by the end of the second quarter. I think we have talked about obviously the impact or the the relevant size of both Russia and Ukraine from a sales, operating income, et cetera perspective.

Our next question is from Lauren Silverman with Credit Suisse.

Thank you. I wanted to ask with regards to the worldwide convention. So performance really strong over the last couple of years. Franchisees also facing a lot of challenges. You talked about some uncertainty in the consumer environment. So can you just talk about sentiment among franchisees at the convention? Biggest takeaways or learnings from your conversations, priorities, concerns, anything to share?

Sure. Well, we're actually in field right now getting detailed feedback from the 14,000 participants that we had. But I would say anecdotally, what I heard back from people was just a tremendous excitement of being back together again and When you haven't seen some of these people in four years, which is true for, you know, many of our franchisees who typically use convention as a way to connect with their, you know, colleagues around the world, just a lot of excitement to be back together and also talk about what we've been through and also where we're headed to. And I think there was a nice balance of looking back but also making sure that we're being forward-facing on that. I did hear many people talk about this being one of the best conventions that they've attended or can remember attending. Now, part of that may be it's been four years since the last one. But there was, I think, a sense amongst franchisees when they consider all the things that have gone on in the world, boy, it feels really good to be part of McDonald's. And that goes to my comment about there's never been a better time to be part of McDonald's All you have to do is look at sort of what everyone else has gone through and compare our relative position on that, and I think you come away with that sentiment. We did share, finally, a number of things that we are looking at, particularly around restaurant operations. This includes everything from automated order taking, which many of our international franchisees have not seen. Our U.S. franchisees have had more visibility on that. a lot of interest and attention in that, as you would imagine. We also showed them some different ways that we're thinking about dual-lane drive-through and perhaps adding a second percent window at a dual-lane drive-through. That was also interesting for people and other ways for us to bring automation into kitchen operations. So that was kind of, you know, everything that was going on at convention, but Just a lot of connecting and socializing as well.

Our next question is from Jeff Bernstein with Barclays.

Great. Thank you very much. It's a question on the U.S. loyalty rollout. I think you mentioned 26 million members, which seems like a pretty quick ramp, and I know you mentioned being above plan. That number is kind of similar to some of the other industry leaders. in the U.S. business. I'm just wondering maybe you can give some color maybe on the average check learnings for those or the traffic implications and where you think that maybe can go. Obviously, I'm assuming you know maybe your total unique customer base or initiatives you're using to push that number. So any color you could give would be great. Thank you.

Sure. So I'd start with the fact that We've always viewed loyalty for us as a frequency play. In the U.S., we see roughly 80% of the population in a given year that visit our restaurant at least one time. So we don't have a big reach opportunity at McDonald's. Our opportunity is always about driving frequency. And one of the things that we've been encouraged by what we've seen with loyalty so far is it has proven to be an effective way for us to drive frequency among our users. In terms of where we are, our view is we're still early innings on this. We have low levels of penetration versus our total market size opportunity here. And for us, the focus then is continuing to drive overall enrollment, but also to be driving engagement. And one of the things that we're spending time on as we get more facts under our belt here is what is the right metric that's most predictive of future performance. So, you know, is it absolute members? Is it monthly? Is it 90 days? We're doing a lot of analysis on that to just get tighter as we've had a year's worth of data under our belt. And we'll at some point, I'm sure, once we've got some conclusive findings on that, come back and share that with all of you. But early innings would be the headline.

Our next question is from Sarah Senator with Bank of America.

Thank you. I wanted to go back to the sort of differences among U.S. consumers maybe that you're seeing. I know you mentioned maybe a bit of trade down, but at the same time, people seem willing to still pay for the added convenience of delivery. And my sense is the fees, in fact, broadly speaking, are going up, not down for the industry. So could you just – is it a different customer that is using the – the one who's continuing to pay for delivery. And, you know, broadly as you look at across countries, is there a difference in delivery penetration based on availability of drive-thru in the sense that, you know, maybe the convenience premium is higher if there's not as much access through drive-thrus.

Yeah, I think the headline is that the overall U.S. consumer, from our vantage point, is in good shape. And consumer balance sheets in the U.S., broadly speaking, again, at the average, are strong, which gives us the optimism that I talked about earlier as we head into Q2. Now, you de-average, which is what you always have to do in these situations, and I think you do start to see that the lower income consumer, particularly around gas prices and the pressure that that puts on pocketbook, the pressure around rents, that there probably is an increased value sensitivity with that lower income consumer. We don't have the detailed type of data that you would love to have that would allow us to slice and dice it. So we're having to use zip codes and other things as proxies for that. But I think it's probably fair to say that the lower income consumer is probably feeling more pressure than the average consumer or certainly the wealthier consumer. And that's why for us, we need to make sure that we continue to have value be an important part of our proposition. It always is one of the things that defines McDonald's is making sure that we stay strong on value. We're pleased right now because as we look at our value scores relative to our competition, consumers are still giving us a lot of credit for being a good value. But we just need to make sure as we're working through some of the inflation that Kevin talked to earlier that we don't lose track of we still need to be providing good value to consumers. And there's a lot of different ways for us to do that. Joe and the team are spending a lot of time with U.S. franchisees on how to think through that and navigate it. But we've always got to stay competitive on value. When we lose sight of that, There's a long history of that being where we've kind of gotten off track. So I can promise you we're not losing sight of it, but broadly the U.S. consumer from our vantage point is still in good shape.

The only thing I'd add to your point about are there different delivery dynamics around the world. In general, our delivery percentage is a little higher in Europe than it is here in the U.S. U.K. is one of our strongest kind of delivery markets. I think there's multiple factors for that. Obviously drive-throughs are a little bit lower percentage in Europe than they are in the US. So some of it's that population density, urban versus rural, et cetera. All of that comes into play. But in general, our delivery percentages are a little bit higher in Europe than they are in the US.

Our next question is from John Ivanco with JP Morgan.

Hi, thank you. The question is on the US. And I was hoping you could give a little bit more color on traffic by day part, if you're actually seeing maybe some positive results in lunch and dinner, maybe offset by negative results in breakfast and late night. And if I can kind of continue with that comment, do you have an opportunity of increasing store hours relative to where you were in 2019? And do you have an opportunity to maybe maximize some of the square footage that resides within the dining rooms that I would assume are below average utilization? Thanks.

Sure. Well, without getting too much into decomposing our comp into various day parts, I would tell you that whether you look at it on a Q1 basis or you look at it on a three-year basis, we've actually seen from a comp sales standpoint, we've seen breakfast and dinner be standout performers for us. Lunch has been a little bit more modest from a performance standpoint, so feel really good about what we've seen. again, at breakfast and dinner. Late night traded off, as you would have imagined, for a variety of reasons. Some of it was related to operating hours there, et cetera. But those two elements are strong. As we think about what lunch is going to look like going forward, it's certainly the biggest part of our day part mix. We're still seeing growth in that. It's just not at the same levels that we're seeing in those other two day parts. Kevin, I don't know if you want to

The only thing I'd say related to your operating hours point and stores reopening, etc. Right now, roughly 95% of the restaurants in the U.S. are fully operational, meaning that they're open for both dine-in and drive-through, etc. And the rest we expect to be pretty fully operational in the next few months or so. We generally do see Some sales lift when dining rooms first reopen. It's not dramatic, I'll say, but obviously just moving some of the sales from drive-through to dine-in helps from a capacity and pressure stamp, throughput pressure, et cetera. There still is, to your point, I think store hours are probably down a little bit, specifically late night and overnight hours are down a little bit from where they were pre-pandemic. And part of that's because traffic, just not McDonald's traffic, but just traffic outside is down in those same hours. So there is potential at some point to, you know, if traffic comes back at some of those hours, for us to be able to gain some more of our traffic also during those late night and overnight hours.

The only thing I would add, which may be is the question behind the question. I don't know, but I'll throw this out there. I said in the last earnings call that our whole mentality is we're in a share-taking mode. And we saw that play out in Q1, and it's played out not just on the quarter, but it's played out over the last several quarters. And it's played out from both a comp sales standpoint as well as from a guest count standpoint within QSR. The relative mix within our own is interesting, but it's also about how is our performance compared to our QSR peers. Our mindset is about stealing share, and that's what we're seeing in the numbers, both on sales and on traffic.

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

Thank you so much. Perfect timing, because I wanted to ask something that really coincides with that. wanted to reconcile or validate that you're taking share traffic down. So you're not losing share to legacy QSR peers. Are people going to convenience stores? Is your customer taking a break at home and eating there? And if so, what are the tools or messages you use to get them back from those places?

Yeah, so if you broaden it out to IEO, which is a larger definition, we are seeing A little bit of traffic share loss in the U.S. I mean, it's less than a decimal point type of share loss there. I think it's maybe a 0.3 or something like that that we've lost versus IEO. That's in the U.S. only. If you look at it globally, we're actually taking share globally against even the IEO market. And as you know, in IEO in the U.S., there's just so much noise around who was open, who was closed. It's difficult when you're comparing share change versus 2021 or you're comparing share change over a three-year time period. Given all the noise and the number, it's a little bit challenging to actually, you know, make a conclusion off of that. But we're looking at, you know, performance both on IEO and QSR and feeling good about what we're seeing.

Our next question is from Chris Carroll with RBC.

Hi, good morning. Thanks for taking the question, Kevin. So just following up on your commentary earlier around cost, inflation and pricing. Can you provide any further thoughts on your consolidated operating margin guidance? I believe the guidance hasn't changed from the low to mid 40% range previously provided. So curious if you could expand on that a little bit more in the context of the current operating backdrop.

Yeah, I think for this year, we still feel pretty good about that low to mid 40% range. We won't get the leverage, obviously, that we all would hope for going forward. So I think there's opportunity to get leverage on that post these large inflationary pressures, which is why we're still remaining with that low to mid 40 range. I think last quarter, someone asked why it wasn't higher than that. And I think The near-term inflationary pressures are keeping that at the low to mid 40% range for this year. I think post-2022, again, obviously depending on what happens with all of these inflationary pressures, but if those get back down to a, I'll call it a low to reasonable level, we believe there's opportunity to gain leverage on that operating margin line going forward.

Our next question is Brian Mulan with Deutsche Bank.

Hey, thank you. Question on the U.S. business, kind of back to the share game mentality theme. You know, you've called out chicken as an area of focus for the business this year. Just wondering if you could give a sense of the opportunity, however you see it, and how much share do you have today versus what did you have in 19? And then, you know, from here, is this a multi-year runway you see to take share in this menu type?

Sure. So if you think about – Burger and chicken as being our two sandwich areas. We've taken share in the U.S. in both of those. Beef is obviously, or burger is obviously the most significant or sizable part of our business there. And if you think about where we're at there, we own a little over a third of the market from a share standpoint in the U.S. on beef. And we've picked up about a share point there versus where we were in 2019. If you think about chicken, which is not for us as sizable, but still an important part of the business, we've picked up about a half a point of share there if you look at where we were prior to the launch of the crispy chicken sandwich. So seeing good share performance in both of those areas. And our thing is with are accelerating the Arches strategy, you know, we're focused on chicken, coffee, and burgers. It's those three areas, and we maniacally track share on all three of those categories across all of our markets.

Our next question is from John Tower with Citi Bank.

Great. Thanks. Quick clarification, then a question, Kevin. In terms of the ongoing impact of Russia and Ukraine, it looks like that was put into the other operating income expense line. Should we expect those costs to remain there in the future? That's clarification. And then the question side is more about the U.S. piece of the business. And I think, Chris, in an answer to a previous question, you kind of hit on this, but I just want to make sure I get further clarification. In terms of the way the brand has been positioned historically, I think in the U.S. it's been much more focused on traffic growth in an absolute sense versus just relative growth. in part by ensuring that check growth never really took off, especially on the pricing side, that seems to have shifted around or coming out of COVID. So is that something you expect to persist into the future? And is it right to think about the business more on a relative share gain basis on a traffic front in the future versus absolute traffic?

Yeah, I'll give my own thought and then Kevin can chime in. But I think, you know, for the last, since COVID hit basically at the beginning of 2020, we've, in all of our various calls with you and I think probably across the entire industry, we've all struggled to figure out what is the right way to think about traffic and probably our historic approach, which is guest counts, we've recognized that there are shortfalls with that, which is why Kevin came up with his other category, which was called stuff. and just selling more stuff, or said another way, just more units. I would say on all of that, it's still unclear to us what is the right way for us to be assessing. We're still seeing a lot of change in consumer behavior, whether it's through digital, whether it's through delivery, and how all of that sort of levels out, and then you get a clean read of what the go forward means. I don't think we're there yet at this point, but You know, we certainly could look at our relative performance versus our competitors on that, and so long as we're beating our competitors, we feel good about it, and we worry maybe a little bit less about what the absolutes are, and it's more about are we still in share.

And then your question, John, about the Russia costs, we put those included in other operating. I think we have a separate line in the detail. I think we call it impairment and other charges maybe. I think in our mind it was the easiest way to specifically call those specific costs out so everyone understands what costs we are incurring related to those operations while the restaurants are closed. So our intent is to do the same going forward just to be able to show all the costs we're incurring related to effectively operations that aren't occurring.

Nearing the hour, Mark. We'll take one more. Jared Garber with Goldman Sachs.

Thanks for squeezing me in. I appreciate it. I wanted to swing back to commentary on digital and maybe taking a longer-term view. Obviously, the digital business has been a key driver in the last couple of years, especially since the launch of My McDonald's. Can you Maybe, Chris, walk us through kind of your thoughts longer term on how digital evolves and then maybe what the next evolution is and how you think about automation and increased technology integration in the restaurants.

Sure. I'd start with, I mean, digital changes everything. So today, you know, I don't know 90% plus of the customers, 90% of the customers coming into my restaurant, I don't know who they are. I don't know their Prior purchase, I don't know what their buying pattern is. I don't know, are they a deal seeker? Are they someone who always orders the same thing? Do they like to try new things? So as I get better and better visibility into that customer, can actually track and identify their preferences over time, it starts with, I'm going to be able to give them a better experience. I'm going to be able to give them faster speed of service. I'm going to be able to give them a cleaner app, a cleaner menu board. And I'm gonna be able to give them deals, offers, programs that are more personalized to what they're looking for. It's not gonna necessarily be a one size fits all type of thing. It's gonna be much more bespoke to what each customer is looking for. And digital allows us to do a level of personalization at scale at McDonald's that is almost impossible for us to do through sort of more of our analog type of approach. As you start to then get much more of this data about buying behaviors, purchases. You can get it integrated into restaurant operations, and it gives you opportunities to do automation. It gives you speed of service opportunities, positioning. That has labor benefits. So it can change, I think, just the entire unit economic profile for the better of what a restaurant looks like We're still very early on this, so I don't want to caution against anybody going out there and running and building a new model off of this. But if you go 10 years out, that's where we're headed to because I think we all recognize those of us who are in the business day to day, there is tremendous opportunity there if we can make further inroads.

Thank you, Chris and Kevin. Thanks to everyone that joined the call today. Have a great day.