Q3 2019 Earnings Call
Hello, and welcome to Mcdonald's third quarter 2019, Investor Conference call.
I have to request of Mcdonalds Corporation. This conference is being recorded.
Following today's presentation, there will be a question answer session for investors.
At that time investors all my ask a question by pressing star one on their Touchtone phone.
I would now like to turn the conference over to Mr., Mike see plaque Investor Relations Officer for Mcdonald's Corporation.
Mr seems like you may begin.
Good morning, everyone and thank you for joining US with me on the call. This morning, our President and Chief Executive Officer, Steve Easterbrook, and Chief Financial Officer Covenant was that.
I want to remind everyone that the forward looking statements in our earnings release, an 8-K filing also applied or 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 with their corresponding GAAP measures.
I'm prepared remarks. This morning, we'll turn the call over for your questions. I guess that you. Please limit yourself to one question and if you have more than one. Please ask your most pressing first and then reenter the queue.
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 Steve.
Good morning, Thank you for joining us.
Bruce based momentum across all markets resulted in a 5.9% increasing global comparable sales for the quarter, most 17th consecutive quarter global comp sales growth.
This was complemented by gains in global guest counts.
Across every country function and level in our system wishing improving discipline and robust levels of execution that have guided by our velocity growth plan.
Before I turn studies punctuated by coach other does embracing and leveraging innovation across every facet of our business.
[noise] every quarter I spend several weeks visiting restaurants to speak with franchisees a market leaders around the world I.
I come waste and these basis inspired by our actions resonate with customers never more so than today, we're not global economy presents many economic social and political challenges and uncertainties.
Across markets, how successful as a consistent formula.
For the customer first strive to understand that needs and desires and closely find ways to improve their experience.
Dan empowering people to pull believers that trade delicious so good moments, but customers every visit every day.
And that is start with strong corporate leadership and system alignment around the vision.
Engage local franchisees, who bring an entrepreneurial mindset a unique understanding of how to drive growth in their markets and skill at developing innovations that improve efficiency and the customer experience.
Leveraged the delicious food this at the core of our menu.
Ron effective value strategy is rooted in deep customer insights.
And provide outstanding customer experience by running great restaurants.
And finally layer is an initiative to accelerate and sustained growth.
Fishing markets this quarter in some Petersburg costs are examples of how the team is pulling velocity growth plan leave us across Russia.
In a tough economic environment, we're meeting customers needs for taste quality and value.
At the same time or impairing all crude to complement it looked almost delicious food with hospitality and convenience for our guests.
Our Russian customers have taken notice was serving more guests and delivering a better experience no restaurants.
In Portugal.
We are seeing balanced growth across all dayparts, an all menu platforms.
Year to date I called products are driving roughly half of comp sales growth.
Delivery is providing a meaningful comp sales lift.
In Taiwan, which recently celebrated the second anniversary as a developmental license or D. L led market.
He is also showing the benefit of the deal model.
I want to bring strong local leadership, a passion for our brands.
Greater insight at a local level and financial strength to invest in a purposeful roadmap for growth.
Finally in Japan, where an aging population declining labor force and softening consumer confidence I combining to create unique market pressures.
Our team has made strong gains.
By offering menu items that top into local tastes table service that resonates with guests and continued promotion of our digital capabilities, we've grown comp sales in Japan for last four years.
Across global markets were serving up a proven formula the signals to our customers we care about that.
You must visits with franchisees across the U.S., it's clear to me that excitement is returning to the system with execution, a big abode a vision 2020 .
The ambitious plan, we build without franchisees.
Average franchisee restaurant cash flows moving into right direction, but 11 consecutive months of cash flow growth through September .
We expect this trend to continue through the rest of 29 team.
During the quarter I spent time in next generation franchisees.
These are children or grandchildren, the franchisees, who grew up in the mcdonalds system and as adults Chevron long term perspective on Mcdonald's proud heritage.
In Minneapolis, and Louisville as in global markets. They are executing the velocity growth plan formula successfully.
At running great restaurants.
Capturing the benefit from growth initiatives.
Anticipates, a new ways to best serve our customers and crew in the future.
Across the U.S., we getting back to basics with the goal of running fast and friendly drive-thrus.
We are providing tools in the kitchen to help apparel food pharma <unk> and with the highest quality standards.
Running national dry food challenges, which should result in improving speed of service.
Deploying new technology like dry through time, as which are now installed in 60% of the U.S. system to ignite crews competitive spirits.
And making bold decisions to reduce the complexity of our menu.
And it's working thanks to these and other efforts, we're seeing continued operational improvements.
Customer satisfaction scores recent all time high quarter three.
And second the dry through have dropped by double digits year over year.
Now, let me turn over to Kevin for a deeper dive into our performance around the world.
We're pleased with our continued topline growth momentum.
As Steve said global comp sales increased 5.9% for the quarter and each of the operating segments contributed meaningfully to our growth.
We also grew global guest counts.
In the U.S., we delivered another strong quarter of sales growth.
Comp sales were up 4.8%, despite the increased competitive environment.
While U.S. traffic was negative for the quarter and remains our biggest opportunity. We benefited again from a healthy average check increase driven by both product mix changes and menu pricing.
Alright kind of core menu continues to fuel results from the fresh beef Q PC in Q PC Deluxe line extension to core items featured in the buy one get one for a dollar national promotion.
Our customers are showing us that our investment in fresh beef is paying off as we continue to grow Burger share.
Additionally, our worldwide favorites promotion that launched in quarter, two and carried into quarter, three resonated well end customers, especially loved the stroup waffle mcflurry.
The sales benefit from our modernize restaurants also contributed to our overall us comp performance for the quarter.
We've converted about 1500 restaurants to EOG TF this year and remain on track to complete about 2000 projects by yearend.
The U.S. now has over 9000, neo TF restaurants, or roughly two thirds of the U.S. the state.
Turning outside the U.S.
The international operated market segment once again delivered strong balanced results.
Comp sales were up 5.6% with every one of the market's growing comp sales for the quarter in nearly all of the markets also growing guest counts.
The UK, which delivered its 54th consecutive quarter of comp sales growth continues to gain market share across nearly all dayparts, despite an increasingly competitive marketplace and declining consumer confidence.
The market's performance was highlighted by a promotional food event, featuring double quarter Palm burgers, and spicy mcnuggets, along with growth and delivery.
Driving record high monthly sales and guest count volumes in the quarter.
France marked its 10th consecutive quarter of comp sales growth with continued all time high market share.
The market is successfully accelerating on premium and core burgers, a continued focus on their value platform and family business and delivery expansion.
Germany also marked its 10th consecutive quarter of comp sales growth.
The quarter benefited from strong value messages and mobile offers along with maximizing contributions from TF.
Looking at the international developmental license markets, which has now our largest segment by restaurant counts comp sales were up 8.1%.
Each geographic region grew both comp sales and guest counts with Japan.
China, and Brazil, as the largest contributors to the segment's performance.
I recently visited Latin America, and had the opportunity to meet with Arcos Dorados, our strategic Dl partner.
Arcos has expanded Mcdonald's footprint across the region by opening new restaurants, and they're also making great progress on modernizing existing restaurants CEO TF.
Using local expertise and innovation our cost has successfully executing their strategy of delivering an enhanced customer experience.
Providing the most relevant menu offerings and running great restaurants.
Despite the geopolitical and economic challenges they face.
Now I'll turn it back to Steve to further talk about the growth accelerators driving our business.
As we've shed on product goals, we're moving with purpose to bring the biggest benefit to the most people in the short as possible time.
This means taking bold actions designed to serve more customers tomorrow than today.
Historically, we've achieved sustained compounding growth when we opened new customer experiences on top of a strong base of operational performance.
Let me close up lofty growth plan in 2017, we committed to three such new customer experiences, which we call growth accelerators.
Experienced the future.
Digital and delivery.
What about giving customers more control over how they order how they pay and how they receive their food.
In a short period, we've moved from deployment, so real business impact with each of these accelerators.
Through our Iot deployments, we created more inviting dining environments easier and foster ordering.
Great to hospitality with guest experience leads focused on serving our customers needs.
These efforts a clearly connecting with guests.
With digital we're working hard to fill customers desire for simpler smoother and more personal engagement I brought digital platforms.
Including kiosks, drive-thrus and all mobile App.
No. It was the power of our emerging digital ecosystem more on display during the third quarter than in China.
The market drove strong comp sales growth in part by delivering tangible members only benefits to our digital community, which now stands at 100 million registered members.
Additionally, we benefit from the Halo effect are promoting delivery to our growing digital network.
We continue to move quickly to deploy dynamic yield, which technology improves our ability to offer customers what they lucky towards using machine learning to make suggestions based on time of day with.
Papilla menu items.
The business cases, driving rapid adoption.
Dynamic yield technology is now and over 9500 us drive-thrus with full rollout to nearly every U.S. restaurant with outdoor digital menu boards expected by year end.
And with just getting started.
Deployment across our existing truck to the Russians and Australia will be complete by year end.
And with scoping future deployment for additional markets and applications, eventually, including kiosks and I'll Global mobile App.
Ultimately dynamic yield will facilitate a range of personalization benefits, but we can leverage knowledge of the customer and with the passengers to provide a tight with experience in restaurants.
At the drive thru and on Iraq.
The other milestone on our journey to embrace technology to provide simpler smoother and more personal customer engagement overall digital channels is the creation of Mcd takes labs, which was fueled by our acquisition of a presentation.
And new team based in Silicon Valley brings first mover advantage they must with area for us system.
Voice technology.
A print say talent and technology comes with the promise of more efficient and accurate older and get the dry through.
A lot better experience for our customers.
The same time, we expect the technology to reduce complexity for all crew.
Whether we look across the take or consumer world, We see voice technology, playing an increasing role in all our lives.
Oh this is particularly significant.
Because the importance of drive-thrus to our portfolio.
Delivery is another area, where we've moved rapidly to capture changing consumer habits around service and convenience.
Once again customers are responding.
In fact, the now placing 10 look delivery orders per second on average globally.
So was rone this coal customers will likely placed 36000 delivery orders.
For 2019, we expect delivery to dry $4 billion or roughly 4% of global system wide sales.
That's up from 1 billion just three years ago.
Hi. This is now available from about 23000 with those restaurants over 80 countries.
Of note almost delivery global average check remained steady at two times the average restaurant check.
Year over year, we continued to see double digit, Ohio, most delivery comp sales increases across many of our major markets.
In the U.S., we saw an increase in average restaurant look delivery orders in restaurants, where we recently introduced door dash as an additional delivery partner.
This result is consistent with our exposures in other markets.
The addition of multiple delivery Poland is in markets, such as Italy, Canada, Russia, and Spain help these markets reached new customer polls by appealing to customers primarily loyal to other apps.
Second expanding coverage to geographies, where existing partners may not have had a presence.
As we add new delivery partners globally to reach new customers.
We're also keeping pace with an evolving delivery ecosystem.
Delivery remains a big frontier for our business and we still have a long way to go.
Even with our existing customers to encourage awareness and trial.
This year over 50 markets participated in our third and new celebration of look delivery.
And most delivery night in doubling the number of participating markets from last year.
Look delivery large and generated a 25% plus global delivery sales lift that those day.
A halo effect on the following day drove the most ever delivery orders on a single day for us.
As we prioritize awareness and trial, we're encouraged by data showing that new or lapsed users accounted for a significant portion of the global sales lift.
We still have a lot of work ahead of us, but we're moving forward a great speed energy and excitement within mcdonalds.
We are confident there's plenty of road ahead for success with with delivery.
Now I'll turn it over to Kevin for a deeper dive into the financials.
In prior quarters, I've talked about the Refranchising, we've undertaken to stabilize our business model.
The capital, we're investing in EOG TF, alongside our franchisees to modernize our restaurants.
And the additional technology investments, we're making to grow the business.
I also discussed earlier this year that these strategic moves have created some short term financial headwinds like lower gains on sales of restaurants, and higher depreciation and Gionee expenses.
As we're setting up our business for long term growth I want to take a minute to put our strong operating results for the quarter in perspective.
We grew global comp sales by nearly 6%.
We grew system wide sales by 7% in constant currencies, that's well over a billion and a half dollars of growth across the system.
We grew constant currency revenue across each of our operating segments for the second consecutive quarter.
Our franchise margin dollars were two and a half billion dollars growing $150 million for the quarter or 6% increase in constant currencies.
We achieved an operating margin of 44%.
And EPS for the quarter was $2, an 11 cents with growth in margins being offset by lower gains on restaurant sales and a higher tax rate.
This performance reflects the strength and stability of our business model as well as the ongoing actions, we're taking to position our business for sustained long term profitable growth.
In addition, consolidated company operated margins increased 20 basis points to 18.6% for the quarter.
You asked company operated margins increased 280 basis points to 15.6% benefiting from comp sales growth and improved operational performance.
Io M. company operated margins declined 60 basis points, but we're still a healthy 21.3% has continued labor in commodity pressures more than offset comp sales growth.
In the US third quarter pricing was up nearly 3% while commodity costs increased about 2% primarily due to higher beef costs.
We still expect the full year us grocery basket to be up about 2% to 3%.
Turning to Gionee.
As Steve mentioned earlier that we're committed to investing in our business for the long term.
As we become more efficient with our day to day Gionee to run the business, we're choosing to invest in technology and R&D, such as our acquisitions of dynamic yield and apprentice.
The creation of Mcd Tech labs.
And an increased focus on back of the house efficiencies for our restaurants.
Our year to date Gionee spend is up 1% in constant currencies and given our strategic investments, we expect full year DNA to be up about 1% to 2%.
Our effective tax rate was 25.3% for the quarter and we expect our full year tax rate to be relatively similar.
Foreign currency translation negatively impacted our third quarter results by three cents per share given the continued strength of the U.S. dollar.
Based on current exchange rates, we expect foreign currency translation to negatively impact Q4 earnings by one of three cents, which would result in a full year headwind of 20 to 22 cents.
As usual this is directional guidance only because rates will change as we move through the year.
And finally in September our board of directors approved an 8% dividend increase to the equivalent to $5 annually.
This marked the company's 40 threerd consecutive year of delivering a dividend increase for our shareholders and reinforces our confidence in the company's long term strategy.
Through third quarter, we returned accumulative 22.5 billion against our three year cash returns share to shareholders target of about $25 billion, which will be completed this year.
As we talk about change and embed a culture of innovation in how we work is important to conduct these efforts to will iconic global brands.
For over 60 years, the strength of the models brand has been our ability to offer a compelling menu of delicious and affordable food.
Made with high quality ingredients.
Complementing that with hospitality and convenience for our guests.
An integral component of that brand magic is meeting consumers on that terms in places, where they congregate whether it'd be in small towns urban centers.
On the sidelines of Wilco play.
On the various other places where communities come together.
Brands.
Hi, This essence is a promise and I'll promises largely remained unchanged over the years.
Well, how does change other ways in which we fulfill that promise.
The world is different than it was in 1955.
Different today, even though it was four years ago, when we launched I'll turn around.
We're keenly aware that we have to be out ahead to these changes investing executing and growing with a deep sense of urgency and purpose.
Our strong performance in the third quarter and over the past 17 quarters Didnt happen it about Q.
Is the result of all people firmly committed to all up and also the growth plan and the culture of innovation that is driving that plan.
A culture of innovation is rooted in a relentless focus on the customer experience.
Making the jobs of our restaurant employee simpler and more rewarding and building an operational foundation for long term growth and competitive success.
Operational and marketing innovations have been embedded into our DNA since the opening of store number one does planes, Illinois.
Each time, we elevates collectively with our franchisees and supply chain partners.
Whether by founding Hamburger University in 1961.
Introducing the big Mac and 1968.
Open to pose dry through 1975.
It just using actually about emails in 1991.
I want you all day breakfast in 2015.
Or accelerating delivery in 2017.
We plan to seize that result is sustained growth for our business.
Indeed, it's through this approach that we've been able to grow guest counts.
Strengthen our three legged stool of employees suppliers and franchisees.
And build on ensuring brands for the legacy of sustained growth.
This is not to say our company and our industry. One face challenges ahead, we have before we will again.
But by having the right people in the right places.
Supporting them with resources and investments they need.
And embedding a kosher innovation, how we work we know we can deliver on our brand promise in any environment.
And sustain the growth trajectory, which has defined this business over half a century.
With that said, let's begin our Q in a.
As a reminder.
Investor and we'd like to ask your question. Please press star followed by the number.
Keith.
We ask that you limit yourself to one question.
Q4.
Okay.
Our first question is from Eric Gonzalez with Keybanc.
Hey, Thanks for taking the question you have a large hamburger competitor announcing its intention to enter the breakfast daypart with the Big AD campaign, and promising you drive a 10% sales mix almost immediately I. Just wondering if you can comment or discuss your thoughts on how that might impact the industry in 2020, and if you see the industry shifting again towards heavy discounting in the morning and I recognize.
You might not want to give too much away, but if you could comment to high speed is playing out among your competitors as they try to protect a share will be really helpful. Thanks.
Yes, Thanks, Eric stated by the way I apologize to everybody fund coughing and it'll be through this cooled off just a bit.
Yes, the breakfast competitive Paul I mean, we've seen.
That's right.
The activity during this year as wed actually so.
Having another veterans in next year will just.
Sure that market share remains as competitive as Ed.
I'm not sure if it's really going to be anyone's.
Best interests to having too much about deal discount.
It is an important for us to protect and grow.
I think for US we are encouraged this current quarter because.
Breakfast has been a little behind the rest of the days performance until this quarter and we've seen.
Breakfast sales growth pretty much in line with this will be sounds focusing across the rest of the day. So I think thats gives us.
Encouragement that the actions that many of our local copes taking to fund this at a local level to be getting traction so.
We operate a competitive market whether its breakfast.
All rest of day, so we used to fighting for all share.
Next year.
Our next question from Andrew Charles with Cowen.
Great. Thank you Kevin you talked about year to date us unit growth roughly 1% for Q implied obviously step up to make the full year guidance of one or 2% and I guess, just given the accelerating rate exit rate of DNA in 2019, and accretion Muckety Tech labs to evaluate feature technological opportunities how should we think about what this means for 2020 June .
Hey, what's treat broadly as you pegged at flashy and $8.
Yes, thanks Sandra.
So as I mentioned, our full year spend is expected to be up 1% to 2%, we're up basically 1% through year to date. So.
I mean do the math for fourth quarter.
But.
As I mentioned in as I mentioned in my prepared remarks.
We are more efficient on our data data DNA, we're choosing to invest in certain areas of technology and R&D that dynamic yield a presentation MCB Tech lab.
Back of the how some efficiencies.
Our increasing the Gnh certainly slightly this year and my expectation is that.
And I wouldn't be higher in 2020 that it is in 2019, mainly because as you know our acquisitions in both the presentation and dynamic yield happened midyear. This year. So we'll have kind of full year impact of those in 2020.
I'd say, we believe these investments are really important to help set us up well for the long for long term growth and so we believe that the right thing to do.
As you know over the last several years.
We lowered our DNA.
Both both in absolute dollars as well as significantly as a percent of sales as a perspective in 2014.
Our DNA was 2.8% of sales this year will be about 2.2% of sales and really what we're focused on is driving growth in operating margin in our belief is that we're going to have to spend some money in order to be able to drive operating margin that certainly has grown significantly again from UBS.
20, 930% back in 2014 to mid Fortys now so.
You should expect a gene a will be a little higher in 2020 that is in 19, but to us it's really about driving bottom line topline and bottomline growth.
Just to hook on that as well I think.
If we take dynamic yield as an example, clearly we've absorbed the incremental gionee that comes with the acquisition I think.
How we challenge ourselves areas to generate the return on that investment as foshee CAD and I think we've been encouraged by.
We have the dynamic yield technology node and by the whole thousand.
Dry foods in the U.S. and that pretty much rolled out across the tallest radiant system as well now and.
With the large international movies lining up so we think it's yeah, we challenge ourselves in terms of being fiscally responsible but.
Growth is kind of the primary driver of all of our ambition and I think these investments.
Sure.
Our next question is from Katy already with Goldman Sachs.
Great. Thank you.
And they started to add test out at that plant based Burger in Canada.
I'm wondering you know as you saw the quarter unfold do you guys think that not having any less burger with a headwind to your sales how are you thinking about that opportunity here. Thanks.
Yes.
Excuse me.
Well, we're interested in this clearly.
We've taken.
The plant based product to.
Kind of difficult 28, restaurants that we only leadership with a couple of days of the colder that goes so.
Very early days clearly there has been competitive activity should be aware.
Which I'm sure has helped create some more immediate interest of shorter term 70 response.
Shiva response, I guess, what we're interested in is really how best to position. This.
Get a sense of the exits area customer.
Really what does that appetite for they slow pun intended but it would drive incremental visits as a option just to switch out from time to time.
We want to get the taste right when we get the marketing right. When we get the operations right. So there's a number of important factors that.
We're learning quickly and we think ontarios, great spot because that would give us a good read.
Across North America, frankly, and but also into the.
To better focus in Europe as well so we think the read across will be beneficial to help us.
Speed up our intelligence on this so more to come clearly, but it's it's an area of interest for sure.
Our next question is from Sara Senatore with Bernstein.
Hi, Good question about technology spend and then just a quick clarification on what Kevin said.
First I guess.
You are spending a lot of money and technologies, you pointed out and certainly makes sense to leverage.
Now to make these investments, but our sense is that a lot of your competitors at least in the U.S. are doing are also doing well, perhaps without as much.
As an investment and to your point about traffic sounds little bit of a headwind for you. So I guess.
How do we have confidence that the amount that you're spending are there.
Magnitude is the right amount that it is and perhaps too much or but there is that there is an ROI Ahmed overtime and then just a clarification wise.
Kevin You mentioned you want to keep growing margin rate. So it sounded like you were working on margin. It sounded like you were talking about rate as opposed to margin dollars. So should we expect margin rate continue to expand from here. Thanks.
Okay.
Yes.
Let me, let me start let me start with the last one first take care of that one and then we'll come back to the text.
When I talk about operating margin I was talking about kind of the mid 40% range, but certainly you should expect an operating margin dollars will grow.
Just as a perspective, if I think about kind of our restaurant margin dollars through year to date through September we've grown margin dot restaurant margin dollars about $450 million in constant currency. So.
You should expect that our ambition is to continue to grow those margin dollars as we continue on and our expectations to continue growing those margin dollars.
Some offset to that will be gionee, obviously as I mentioned, we think Gionee will go up some in 2020, but certainly not anywhere close to offset growth in margin dollars, which would mean that our expectations that operating margin dollars would continue to grow.
Relating to tax spend.
I'll say, a couple things and if he wants to chime any certainly welcome.
I, it's an interesting question, but I don't know how to prove to you or convince you, let's say that we're spending exactly the right amount I'd say a couple things one I think we have certainly proven internally and hopefully externally and we have put discipline around our DNA.
Processes and that we are investing and things that are driving growth for the business as Steve mentioned the way we look at our spend is to determine what kind of return we expect to get on Netspend and that helps drive.
Termination of what we'll spend we were as you know certainly a couple of years ago, a little behind on our technology spending so that we did have to spend some in the last couple of years I'll take just to get infrastructure and and things set up the right way and then finally I'd say our entire.
Right.
Is to set ourselves up for sustainable long term growth and Thats why were investing in technology today, our belief is that those who aren't investing in technology at some point will be behind and we'll need to catch up and we'd rather be a little bit ahead of the curve and spend the right amount that we think will drive future growth.
Yes, that's pulled that I think.
I think part of the performers.
Shoving say through 2019 is the result at some of the technology spend that we've invested last two to three years.
If I was just backtrack say four or five years.
Hi Tech spend was back of house type spend just to keep the the restaurants operating that we've really go much will consumer facing so that's kind of a new arrows spend for us, but we're beginning to see the results.
We see the self order kiosks usage increase around the world, we see the average check growth that comes with it.
As we invest in the outdoor digital menu boards and then you can plug in.
Dynamic yield capability as we start to see again average check growth come from that or even just a simple as getting our infrastructure set up to enable us to be home delivery for example, and now integrating those apps into our global mobile digital takes investment.
That makes.
You see the driving is what's driving check but is also driving some efficiencies, but he's not worries about acquisitions either so obviously, we've made a couple of acquisitions this year, which clearly gives us an incremental gionee, which.
Just spoke about but this is also just ongoing investment through our innovation center around modernizing the equipment stack. If you like getting that kind of ecosystem functioning more effectively to help them managers and crew on the rational sped up so so I would say some of the proof points are out there already.
But you know we're excited about continues to drive efficiencies through technology them, so growth through technology, so more to come.
Our next question is from David Palmer with Evercore.
Thanks, Good morning question on earnings.
Obviously 2019 is not going to be in Europe earnings per share growth, but there's been significant drags in their lease accounting tax rate DNA step ups currency.
Maybe seven plus points of drag and all those things altogether, you mentioned DNA being somewhat higher for 2020.
Just thinking about.
You should view and 2020.
Earnings versus that high single digit algorithm.
There's some gives and takes aside from DNA that we should be thinking about and then on free cash flow is your capex outlook still the same with your capex dropping from about 2.3 billion in 19 to about half that by 2023. Thank you.
Thanks, David.
Okay. Let me try me going going through all of that so regarding 2020.
I guess, let me first say this we still have strong belief in our long term algorithm and target. So I'll start with that regarding 2020.
If I think about this year just to put this year and perspective that obviously leads into 2020 year to date again September right now, where we've put up a fixed 5.9% global comp 5% in the US 7% system wide sales growth in constant currencies.
And as I mentioned it to Sarah's question.
That has resulted in about $450 million of restaurant margin growth in constant currency year to date, we do have higher DNA. This year, because the dynamic yield a presentation.
We will have higher Gionee next year because of those as well as just amortization up some of the tech investments we've made.
As I think about the gives and takes the other couple things. It won't be this year will have nearly 200 million dollar lower $200 million lower of restaurant gains we will likely have some lower gains even next year certainly not to the extent of this year, we will have content.
Due to incremental EOG T.F. depreciation again not to the level of this year's increase which was roughly or a little bit over $100 million on franchise margins. We don't expect the incremental to be as much in 2020, but we will still have some incremental depreciation on those.
So thats some of the pieces.
What I would say is.
We feel good about well let me let me go to Capex first I guess Capex as you mentioned.
It will be roughly 2.3 billion this year.
Roughly similar amount next year and then it should fall, but below 2 billion after that.
And so that.
Regardless of that we believe that free cash flow will continue to grow year on year. That's how our model shows there right now and I think based on our algorithm and the way we've looked at I feel good about the business model I feel good about our ability to grow margins and drop that to the bottom line.
I certainly feel good about our strategy and I feel good about investments, we're making a technology in R&D that we think will help set us up well for long term growth.
Our next question from John Glass with Morgan Stanley .
Okay. Thanks, very much if I could just come back to maybe to the current quarter in the U.S. and the comps.
Which at 4.8 were strong, but they weren't as strong as the prior quarter at least in you've got building you TF momentum you talked about dynamic yield you talked about expanding your aggregator network. So those would point to better results and they were slightly softer at least sequentially. So it was so what were the offsets where are you seeing how did traffic fair relative to last quarter I think you were.
Sort of optimistic traffic, a little better last quarter, but maybe it wasn't sustainable so was it just the relapse after normalization little more color on what changed in the business third quarter in the U.S. versus the prior quarter.
Yes, I'll start and then I'll, let Steve chime into so he can favorites voice a little bit.
Traffic for third quarter, I'll say, there it wasn't a meaningful change in traffic trends in the third quarter for the us versus the first couple of quarters. So it's still negative as I mentioned that still our largest opportunity, but not a meaningful change in trend in the third quarter versus second quarter.
You will recall as we mentioned on our second quarter call. We had a couple.
Benefits in second quarter, two unrelated to the timing of Easter holiday one relating to some promotional activity we had related to fully a fish that helped second quarter.
I'll say, maybe a little bit above trend, if you will so third quarter.
Think about two years stacks third quarter is relatively similar to first quarter.
The other thing I'd say related to within the quarter, because I know there's been some chatter out there about how the quarter got weaker for us as the as the quarter went on.
All three months were relatively similar in terms of comp sales. So each month was between four and a half in five and a half.
So it's not like it's not like the world fell off in August September or anything like that and the other thing I would say is.
Theres certainly want some competitive pressure mid August probably through mid September that seemed to lessen as we ended the quarter. So I think all of those factors kind of impact and ER.
Our net result in the quarter as you mentioned EOG tap. It is a benefit third third quarter benefit was relatively similar to second quarter benefit and I would expect that to be similar in the fourth quarter before it starts leveling off for next year.
I think the only thing I would I'd add is.
If we kind of drill into our detailed the 0.10 point was there.
Some of the what we've done on simplifying our menu as many got a little bit of resistance here when we move away from say signature profit now the flipside A's.
Itself is running better restaurants and.
We sold on drive through service times in the U.S. improved by around 20 seconds across the quarter year on year. So I think we still making the right decisions, but long term, but is it going to be little bit of short term resistance. When you simplify the menu so there'll be some basis, but the fundamental shift in momentum I mean, it really was.
On the sales growth in prostate offset across the menu actually which I think is whats, giving us confidence and some of the acceleration initiatives that we've launched on delivering.
The the sorts of performance that we've had the unit cost.
Our next question is from John Ivan Co with JP Morgan.
Hi, Thank you actually have a follow up on that as well.
You, obviously mentioned improving drive through times, which is obviously important record guest satisfaction scores. I mean these are things that would normally have driven a positive traffic comp up for Mcdonald's maybe in the past.
Hi.
The comments that you made on.
Franchisee store level cash flow 11 months I think of up positive year on year cash flow how much of that was due to some of the changes that you made.
From a promotional perspective, and what's the postmortem on on giving more of the value that got back to some of the local partners are you in the place where do you think you're optimizing profitability in traffic or might there be kind of a shift in balance. If you will in 2020, where we might see more value inward to drive traffic maybe into some.
And at the.
At the second profitability.
Yeah John .
As you know it is that delicate balance I mean to get the consistent top line growth.
And having profitable growth our unreal prices clearly critical that we will that drives that motivation to george that confidence that drives the ability and willingness to keep reinvesting in the initiatives as we as we've identified them.
But yeah, we don't want to give up customers and.
It's fair to say that.
The guest count declines we do see this couple things up the shape of the one is the lower average check level. So clearly there is a value component and that is just a case of how do we address that is that Florida local level as a national level, though you asked teams working through that.
Another way Weve cotton.
This is across the U.S., we have 56 co ops and if we look at the the.
A full quarter most challenged performing co ops.
See clearly, 25% about cost, but actually more and more than half about guest count. The current explained and those will change so we're putting.
Most of pole.
Activity into those comps to see if we can just some put up that tail wish has multiple that left us connectivity as well and we're beginning to see traction there as well so there's a number of different ways. We're approaching this but.
Yeah, we were able to remain competitive owned by the explicitly.
Getting back to the drive through service times and we.
We will see incremental visits as we continue to improve.
Fundamentally.
We have a.
Quick service restaurant and adult trends have been heading the wrong way too many isn't.
How much traction with getting that given the focus we put on it this year and we don't customers will notice 20 seconds, particularly the time price customers those BCP cows, yet with us the breakfast, Russia lunch time, those savings that they don't actually notice it won't just one visit as we consistently running better right.
Restaurants, we believe that will.
But especially strong competitive position going forward.
Our next question is from David Tarantino with Baird.
Hi, good morning.
The question on the technology investments, the man and and specifically dynamic yield you know I guess, what I was wondering if you can comment on on what you're seeing so far as you roll it out and in terms of the customer response for the business impact and how you see.
That evolving.
I guess customers get more accustomed to using the technology.
Yes.
We've effectively rolled out the coal capability of dynamic unit is kind of what we would say suggestive sell.
The beauty of this is there is nothing the customer has to adjust to they almost no. The this experience is happening for them.
Dynamic.
Digital menu boards and effectively as they start to place that rolled.
Menu boards responds to that to that wondering process and that will more likely suggest items of customer will want.
Led lighting, so show items of customers less lumpy towards includes machine learning helps you.
Improve that given that.
The transaction levels, we have across all business, we can look pretty ready very quickly.
Well this further capabilities as well.
So for example, as an area now where they can have a trending now which will actually pick up items, either in a restaurant or local group of restaurants.
Proving to be particularly popular at that point in time, So that's kind of get another level of Scotia dynamic interaction going that.
Again at this point, we're only really talking about having its on the outdoor digital menu boards, but.
Suffice to say the team part of the investment, we're making that business with talents and.
I think expertise is to look how can we integrate that into so for the chaos and perhaps ultimately the global mobile app as well. So I think we're at early stages.
Already very encouraged about the results, we see the speed with which we can execute and roll. This out deployed this is.
To give us a little a confidence that we can get this across I guess, we've now got up.
Outdoor digital menu boards in.
Yeah.
Over 10000 restaurants in the U.S. and the majority of our full internationally, it's a pretty much fully deployed as well take a little bit of catching up to do but.
So this is encouraging operators to invest in the technology because that seeing the Rita.
As a site. This is just for the call basic capability Thats moving that to it.
Our next question is from Matt Difrisco with Guggenheim.
Thank you just had a couple of follow up questions. I guess can you just comment on how that 3% price should look going forward. If that's something that is going to be held in and then I think in previous quarters. You described how much that was contributing to the check in Twoq is about a third of the Chuck or so.
If you could just sort of the draw that line for US and then a clarification I think you mentioned on my prepared remarks Hamburger share was gained or you gained hamburger share, but your traffic was negative does that imply then there was some near term increased competitive pressure around chicken and your you lost a little bit of business and are on the chicken finding.
The near term and loss.
Okay I'll I'll start.
Price.
Matt.
Let me start with how we think about it.
I think we've talked before but we look at various things certainly food away from home is a one guidepost, but also we look at.
And the pricing we talk about is pricing system wide, which as you know 95% of those restaurants are run by franchisees determining that determining that pricing, but certainly I think as they consider their pricing. They're also looking at cost pressures, whether that's labouring commodities et cetera.
And it's really about trying to strategically balance.
Offsetting some of those cost pressures with kind of what our customers willing to pay.
So.
There isn't a pure formula that 3%.
I think and we've had nearly 3% it actually was a little bit below 3%, but close to 3% and the impacted our comp is actually a little bit less than that because.
While the pure price what I quoted on pure price increase, but you hit a little bit resistance and so the actual contribution that comp ends up being a little bit below that but it's still is roughly that third two thirds about a third from price roughly two thirds from product mix.
For various reasons, including dynamic yield kiosk usage delivery all the things that we've been talking about.
So that's the that's the story on pricing related to the Burger share.
So as we said that in the U.S., we did gain hamburger share in the in the quarter I think it's fair to assume with everything going on in the quarter with chicken that.
We did go go a little bit the opposite way on chicken so.
I think thats a fair conclusion.
Although not yet.
Say that.
If we look at the top 11 markets, we actually gained.
Okay and QSR share in owns had the largest markets beyond the U.S. as well, including so.
Extremely strong gains in markets like the UK, Russia, Australia.
Relative to our market share for example, so I think we've we've proven to be competitive and driving the broader market dynamic around the world actually which is helping underpinned the sales momentum in business, but.
Our next question is from Chris So call with Stifel.
Yes, Thanks, Steve Theres been a lot of discussion about how dynamic yield tech support suggestive selling but I would think the new digital menu boards would also allow the company to do a better job of price optimization, meaning no stores could be able to adjust prices more frequently can you describe how the new menu board.
Your digital boards will change kind of the company's approach to pricing.
Yes, we typically choice to avoid that.
I Didnt.
Tony just because I think as part of the brand promise we have the customers is just that reliability in and knowing what the typical me a little combination costs. So.
It has been discussed in terms of and I know others out there and thats kind of if you'd like to the ultimate dynamic pricing capability, but thats not really kind of underpinning the based the way we want to do business and.
We stay away from that we try to have.
A careful full approach without kind of pricing consultants. If you like I think just make periodic adjustments and just get customers that that kind of assurances reliability.
Our next question from Brian Bittner with Oppenheimer.
Thanks. Good morning, first just a clarification on David Palmer's question on 2020, Kevin should we be interpreting your answer in a way that we should be modeling 2020 is it below algorithm. Your for earnings are no and just on the store level margins in the U.S.
Meaningful trend change and the margins, they're up 280 Bips. This quarter can you just dive a little deeper on what specifically changed in the margin dynamics. This quarter for the U.S. first last several quarters in should we expect it to continue thanks.
Yes, let me talk about the U.S. margins first.
In my prepared remarks, I mentioned, what I called operational performance improvement and really what that means.
As unexciting as this may be is it's kind of the basics of running better restaurants, we keep talking about just running better restaurants, and getting more efficient in running restaurants, but things like reducing complexity in the restaurants, simplifying procedures focusing on efficiencies and then derived through being more diligent.
And with more diligent with our labor scheduling and staffing basic food control. So it's all the stuff that we talk about when it's kind of just managing a restaurant really well and I think putting more of a focus on that has helped our company operated folks.
Focusing on that can be fair I think the other piece I would just throw in there a little bit is theres less disruption going on this year than there was last year from a couple standpoint, a couple pieces one.
We are almost completed with Ito TF in the company operated restaurants by the end of this year, we'll have all of the Ito TF projects on our company operated restaurants completed that's one thing that Doug as a distraction and or disruption to the restaurants. The other thing is you know is we've been refranchising over the last several.
Years, and that becomes a little bit of a disruption certainly to the company operated business. So the fact that thats more stable and we've kind of settled in where we are now I think helps to the stability of running the restaurants on the company operated side. So all of those things I think go into play into why you said, we saw some of that.
Prudent this year I think as we look forward.
In the near term in the U.S., we don't do have some pressures like 10.
Preciation, some labor costs, but I think you know kind of similar range that we've been in the 15 or 16% range in the U.S. is probably a.
Reasonable.
Way to think about it going forward.
Regarding kind of 2020.
In the fourth quarter, we'll give more details and going through our actual outlook then we'll provide more detailed guidance.
I'll leave what I've said for now as general guidance and certainly we'll get into more detailed as we get to year end, where we're in the midst of going through our detailed planning right as we speak and so I don't want to get too far ahead before we actually complete that process.
That completes our call. This morning, thanks, everybody for joining us have a good day.
This does conclude Mcdonald's corporations Investor Conference call.
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