McDonald's Corporation

Ladies and gentlemen, please stand by. Hello and welcome to the McDonald's Second Quarter 2022 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 Cplak, Investor Relations Officer for 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 Kamchinski and Chief Financial Officer Kevin Ozan. As a reminder, the forward-looking statements in our earnings release and 8K 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 conference 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. I'm proud to report that our Q2 performance was yet another demonstration of our broad-based business momentum, with global comp sales up nearly 10%. and most of our major markets continuing to grow market share. One thing is clear, the world continues to move in fast and often unforeseen ways. As it does, the McDonald's brand endures. But before we get into details of the past quarter, I want to offer up a few words about Kevin Ozan, who is joining today's call for the final time as McDonald's Chief Financial Officer. According to Kevin, this is his 30th earnings call as CFO, but who's counting? To say that Kevin has had a profound impact on McDonald's is an understatement, and I should note that this impact isn't coming to an end just yet. But as he transitions from his duties as CFO, it's a perfect time to reflect on what he has done in this seat. When Kevin first took the reins as CFO in Q1 2015, comparable sales and guest counts were declining globally and across each geographic segment, and there were real questions about the growth outlook for the company. Rising customer and investor expectations demanded a clear vision and voice, which Kevin ably provided. Kevin has been a constant in shepherding McDonald's through unprecedented change again and again. From leading the company's financial turnaround in 2015 and helping create our last two strategic growth plans to navigating through a global pandemic and exiting a major market, Kevin has seen it all. During his time as CFO, the company increased system-wide sales by over 25% to more than $100 billion, increased the number of restaurants worldwide by more than 10% to nearly 40,000 restaurants, and returned over $50 billion to shareholders through dividends and share repurchases. As just one barometer of Kevin's impact, McDonald's stock has appreciated 150% during his tenure. Anyone who's worked with Kevin knows his leadership is as much about what he does as how he does it. His insightful strategic approach to the business is matched by his ability to make human connections at all levels and with all stakeholders across our system. It's safe to say that Kevin is one of the most beloved senior leaders in our organization. But like I said, Kevin's not going anywhere just yet. He's been promoted to a new elevated role as our Senior Executive Vice President of Strategic Initiatives where he'll work closely with me until his retirement next year. I'll look to his counsel as we execute against our Accelerating the Arches strategy and identify areas where we can continue to evolve this strategy to meet the needs of customers long into the future. I expect we'll be sharing more down the road with all of you. Kevin, this isn't goodbye, not by a long shot, but on behalf of the entire McDonald's system, it's an opportune time to say thank you. Now on to the business operating environment. As we entered the year, we knew we were facing rising inflation, a surge in COVID-19 cases, and the return of government restrictions in many markets, exacerbating labor shortages and supply chain challenges. Over the last six months, the macro uncertainty has only increased. We now face war in Europe. Inflation is running at its highest levels in 40 years. Interest rates are rising to levels we haven't seen in years. All of this is contributing to weak consumer sentiment around the world and the possibility of a global recession. We're mindful of these risks, and we're planning for a wider range of scenarios. And while our McDonald's business continues to perform well, this is a very challenging environment for our McFamily, from restaurant teams to franchisees to suppliers. But we're united in our purpose to feed and foster the communities in which we operate, to provide an affordable destination for a delicious meal. Now more than ever, that is what our customers are seeking, which is why we feel so well positioned and confident in our continued success. Our global system is aligned behind a comprehensive strategy that is centered on the customer. This is strengthening our brand, which is driving broad-based market share gains. I mentioned during our last quarter that we would provide an update on the state of our business in Russia. became increasingly clear the Russian war against Ukraine meant that McDonald's wouldn't be able to continue to operate in Russia in a way that would be accretive to our business objectives or aligned with our values. That's why in May, we announced that we would exit the market and sell our restaurants to a Russian buyer to be operated under a different identity. While the golden arches no longer shine in Russia, we are continuing to support our people in Ukraine and remain ever hopeful for a resolution to this conflict. Now, for more on our Q2 numbers, let me turn it over to Kevin so he can give his 30th and final quarterly earnings readout. Kevin?

Thanks, Chris, and thank you for the kind words. As Chris mentioned, global comp sales were up nearly 10% in the second quarter, demonstrating the continued resilience of our business despite the challenging environment. In fact, when we look at our three-year comp growth, with the U.S. over 19%, and our IOM and IDL segments both more than 15%, we see that our business around the world has been extremely resilient through the tumultuous last few years. Our quarterly results reflect strong underlying sales growth across all segments, a direct result of remaining customer focused and executing against our strategy. In our international operated markets, we continued to gain QSR traffic share, as markets showcased our iconic core equities and further capitalized on our digital channels. This fueled comp sales growth of 13 percent for the segment, with positive comps across all markets. Recovery in Germany and France continued as remaining government restrictions eased early in the quarter. Germany built on their successful launch of loyalty at the end of last year and ran a Big Mac celebration campaign. using mobile app offers to further drive digital adoption. In France, we highlighted our core burgers with strong marketing behind our triple cheeseburger, helping grow QSR market share to another record high level. Canada continued to prioritize convenience as the market accelerated digital momentum with always-on loyalty messaging. We also featured a summer drink days promotion highlighting our strong value proposition across all day parts. Australia built on their first quarter launch of loyalty and accelerated digital engagement across the market with a strong lineup of mobile app offers. And we partnered with Australian pop star, the Kid Laroi, whose famous order was available exclusively through our mobile app and McDelivery. In the UK, The return of the McSpicy chicken sandwich and Big Tasty promotion drove significant incremental sales. A daily digital sales calendar also helped build our digital customer base, leading up to the recent launch of Loyalty. While the expiration of VAT benefits impacted our quarterly comp sales in the market, we continue to grow QSR market share. Moving to the U.S. We posted positive comps across all day parts in the second quarter, led by breakfast. Overall comp sales were up nearly 4% due to higher average check supported by strategic price increases. We continue to focus on everyday affordability that customers are looking for across both our everyday value menu and digital offerings. Turning to the international developmental license markets, Comp sales were up 16% in the quarter, largely driven by strong comps in Japan and Latin America. Japan achieved an impressive 27th consecutive quarter of positive comp sales, with strength across our delivery and digital channels. And our growth at the dinner date part continued, with popular limited-time offerings across both chicken and beef. Recovery in China remains challenged, with negative double-digit comp sales in the second quarter due to ongoing COVID resurgences and related lockdowns across key cities. This resulted in temporary restaurant closures throughout the country for most of the quarter. While operating conditions are challenging, restaurants remain focused on the consumer, offering core menu favorites and targeted digital coupons. And now I'll turn it back to Chris.

Thank you, Kevin. McDonald's is one of the most recognized and beloved brands on earth. Today, our opportunity is building on this recognition to keep up with customers in communities around the world and on every platform, whether it's our global mobile app or social media. I'm proud of McDonald's industry-leading digital and marketing initiatives that allow us to connect with even more customers in entirely new and creative ways so we can strengthen our relationships, better connect to culture, and meet customers where they are. The investments we're making in digital, one of our biggest opportunities for growth, are beginning to bear fruit. In our top six markets, digital sales, which include mobile apps, kiosk and delivery, represented over six billion or nearly a third of system-wide sales in the second quarter. With the launch of My McDonald's Rewards in the UK this month, we now have loyalty programs in nearly 50 markets, including all of our top six markets. Enrollment and participation continue to grow. And our loyal customers are highly engaged with us. Nearly 22 million of U.S. loyalty members have been active in the last 90 days. MyMcDonald's Rewards has consistently driven more frequent visits and incremental sales in each of the markets as we've launched. Each reward a customer redeems and each preference a customer shares helps us power our personal touch. We can use this deeper understanding of our customers to create content and offers relevant to them through the channels they prefer. By tailoring messages, our customers feel more connected to McDonald's, ultimately driving engagement that increases both spend and frequency. It even means we can reunite with customers who haven't visited us in a while. We're also strengthening our iconic core menu. As I've mentioned before, in markets around the world, We're taking our leading burgers and making them even better by implementing enhanced cooking procedures and new buns, resulting in hotter, juicier, and tastier burgers. Spain was the latest market to launch these taste and quality improvements, driving incremental sales and giving our customers yet another reason to keep coming back for more. We'll also keep coming up with fresh spins on our classics, creating craveable moments for a new generation of McDonald's fans. In Germany, strong marketing and core menu campaigns, including the Big Mac celebration featuring double Big Mac, drove strong comps for the quarter. In Australia, we leveraged the strength of our McCafe brand with the launch of the Australiano coffee in the second quarter and continue to grow our share in coffee. Of course, there's no better example of combining classic with modern relevance than our transformational marketing. And that's not just my opinion. It's the consensus of the marketing industry. McDonald's was repeatedly recognized this quarter for advertising that captures both hearts and minds. At the Cannes Lion last month, McDonald's and its marketing partners received multiple awards, while simultaneously being named the most effective brand on the Work Effective 100 for the third year running. We swept the Global Effie Awards and were recognized as the number one most effective brand and marketer in the U.S. Over the past few months, we've continued to turn cultural moments into creative pedestals for the Golden Arches. In May, McDonald's commemorated Queen Elizabeth's Platinum Jubilee by recording a new version of our world-famous I'm Lovin' It jingle, making headlines and history. As Kevin mentioned, Australia launched our latest famous order with Pop Phenom, the Kid LAROI. And we created a significant brand moment in Canada with our annual McHappy Day campaign, raising nearly $6 million for Ronald McDonald House Charities and lifting sales and brand perceptions in the process. Our creative excellence has expanded our reach and made McDonald's not just more recognizable, but more relevant. And it's this customer connection that is continuing to drive our business in new and exciting ways. Now to talk more about our second quarter financial performance, I'll hand it back to Kevin.

Thanks, Chris. Our strong top-line performance resulted in adjusted earnings per share for the quarter of $2.55, an increase of 15 percent in constant currencies. This adjusted EPS excludes $1.2 billion of charges related to our exit from Russia and a gain of $270 million from the sale of dynamic yield. Adjusted EPS was hurt by 16 cents of currency, as the dollar strengthened significantly in the second quarter. That was double the amount we estimated in our first quarter earnings call, based on exchange rates at that time. Our G&A costs increased 10% in constant currencies for the quarter, reflecting higher investments in restaurant technology and incremental expenses related to our worldwide convention and proxy contest. As expected, company operated margins were hampered by significant commodity and wage inflation, as well as rising energy costs. Given macroeconomic conditions, we expect these inflationary pressures will continue to impact margins for the remainder of the year. Our company operated margin dollars for the quarter were also negatively impacted by our exit from Russia, which was a heavily company owned market. Even with these cost headwinds and our exit from Russia, our strong system-wide sales growth contributed to healthy flow-through to operating income. Total restaurant margin dollars grew $270 million in constant currency as a result of sales-driven growth in franchise margins, which now make up nearly 90% of restaurant margin dollars. This resulted in an adjusted operating margin of 45% for the quarter. Lastly, Based on current exchange rates, we expect FX to reduce third quarter EPS by about 14 to 16 cents, and full year EPS by roughly 40 to 50 cents. Again, double the impact that we estimated on our first quarter call. As we certainly saw last quarter, this is directional guidance only, as rates will likely fluctuate as we move through the year. Before I pass it back to Chris, I want to take a moment to say thank you. It's been an absolute privilege to serve as CFO of this iconic brand for over seven years. During this time, I've met many people who are on the call this morning, from analysts who follow our industry to investors in our company. I've had a lot of thought-provoking conversations with many of you. You offered your opinions and challenged me, and my interactions with you over the years helped make me a better CFO, and helped make McDonald's a better company. I'm extremely grateful for your engagement through the years and for the confidence you placed in us with your investments. I look forward to passing the baton to Ian Borden, who I worked closely with on our senior leadership team for many years. We will continue to work together to ensure a smooth transition. Thank you again, and now back to Chris.

Thanks, Kevin. As we reflect on these results for the second quarter, I feel tremendous pride in the entire McDonald's system. I believe there has never been a better time to be part of the McDonald's brand. We have the right leadership and the right strategy at exactly the right time to take this iconic brand to even greater heights. As we announced over the past few weeks, we continue to assemble the right members of our global senior leadership team to help lead the next chapter for brand McDonald's. building on the successes made because of the outstanding contributions of former leaders. Because of McDonald's ability to provide a variety of opportunities and experiences at one of the world's most recognized and respected brands, our ability to recruit top talent and develop a deep bench is unparalleled in our industry. This only builds our confidence in executing on our strategic plan for the long term. As Kevin mentioned, Stepping into the CFO role next is 30-year McDonald's veteran Ian Borden. Currently President of International, Ian has worked literally around the world for McDonald's in a variety of capacities. He brings a great mix of financial and field experience into the CFO role, and it will be great to have him now based in our Chicago headquarters. Additionally, Jill McDonald will be returning to McDonald's as President of our International Operated Market. Jill began her career as a marketer eventually leading global marketing at British Airways. Jill then joined McDonald's as Chief Marketing Officer for our UK business in Northern Europe and later became the Managing Director for our UK business and President of Northern Europe. Jill is a seasoned veteran of the consumer industry, having served most recently as CEO of Costa Coffee. Her strong customer focus, passion for creative excellence, and commitment to innovation align well with my priorities and I'm confident Jill will help accelerate the next phase of the IOM segment's growth. I'm also happy to share that Joe Semples will continue to lead our international developmental license markets as president of IDL. Joe's responsibilities will now include our large, fast-growing China business, which currently reports to Ian in his capacity as president of international. Meanwhile, Francesca DiBiase will be retiring as Global Chief Supply Chain Officer after more than three decades at McDonald's and over seven years in this role. I'm especially grateful to Francesca for stewarding our world-class supply chain through unprecedented disruptions and for spearheading sustainable solutions that are now standard practice throughout our system. While we'll miss Francesca, we're happy that Marian Gross will now be stepping into this role. Marian has been with McDonald's for 29 years, most recently as Chief Supply Chain Officer of McDonald's North America. I'm lucky to be surrounded by such great leaders who are also such good people. That's what McDonald's is all about, which is why we call ourselves a McFamily. With that, let's begin Q&A.

Thank you. As a reminder, if you're 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 David Tarantino with Baird.

Hi. Good morning. First, I wanted to congratulate Kevin on a great career. You'll be missed by the investment community. And then secondly, I guess, Chris, I wanted to ask about the situation in Europe specifically again, and I know you called out a lot of macro challenges, and I was just wondering if you could comment specifically on whether you're starting to see any consumer behavior changes in your European business as a result of some of those pressures. And then I guess relatedly, you mentioned that you're planning for a lot of scenarios, and I was wondering if you could comment on what McDonald's might do if we were to see a more material downturn in consumer spending. Thanks.

Thanks, David.

Well, as you saw in the announcement, we continue to have broad-based growth, and our European business overall is performing quite well. I'm actually very happy with how the European business is performing. There's a few things that we're seeing consistently across that we are seeing that we're gaining traffic and comp sales share in every market, major market where we operate. We feel great about that. We're gaining share in beef and chicken, which were priority areas for us. And we're doing quite well in delivery, and I expect digital, particularly as we bring on the U.K., is going to be a performer for us. So headline is Europe is doing very well for us. I think what is weighing on our mind and we're certainly attentive to is consumer sentiment as one area and a number of markets in Europe. France is an example. Germany is another market. Spain is another market. We're seeing consumer sentiment down and in many cases down at record levels. So that's one area of concern. The second is we do know that the inflationary pressures in Europe are elevated even beyond what we're seeing here in the U.S. And that has an impact on sentiment, but that also has an impact on what we're needing to do from a menu board standpoint and pricing. And so, you know, I think while we look at Europe right now and we're seeing strong results, it is a challenging situation. It's challenging for our franchisees. And as you think about what we plan for under a variety of scenarios, it goes to essentially what are our marketing levers and what are our investment scenarios. And do we need to lean into harder, for example, the value end of our menu platform? That could be one scenario. On the other hand, if it, you know, continues at its current pace, maybe we don't need to lean in as hard as that. So these are things that happen at a market level on a country-by-country basis. But I think, you know, the way our teams are looking at it is, Because of this uncertainty around consumer sentiment, we're just having to plan for more different scenarios, and that means having more flexibility on the marketing calendar to pivot if need be.

Our next question is from John Glass with Morgan Stanley.

Thanks. Good morning. And, Kevin, let me just add my congratulations and best wishes as well. My question is similar but to the U.S. Last quarter you talked about a little bit of trade down in the U.S. as maybe early evidence the consumer is changing. Where does that stand now? And what is the conversation now about pricing with the franchisees? Pricing has been used obviously to cover inflation, but maybe are you coaching them now to be easier on that factor just given the changing dynamics in the U.S.? How do you view pricing today versus maybe 90 days ago? Thank you.

Why don't I have Kevin hit this at the top, and then I'll cover anything he misses. Yeah, I can take it. And thanks, David and John, for your kind comments. Let me talk about the U.S. and the comp and what drove the comp, and I think that'll help talk about some of the trade down that you're talking about. Our Q2 comp of a little under four was driven completely by higher average checks. our gas counts were relatively flat, so it really was check-driven. And that average check was driven, obviously, mainly by price increases. Year over year in the second quarter, our menu prices were up high single digits, relatively consistent with what I talked about in the first quarter, a little bit higher than that. And we expect for the year to be in that high single-digit range for the full year. What we are seeing still is flow through it similar to what we've seen historically, still strong flow through of roughly 70% or so. So if you think about an 8%, 9% price increase with a 70% flow through, the difference between that and our comp of a little under 4% was driven by two main things. First, one of the things I started talking about in the first quarter was a decline in units per transaction. That's partly driven by a reversion in the number of people per transaction. You'll recall during COVID, what happened is we had a significant shift in channels from front counter to things like delivery and drive-through, and that increased the number of people per order. What we're now seeing in the U.S., but also around the world, is is a little bit back to some normal channels as restaurants open up. So delivery is still a little bit elevated versus where it was pre-COVID, but drive-through percentages are pretty much back to where they were pre-COVID. So we're seeing number of people per transaction go down. We knew that would happen at some point. We didn't exactly know timing. The other thing to a lesser extent and again I mentioned last quarter, is that we are seeing some trade down. We're seeing customers and specifically lower income customers trade down to value offerings and fewer combo meals. So those dynamics are kind of what's driving both the comp and our pricing. We do, as we've talked about historically, we do work closely with our franchisees on pricing. We use a third party. advisor that advises the franchisees as well as the company on pricing. It's a consumer-based research approach. And I've talked before about, and specifically this year, how we're taking smaller, more frequent price increases because it gives us the flexibility to be able to see how consumers are reacting and then adjust if or when necessary. One of the most important things that we keep an eye on is obviously there are cost pressures both on the commodity and labor side, but we have to balance that with continuing to provide value for our customers. And there's a couple key metrics that we look at. One called good value for money, which is one of the customer scores we look at, and another is affordable options that I like. And we still continue to do well on those metrics, which is the most important thing to make sure that our customers still are perceiving our offerings as value.

Yeah, the only thing I would add to what Kevin said is we track, as I think many of you do as well, food at home versus food away from home. And right now we're seeing a significant gap. In fact, we think by our measure it's the largest gap we've ever seen, well, seen in 50 years. between food at home and food away from home, meaning that food at home has increased pricing significantly faster than what food away from home, McDonald's and others in our industry have done. I don't know what the impact of that is, but certainly we expect that there's some benefit that we're seeing as part of that. And the other thing I would just add is Kevin's comment about looking at good value for money. We look at that around the world. One of the things that makes me feel confident is In almost every major market where we operate, there's just two exceptions, China and Spain. But in every other market where we operate, we are leading amongst any of our peers for a value for money standpoint. So we're still, even though we're pushing through pricing, the consumer is tolerating it well, and we're still doing very well from a value score standpoint.

Our next question is from Andrew Charles with Cowan.

Great, thank you. And Kevin, congrats on a very successful tenure as CFO, and best of luck to you and Ian in your new roles. My question for you, Kevin, is just around modeling the IOM segment. Can you help us think through what is a fair segment EBIT dollar embedded in your guidance, just given the many moving pieces of the Russia sale and the company-operated Ukraine market that's still largely closed on a temporary basis that's just making this a very difficult segment to model?

Yeah, thanks, Andrew. Let me give you a perspective on Russia. They were in our comp through first quarter, and then they wouldn't be in our results or comp beginning second quarter. Russia represented roughly 2% of system-wide sales, about 7% of revenue, and about 2% of operating income. So if you use that for modeling purposes, that should get you kind of to hopefully the adjusted numbers that should be representative of our trends going forward.

Our next question is from David Palmer with Evercore.

Thanks. Kevin, congratulations on your career at McDonald's. Just a follow-up for you on pricing and inflation. Could you talk about inflation relative to pricing in the U.S. and IOM in the quarter and how you see that gap? progressing through the year to the degree that it might be closing. That would be interesting, and I sense that that gap is relatively larger for IOM than it is in the U.S. And then, Chris, if I could just squeeze one more in. I'd just love to get your take about, aside from getting ready for the need for value, what are the biggest improvement areas for the company that you see on the horizon, kind of thinking out a couple years? You've teased out things like menu with chicken and beverage and technology benefits and CRM and the operations, but love to get your sense about what's most important on the horizon. Thanks.

Okay, you go. I'll start with the inflation and then we'll go back to Chris on your second question. So let me give a perspective. Right now, second quarter, year over year in the US, our food and paper inflation Well, let me talk about it this way. For the full year in the U.S., we expect roughly 12% to 14% inflation. It's a little higher than that in the second quarter, likely a little higher than that in the third quarter, and then we expect to see it moderate some in the fourth quarter. Obviously, that's based on what we know today. That's on food and paper. On the labor side, we're probably seeing a little over 10% labor inflation right now, Part of that is we had strategic wage rate increases in our company operated restaurants kind of mid last year. So we'll go and start lapping those until the second half of the year. So more of that inflation was hitting the first half of the year than the second to your point on the international side. Um, right now the range is probably similar on average, the 12 to 14% for the year. But a couple things there. One, we're probably at the higher end of that range on the international side. Two, there's probably a wider range of scenarios like Chris talked about. And three, different than the U.S., we don't see that moderating. Their increases will actually likely be higher in the third and fourth quarter than they were in the first and second quarter. So to your point, Europe is getting hit harder. on the inflation, certainly on the food and paper. The other thing I would just say, it certainly varies by country. You have some countries that are getting hit dramatically by energy prices based on kind of Russian oil, et cetera. And so it really is a country-by-country dynamic. But in general, the international side will get hit a little bit harder than the U.S., and it will last a little bit longer later in the year than the U.S.

right now. To answer your second question in terms of what I think are the biggest priorities over the next few years, if I use our MCD framework under accelerating the arches and start with the – I think we have an opportunity to continue to improve on the marketing front and just get more consistently excellent around the world from a creative standpoint. Jill McDonald is going to be a part of helping to do that. I think we've made a lot of progress in the U.S. I think there are still opportunities for us to improve our creative in some of our international markets, so that's one area. Second is, as you move to the C and core menu, chicken for us continues to be, I think, a significant opportunity for us to improve our chicken portfolio. We've got some great global equities already in our McNuggets and with McChicken, but we also have some equities in McCrispy and McSpicy that we think we've got an opportunity to do more with globally. So that's going to be a priority area. And then digital. And we talk about digital being a multi-year journey, but I'm incredibly encouraged by what we're seeing in digital. And just to give you a sense of what I think the opportunity is, if you look at Germany, France, UK, China. I mean, digital is over half of the sales in those markets. In the case of China, it's over 80% of the sales in those markets. Compare that to the US, compare that to Canada, where it's maybe a quarter of the sales. So there's a big opportunity for us in North America to increase digital as a percent of sales. And then what happens when you do that is your percent of identified customers goes up Very dramatically and and that opens up a whole range of things from service opportunities pricing opportunities, etc So I think digital for us is we're starting to see the benefits We just need to go harder and faster against that and you know We have a few other ideas part of what I wanted Kevin to help me with in this next phase this next role that he's going to be in is just working through a few other ideas and that we think might put a little top spin on the plan. So we'll come back at some point later and talk about that.

Our next question is from Dennis Geiger with UBS.

Great. Thanks for the question. And, Kevin, congratulations and best of luck, of course. Chris, you talked about a bunch of the strategic opportunities in Europe that you and the team are looking at. I'm curious if most of the levers that you mentioned are kind of similar to the U.S., in thinking about how you navigate some of the challenges and plan for different scenarios? Or are there differences in the US in how you're thinking about navigating US macro challenges? And if so, could you touch on some of those at all?

I think there's probably more consistency than not. And when I think about Europe, one of the things that we're seeing in Europe is we're seeing But that was a business that was largely a dine-in business that through COVID, we are seeing that the takeaway portion of the business continues to be elevated. We're seeing a much greater traction on digital as being one of our service channels there. That, I think, creates some opportunities for us that we need to get after that are probably different than what you would see in the U.S. because the U.S. has always been more of a takeaway market. But what does that mean for Europe? So that's one area. for us that I think we've got more to do in that. I think when we look also at what's going on in Europe, we've got a very strong coffee business in a number of markets, and I think driving that and using that particularly as a way to drive transactions, I think that's also an opportunity for us. The other things that Europe is focused on, like chicken as an example, those tend to be more If you move over to the U.S., the U.S. team has done a great job over the last several years, and it's shown up in a strong multi-year run in comp sales. I think a lot of what is currently in flight in the U.S. is just continuing to do that. I've talked about it on a number of different occasions, and it was in our press release around this. It's execution, execution, execution. Part of that means that we need to make sure that our restaurants are properly staffed. It means to make sure that we're getting our crew trained and make sure that we are operationally delivering on things like service times that we know can have a big impact on customer satisfaction. So those are the priorities for Joe and the team in the U.S.

Our next question is from Lauren Silverman with Credit Suisse.

Thank you, Kevin. I also echo my congrats. A follow-up on the value commentary. Can you expand on how you're thinking about everyday value and balancing the elevated costs in the U.S., whether that's dollar drinks or dollar one, two, three menu? I guess what's the franchisee appetite for value should we see a more challenging environment? And then related, you offer an array of promos to the app. How do you think about your composition of value offers as it relates to digital versus in-store? You know, are we getting to a point where personalization might be something on the horizon? Thank you.

Yeah, so when you think about value, I think you touched on a number of things here, which is you have to think about value in a very targeted way. And there are different products with different elasticities in different geographies. I think a thing that I get excited about, particularly as we move more of the business to digital, is the ability for us to be much more targeted in how and where we deliver that value. So in the past, go back maybe 10 years ago, we didn't have the ability to deliver that sort of precision value, and you would end up having, you know, kind of a national deal that would hit everybody. But we know that there's a lot of waste in that, that there are people that you're delivering value to under that scenario who probably would have still bought without it. So what we're looking at doing, and with the U.S. team, along with our pricing advisors, is exactly which products on the menu do you need to offer value, to what degree And then what through what vehicle? Is it through an offer? Is it through a menu price adjustment? Or is it through some sort of promo that you do? So it ends up being a much more nuanced way that we're able to look at value. But I think part of being more nuanced in it is how we're able to push through this pricing without seeing a big fall off in the pass-through numbers that Kevin was talking about. So it's tough to talk about value these days in kind of a one-size-fits-all approach because the beauty of, I think, what we're transitioning to is a much more targeted, tailored approach to our value. But, Kevin, I'll let you pick up on that.

The only thing I'd add is just to demonstrate what Chris was talking about, if you think about this transition or evolution, historically we would have had a big national value menu. Today, value is primarily driven at a local level. specifically at the breakfast day part. So we do have a $1.123 nationally advertised value platform, but it's really complemented with a localized approach that allows the individual field offices to promote products that make sense in their local markets and based on their competitive set. We'll continue to have some national programs, whether it's a two for $6 or buy one, get one, But we've moved really more to a local approach, which then becomes ultimately a personalized approach, as Chris talked about. So we're in the middle of that evolution going from national to local to ultimately really more personalized.

Our next question is from John Ivanko with J.P. Morgan.

Hi, thank you. I wanted to get back to the comment on labor. If you think the stores, and this is both U.S. and IOM, are staffed to the extent that you can properly meet demand. In other words, do you have unmet demand that's in the system because of your staffing levels at the store? And if that is the case, are there any capital or technology type of investments

in coming years you know that could allow you to reduce your demand for labor while increasing overall customer service thanks sure well if i start with and i'll just use the us as an example i mean macapco is showing the way on how to do this our macapco business uh in the u.s uh is over is outperforming our u.s average and if you look at the macapco business despite all the challenges, they are at sort of our target roster sizes, and they're seeing speed of service improvements that are ultimately driving customer satisfaction. So we know from our McCopco business that it is possible to do it. It's not easy. It takes a lot of work, but it is possible for us to get after that. The people are out there, and part of why we put in the EVP program that the U.S. team did is to make sure that we're able to talk more consistently as an employer to get people to come into our restaurant. So headline is we do think we've got a formula and a playbook that, if deployed, can ensure that we've got our restaurants properly staffed. And like I said, McCopco is a great example of that. Thinking about longer term, you know, there's a lot of interest around what can you do from an automation standpoint. I've talked about in the past, we've spent a lot of time, money, effort looking at this. And there is not going to be a silver bullet that goes and addresses this for the industry. The idea of robots and all those things, while it maybe is great for garnering headlines, it's not practical in the vast majority of restaurants. The economics don't pencil out. You don't necessarily have the footprint. And there's a lot of infrastructure investments that you need to do around your utility, around your HVAC systems. you're not going to see that as a broad-based solution anytime soon. There are things that you can do around systems and technology, especially taking advantage of all of this data that you're collecting around customers, that I think can make the job easier, things like scheduling as an example, ordering as another example, that will ultimately help reduce some of the labor demand in the restaurant. But I think your question was, Is there a big automation solution? And you're not going to see, like I said, robots in the restaurant. We've got to kind of get after this the old-fashioned way, which is just making sure we're a great employer and offering our crew a great experience when they come into the restaurants.

Our next question is from Jeff Bernstein with Barclays.

Great. Thank you very much. And, Kevin, congrats on the upcoming moves and ultimate retirement. I had a Bigger picture question just on franchise relations. Chris, I know you mentioned McFamily in your closing remarks, and it seems like it's an ongoing balancing act considering the very strong performance through the pandemic, and I know you mentioned franchise profits at all-time highs to close last year, and now obviously seemingly some pressures to profitability, and there's more headlines in the press on changes in contracts and some frustrations from the franchisee side. So just trying to get a sense for whether you think there's been any change how you think about the relations and as it relates to that just because china is a big franchise market is there any reason for concern on your end on the underlying fundamentals of the business so do you really think it's purely covet and therefore the recovery will will follow suit as covet concerns ease thank you yeah thanks for the question let me start with that at a macro level we have about 5 000 franchisees globally and

So when you think about franchisees, and I've talked about this in the past, it's hard to talk about them as one group of franchisees because we have, like I said, 5,000 franchisees of different sizes, of different constructs, et cetera, around the world. I think if I get underneath your question, you're probably asking about some of the headlines that have occurred in the U.S. of late and I would just point out a couple things. Our aspiration as McDonald's, frankly, one of the things that we pride ourselves on, we absolutely believe that we're the best franchisor in our industry, and we think we've demonstrated that over the last 70-plus years. You only get to say that if you continue to have the best franchisees, and the moves that the team announced in the U.S. are designed to ensure we continue to have the best franchisees in our industry, which then make us the best franchisor. And the way that they're going about it is two ways. They're going about it in some areas raising standards and in other areas improving access for people who want to join our system. And I would say that the announcement that the US team made recently, it connects to an earlier announcement that we made that I think maybe many of you saw, which was our commitment to put $250 million into financing options to be able to continue to attract new people to become franchisees, many of whom we hope are crew working in our restaurants to then become franchisees. So everything that was announced is about for us continuing to make sure that we are going to be the best place for the best franchisees. You only get to make those announcements, in my view, when you're doing it from a position of strength. And that's what we've got. in the US right now earned over the last several years through our performance. And the position of what it's given us is it's given us a very nice situation where the demand for our restaurants significantly outstrips the supply. If you look at our current franchisees, the vast majority of our current franchisees are continuing to look for ways to grow their organizations by buying new restaurants. And they're also looking for ways for their children to continue to run and continue in the system. That's a good thing. At the same time, we've got strong external demand, especially with the support on financing for people who want to come into our system and become franchisees. So from my vantage point, I'm excited when I see demand for our restaurants outstrip the supply. I think that makes us a better business. There are people that are exiting the system. That's been written about as well. I would say what they're doing at this point is they're taking advantage of the strong health of the business to get multiples of 8 to 10 times when they're selling, which is the best that we've seen in I think anybody's recent memory on this. So there are some people looking at taking money off the table right now, but they're doing it at incredibly strong multiples. If you step back on this and think about it, again, I'm talking more about the U.S., but Everything that we've announced, if you are a strong performing franchisee, you're going to be excited about this because what it means is that you're going to continue to have the opportunity to grow and you're going to have stability around your equity. I think where there is concern is if you are maybe not one of our stronger performing franchisees, this probably does, some of the announcements that the team made probably does raise your concern. But the US team I know is committed to helping improve there And you know I would be delighted to see that if we can get improvement and maybe some of the lower performing franchisees, but broadly I would say our our Relations with our franchisees globally the 5,000 franchisees is strong and When we're when we're a great franchise war with great franchisees this business tend to do pretty well over time and then on China and

Your question related to China, I think we still believe there's huge opportunity in China. We're still committed to our China business. They certainly have had a rough couple of years with all of the stops and starts with COVID, but we still expect to open roughly 800 restaurants this year. Hopefully, the economic environment can get back there to something relatively normal because We're still big believers in the opportunity in China and have a lot of confidence in our business there.

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

Thank you. Yes, and, of course, congratulations to everyone on their new roles, and it's great to see Jill coming back, an excellent re-edition. But I have two questions there about the outlook. The first is just unit growth in the U.S. you know, coming in slightly lower into the previous range, is that, you know, because of challenges in the supply chain and we hear about, you know, constraints around equipment or labor and staffing, doesn't seem like it's an access to capital issue given, you know, the multiples that are historically high. And then also on the guidance, you talked about mid-40s operating margin, again, also slightly higher than the prior. Is it a function of mix, you know, like less company-operated or better top line? Because, again, we're seeing costs coming very high. So just trying to understand those relatively minor changes, please.

Yep. Thanks, Sarah. Let me take a shot at both of those. On the unit growth in the U.S., you're right. It's come down a little bit. That's mainly due to timing. Some permitting is taking a little bit longer in some areas. We do still expect net unit growth in the U.S. this year for the first time in several years. But it's certainly not an access to capital, as you mentioned. It really is just a timing thing. And we are finding that openings are taking a little bit longer between some supply chain challenges and some permitting just time frames. I think there's a back load that's making just getting through all the government processes take a little longer. On operating margin, we upped that guidance a little bit right after the Russia announcement. It really is a function primarily of selling our Russia business. The Russia business, as you know, was primarily company owned and actually had a operating margin below our global average. So by taking them out now actually helped improve the operating margin. So it is just a function of mix in the near term. We do still believe that longer term there's leverage to be gained both in operating margin and specifically on the G&A side that should help that operating margin longer term, not in 2022, but longer term that should help improve that operating margin going forward.

Our next question is from Jared Garber with Goldman Sachs.

Hi, thanks for taking the question. Just sort of two for me. I'm curious on day parts, if you're seeing any shift in day part usage across the U.S. system. I know you talked about maybe some easing on the lower income side of the consumer, but wondering if you're seeing anything specific to any of the day parts, whether that's breakfast, lunch, dinner, or late night that you'd like to call out. And then I also wanted to know if you could help quantify or provide some incremental color on the gains that you're seeing either on average check or frequency from the loyalty program now that we've sort of effectively launched one year past the launch in the – or last one year since the launch in the U.S. Thanks.

I'll start with Dave's part and then let Kevin address any check commentary that we want to do around loyalty. The great thing, I think, about the U.S. performance is the growth that they're seeing is broad-based. It's across all day parts. And, in fact, breakfast was the strongest performing day part in the U.S. comp, which we feel good about. It's a change. If you remember a few years ago, I think there were a bunch of questions about breakfast. If you also sort of zoom out and you look at our performance, our day part performance on a three-year stack in the U.S., incredibly consistent. U.S. breakfast, lunch, dinner are both north of 20% that we saw with a three-year stack from a day part standpoint, late night being the one area that we saw a significant impact over the last three years. So I would say generally we feel very good about the balance that we're seeing from a day part standpoint and probably not any noteworthy color that I would offer around differences by day part. Kevin, I'll let you handle the loyalty question.

Yeah, I mean loyalty is an interesting dynamic related to check. Loyalty is really about driving frequency and increasing frequency and we are seeing definite increases in frequency everywhere where loyalty has gone in. If you take into account redemptions on the loyalty, you actually see a little bit lower average check because of the redemptions that occur there. But it is significantly driving frequency, so when you look at it in total, it's clearly additive to sales. But if you just look at an actual average check and take into account redemptions, you end up with a little bit lower check because of that.

As we near the bottom of the hour, we have time for one more question from Nicole Miller-Reagan with Piper Sandler.

Thank you so much. Good morning. In the U.S., can you talk a little bit, you know, finish up the conversation essentially just having about cohorts? Can you do that a little bit by income? So let's say, you know, the lower income you've said a few times now is coming a little bit less. How much less, you know, does that matter? So by cohort of income, who comes the most or spends the most such that we can't really understand, you know, when you're saying they come less. Like, what is the impact of that, if that makes sense?

Yeah, I know the question. I don't have the degree of precision on the data that I think you're looking for, but I would say generally what we know is happening is that there is a challenge on the lower income, but that we are getting trade down out of things like full service restaurants, getting trade down out of fast casual that's helping offset any of that impact. Net-net, what we saw in 08-09 and what we expect is going to continue is that we're going to be a net beneficiary on all of that. That's our planning expectation is that while there is going to be some shifting within the cohort as you describe it, net-net, our value positioning, our value scores, we expect to be a winner out of all of that.

Okay. Thank you, Chris. Thank you, Kevin. Thanks, everyone, for joining. Have a great day.

This concludes McDonald's Corporation's investor call. You may now disconnect.