Q4 2019 Earnings Call
Hello, and welcome to Mcdonalds fourth quarter 2019, Investor Conference call.
At the 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 only may ask a question my pressing star one on their touchtone phone.
I would now like to turn the conference over to Mr., Mike see POC Investor Relations Officer for Mcdonald's Corporation.
Mr. C plus you may begin.
Good morning, everyone and thank you for joining us a little earlier this quarter with me on the call. This morning, our President and Chief Executive Officer, Chris Kempczinski, and Chief Financial Officer, Kevin I was and I.
I want to remind everyone that the forward looking statements in our earnings release, an 8-K 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 with their corresponding GAAP measures.
Following prepared remarks. This morning, we will open to queue for your questions I ask 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 Chris.
Thanks, Mike and good morning, Thanks, everybody for joining us it's great to be with you on my first earnings call as CEO of Mcdonald's before I go into our highlights for the quarter and full year want to talk briefly about some of my observations for my first few months in this role.
For the past three months I've been meeting with employees conducting town halls, reviewing plans with senior functionally market leaders sharing ideas with franchisees and suppliers and visiting restaurants in customers.
This invaluable time spent with our people partners and customers reinforced to me the vitality and global alignment, we're seeing behind our velocity growth plan.
Our people are energized, they're proud of our culture committed to the promise of our brand and share my confidence in the business and our direction.
This time is also reinforced things that make me deeply proud of our system.
We create opportunity for our colleagues across the system.
And every Mcdonald's gathering there's a story to tell.
The crude person who's also a grandparent and excited to begin a new chapter in life working for Mcdonald's.
For the company employee who started in the system with a first job in their teens went to college with the system support and is now in a leadership role.
For those who work hard and live our values Mcdonald's can change lives.
We provided community space for our customers.
When you enter Mcdonald weather and Brisbin Berliner Boston.
We're entering more than just a restaurant.
You're walking into a vibrant community a place where people congregate share stories enjoy simple, but powerful and delicious moments of happiness with family friends and loved ones.
That commitment to community is the spirit that inspire the creation of Ronald Mcdonald House charities and his help friends and neighbors through Hurricanes tornadoes and countless other times of stress.
Being integrated into communities worldwide, we know the very real challenges, our customer space and we show up with solutions.
As we have grown we've recognized our responsibility is one of the world's leading companies to use our scale to gain traction on some of the globes most pressing challenges.
The strength of our business over the past 65 years that enables Mcdonald's to play this role.
And the humbling responsibility to lead an organization with the ability to make an impact on the world.
Kevin will drill down on our quarterly results for that I'd like to share with you some headlines for the year.
In 2019, our system marked a historic milestone.
$100 billion in system wide sales.
For the year, we grew global comp sales, 5.9% the highest increase we've seen in over a decade.
2019 was our third consecutive year of global comp guest count growth.
To put that in perspective, Mcdonald's in our franchise partners now serve nearly 70 million people in over 100 countries every 24 hours.
And owner operator cash flow is at or near all time highs in most of our largest Marcus and in the U.S.. It's at an all time high.
Turning to segment highlights.
Our international operator market segment, or Iowa generated comp sales growth of 6.1% for the year.
This was underscored by every market in the segment delivering both comp sales and calm guest count growth.
At the same time or international develop licensees segment were ideal generated comp sales of 7.2%.
Importantly, our three largest ideal market, China, Japan in Brazil, all posted positive comps sales.
Leading a list that includes nearly all of our idea all markets.
We also have strong momentum in the U.S. in fact, we're now seeing the results of our most ambitious turnaround of the U.S. history for the full year comp sales growth grew 5.0%, our best comp since 2006 or 13 years ago.
Across the country, we're seeing clear evidence of the power a bigger Boulder vision 2020.
We are U.S. adaptation of the velocity growth plan developed in combination with our franchisees.
The initiatives, we and our franchise partners deployed in 2017 in 2018, including a new value platform fresh beef delivery IATA, Jeff modernization and more were met with strong approval by our customers.
This led to continued strong top line growth over the past three years.
As one of the architects of our velocity growth plan gives me a great sense of pride to watch 2 million restaurant crew around the world execute our strategies with such care and conviction.
I continue to have great confidence in our ability to grow in shape, our industry and I'm equally confident that we have the right leadership in place to meet our customers evolving needs with increasing ambition and speed.
Joe Erlinger, an 18 year veteran of our company is now head of our U.S. business.
Where he is responsible for the operations of nearly 14000 restaurants across the country.
Joe returns to the U.S. after several years of increasing responsibility around the world.
Most recently he served as president of our international operator markets, where he had oversight for Mcdonald's wholly own markets outside the us.
With Joe's transitioning inboard has expanded his role to oversee both our Iowa and I'd Els segment.
Then began his Mcdonald's career 25 years ago in our Finance Department in Canada and has spent 23 of these 25 years in markets outside of North America.
It is most recent role as president of our RTL segment in worked with our developmental licensee partners across more than 80 markets.
Under his leadership, we will drive greater collaboration across all markets and accelerate our pace of best practice and innovation sharing.
Building on our rich heritage of learning from each other.
An important role for mcdonalds as we maximize the full potential of our three legged stool of company franchisee and supplier resources.
Both the in a Joe have deep track records of delivering profitable growth, while building high performing teams and strengthen in collaboration with our franchisee community.
Importantly, Ian Joe and I have also worked closely together a segment presence over the past few years embodying the trust respected unity of mission that are the hallmarks of our partnership culture.
Thrilled to be working with both of them in their new roles.
Now I'll turn it to Kevin to talk about our fourth quarter results Kevin.
Chris talked about are impressive full year results. So let me spend a few minutes talking about the quarter.
Our strong topline momentum continued in the fourth quarter with global comp sales increasing 5.9%.
And as we've seen consistently throughout the year each of the operating segments contributed meaningfully to our growth.
This marks over four years of consecutive quarterly global comp sales growth.
Our caps are comp sales performance is a significant achievement given a soft global IPO market and on top of strong prior year results.
Our international operated segment, which represents over 50% of total revenues and operating income generated comp sales of 6.2% for the quarter with strong performance across the segment.
France in the UK drove the segment's growth along with positive comp sales in every market and positive guest counts in nearly all markets.
France delivered its 11th consecutive quarter of comp sales growth with continued all time high market share.
The quarter benefited from delivery expansion digital engagement and continued deployment devivo TF.
The market has also been successful with the balance of premium in core Burger offerings.
The UK reported a remarkable 55th consecutive quarter of comp sales growth and continued to gain market share across nearly all day parts.
The quarter benefited from extended breakfast hours compelling digital offers successful national LTL shows and delivery, which has grown to about 10% of sales in the restaurants that offer it.
Turning to the U.S. comp sales increased 5.1% for the quarter with balanced growth across all dayparts.
While traffic was negative the U.S. continues to drive significant average check growth with contributions from both product mix and strategic pricing.
Similar to prior quarters in 2019 experience of the future contributed to positive comp sales in the fourth quarter.
Another 500 Eotech off projects were completed during the quarter for a total of about 2000 projects for the full year.
The U.S. now has nearly 10000 restaurants that have been converted to eotech stuff or about 70% of the estate.
In addition, core favorites, including our fresh beef quarter pounders and world famous French fries continue to resonate with customers in fueled growth for the corridor.
Delivery was also a contributor for the quarter as the addition of new delivery partners like door dashing Grubhub drove incremental orders.
And the deployment of dynamic yields suggestive cell technology in over 11000 drive throughs also contributed to the growth in average check.
That said returning to guest count growth in the U.S. remains our top priority.
Sluggish industry traffic growth in unit expansion continue to fuel and aggressive battle for market share.
In particular, the U.S. is centered on stemming traffic losses at the breakfast day part by focusing on running better operations, introducing new menu items and offering delicious food at a compelling price point.
Finally in the international development, a licensed markets comp sales were up 6.6% for the quarter with growth across each geographic region.
The largest contributors to segment performance, where Brazil, China and Japan.
Turning to the bottom line adjusted earnings per share was $1.97 for the quarter, a 1% increase in constant currencies when excluding impairment charges in the prior year and tax law change benefits in both the current and prior year.
Results reflect strong global comp sales and operating growth, mostly offset by higher tax rate versus the prior year.
Consolidated franchise margin dollars increased 7% in constant currencies, reflecting strong sales performance across all segments as well as expansion and the impact of Refranchising.
Franchise margin percent declined 60 basis points as franchise revenue growth was more than offset by higher depreciation related to EOG TF modernization in the U.S. and the impact of the new lease standard.
Consolidated company operated margins improved 40 basis points to 17.9% for the quarter, primarily due to strong comp sales growth.
I O M segment company operating margins increased 30 basis points to a healthy 20.1% in U.S. company operated margins increased 150 basis points to 16.4% as solid sales performance more than offset continued commodity and wage pressures and eotech.
Related depreciation.
Overall, our restaurant margins increased nearly $180 million in constant currencies for the quarter and over $600 million for the full year.
And finally, excluding current and prior year special items operating margin increased 30 basis points to 43.4% for the full year.
We also achieved our three year target of returning $25 billion to shareholders. This is a significant accomplishment given our substantial investments and experience of the future and technology to drive sustainable profitable growth.
As a perspective over the last three years, we invested about $7 billion in the business to drive growth.
We increased our dividends per share by over 30% and paid out $10 billion in dividends and we reduced our shares outstanding about 10% by purchasing $15 billion of Treasury stock.
This also speaks to the progress we've made in enhancing our free cash flow profile.
As a result of Refranchising efforts and Rightsizing, our cost structure over the past several years, we've evolved to a more stable and predictable business model.
In 2019, our free cash flow was $5.7 billion up over 35% from the prior year.
And free cash flow conversion, which measures our ability to convert bottom line earnings to free cash flow was 95% a significant uptick from the prior year.
Going forward, our capital allocation priorities remain unchanged first to reinvest in existing restaurants and opportunities to grow the business.
Second to continue growing our dividend and third to buy back shares.
We expect our free cash flow to continue to grow and we expect to continue to return all free cash flow to shareholders through a combination of dividends and share repurchases.
Now I'll turn it back to Chris to talk more about our velocity growth plan and where we're headed in 2020.
Thanks, Kevin.
No where does the power of our velocity growth plan and franchise model come more to life than in our restaurants.
In my recent travels to our European markets I saw this first hand everywhere I when.
I was struck in particular during a visit to a restaurant in France, a society that famously values, good food and beverages.
And inviting atmosphere in the spirit of community.
There are I saw an engaged owner operator, who are newer customers by name and had made or modernize restaurant a vibrant gathering place for the community.
Kids were everywhere.
It's like their counterparts around the world Young adults were busy multitasking between bites of burgers and fries.
Parents appear to be appreciating a moment of rust another adults receded in singles in pairs, something I think a full mill others, just having coffee.
With the scene that reinforce the fundamentals of the velocity growth plan.
By simultaneously pulling the levers of great tasting food with good value convenience and a pleasing customer experience this owner, operator, and many others across brands and other international markets are growing visits.
A similar dynamic is playing out in the UK for our system is doing a great job meeting customers expectations for convenience and speed will providing differentiated experiences for gas dining in visiting the drive through ordering through mix delivery.
This dynamic is playing out in Italy, where customer satisfaction scores are up a drive through end dine in and across all three peak day parts of breakfast lunch and dinner.
The excitement and energy behind our velocity growth plan is widespread.
The result of this commitment that our business is growing and our strategy continues to deliver.
The same time, there's a realization that we can and will do more to deliver better taste greater value and enhance convenience for our customers.
The guiding philosophy behind our three accelerators spear into the future digital and delivery.
With experience of the future our strategy is focused on enhancing the customer experience by improving convenience hospitality and personalization.
As Kevin said in the U.S., we completed about 2000 projects in 2019 and are on track for just about all restaurants it'd be modernized by the end of 2020.
Customers are recognizing the changes we have made for their benefit.
Customer satisfaction scores in the U.S., our at an all time high.
Inner Iowa markets, where the vast majority of our restaurants are now modernized we have a strong foundation for long term success by creating greater convenience comfort and hospitality for our guests.
Meanwhile, our digital journey another.
Critical accelerator is focused on giving customers simpler smoother and more personal engagement with mcdonalds by leveraging the most relevant technology.
To that end, we significantly strengthened our digital capabilities in 2019.
In markets around the World for example, a growing community of registered users is redeeming digital only offers giving our teams more opportunity to understand customer need and create engaging digital customer experiences.
Throughout the year, we made targeted investments to accelerate our capabilities.
The suggestive selling capability of dynamic yield is now deployed nearly all outdoor digital menu boards across to you us in Australia.
In both markets were using that technology to make smarter recommendations to customers of menu items, they are likely to one.
There's no question that digital is transforming global retail.
Across the system. There is great excitement about the role that will play in transforming Mcdonald's by strengthening and deepening relationships with our customers.
So we know there's great potential with digital but there's also a lot of hard work to do to realize our ambitions.
I recently announced the creation of a new digital customer engagement team.
To accelerate customer focused digital initiatives, including ordering personalization payments loyalty and delivery platforms.
Lucy Brady's, leading this team.
Lucy has been a driving force behind the evolution of the velocity growth plan and rapid expansion of our mic delivery platform and our most recent role leading corporate strategy and business development.
Lucy and her team will be responsible for developing new industry, leading digital experiences for our customers and will partner with our global technology team to build new product Roadmaps and technology solutions to fuel growth.
With our third accelerator, we're bringing more customers the Mcdonald's they love with the convenience of delivery today about two thirds of our restaurants worldwide nearly 25000 offer mic delivery and just three years mic deliveries gone from generating 1 billion in sales for Mcdonald's company and franchise restaurant to over four.
<unk> billion in sales this past year.
We now have multiple Threepl partners in most major markets, including new us where the rapid scaling of jordache, showing consistent growth and the UK, where we recently announced an agreement to partner with Justine.
We continue to see great runway ahead of us to drive awareness and trial and we're doubling down on our efforts to encourage frequency and retention.
As we inject speed agility and flexibility into our system through the accelerators of experience of the future digital and delivery.
We continue to focus on the fundamentals of running great restaurants.
And customers are noticing.
Across our largest markets we've reduced the time it takes a customer received their order by an average of 20 seconds.
Well this change most markets, our overall customer satisfaction improve in 2019.
Our velocity growth plan provides a solid and sustainable foundation to grow our business in 2020 and beyond.
Yet we know that we must stay in tune with evolving customer needs and adapt to changing market conditions.
The uncertainties before us or no surprise to anyone on this call.
Whether due to geopolitical challenges Lou I O growth intensifying competition growing labor costs were continuous technological disruption.
The topics, we've shared before continue to impact the industry and we'll need to be overcome.
Not means continuing the wind around a plan that always puts our customers first with great tasting food convenience and value.
Collaborating with our franchisee community for successful local execution.
That means building flexibility into our system for initiatives that accelerate and sustained growth and provide new opportunities for Mcdonald's.
To build on that let me turn it back over to Kevin.
We head into 2020 from a position of strength.
The velocity growth plan has resulted in strong operating performance over the past several years reinforcing confidence in our ability to deliver long term sustainable results.
I want to take a minute to walk through some of our financial expectations for 2020.
We anticipate that will host an investor day this year to provide an update on the business and longer term expectations.
With our efficient business model in 2020, we expect to continue achieving an operating margin in the mid Fortys range, which includes the following.
Higher depreciation expense of about $80 million versus 2019 related to Iot TF in the U.S. with the vast majority in franchise margins.
With most of our major Refranchising efforts complete we expect gains on restaurant sales in 2020 to be roughly half of the amount in 2019 with most of the gains in the second half of the year.
And as we have become more efficient with gionee required to run the business over the last few years, we've invested in areas that are already contributing to business performance and that we believe we'll continue to accelerate growth, including technology and research and development.
As a result, we expect full year 2020, DNA to increase 5% to 7% in constant currencies due to these investments.
This includes full year operating costs associated with the 2019 acquisitions of dynamic yield and the print today.
R&D spend and costs related to our biennial worldwide convention.
We expect Gionee percentage increases will be significantly higher in the first half of the year than the second half of the year.
We also expect our annual tax rate will be 23% to 25%.
Finally based on current exchange rates, we anticipate currency translation will negatively impact EPS by one three cents in the first quarter in a similar amount for the full year.
As usual this is directional guidance only as rates will change as we move through the year.
Moving on the capital we ended 2019 with capital expenditures of 2.4 billion inline with our expectations.
As we've previously indicated in 2020, we expect to spend a similar amount.
About half of the total capital will be dedicated to the U.S., including the completion of roughly 1800 EOG TF projects.
Restaurant development also continues to be an important driver of our growth equation.
We plan to open about 1400, new restaurants, this year substantially all in markets outside the U.S.
I will spend approximately $800 million of our capital to open about 400 restaurants in our wholly owned markets.
And our developmental licensees in affiliates will spend their capital for the remaining openings of which over 450, our planned in China.
So while we expect total capital this year will be similar to 2019, we've shifted about $200 million from reinvestment to new restaurants, which are higher returning investments.
As we enter 2020, I'm confident that we're well positioned to deliver sustained long term profitable growth for the system and our shareholders now I'll turn it back to Chris to close.
We've been on an ambitious journey the last few years from turnaround to transformation.
Throughout all we've made a path forward, even as the landscape changes.
With these changes customer expectations evolve, placing new demands on the world's leading brands.
We're ready for that challenge embracing it across our business with the enduring strength and values that make Mcdonald's a force for positive social and economic development in every community we serve.
As we enter 2020, we do so from a position of strength.
And with an unwavering commitment to our velocity growth plan, the accelerators driving it and the incredible people in partners, who keep us nimble agile and opened a new innovations and new possibilities.
We have some exciting milestones ahead of us in 2020, including worldwide Convention in April .
Final note I'd like to offer a heartfelt. Thank you to everyone across the Mcdonalds system, who helped us achieve this milestone of $100 billion in system wide sales this past year.
It's the sum of many things done right everyday by every employee supplier franchisee and crew member around the world.
I'm proud of our collective success and grateful for their commitment as we begin a new year.
With that let's begin today.
Thank you.
As a reminder.
In Investor and would like to ask your question. Please press star followed by the number one.
Okay.
We ask that you limit yourself to one question.
Any additional questions.
Our first question is from Andrew Charles with Cowen.
Great. Thanks, Chris I know you in Joe are prioritizing traffic growth in 2020, but can you help outline your confidence. This can be achieved you on one hand, theres better alignment with operators at the start of this year versus a year ago, which data by the simplification efforts that you guys put in place.
Other Hamed breakfast competition is set to intensify shortly here all the same store sales benefits from experienced the future likely to be lower in 2020 versus what you saw in 2019.
Yes. Good morning, Thank you Andrew.
So as Kevin talked about and as you alluded to.
Getting us to positive guest count grew for us the number one.
The things that certainly give me confidence were make me feel better about our ability to do that is as you mentioned, we have really strong alignment with franchisees at this point that this needs to be a priority one of the things that.
I think sometimes not fully appreciated about the U.S. owner operator base is it's largely a franchise shrunk largely a family business.
Over half of our franchisees are second third generation franchisees and so.
For them they completely recognized that no family business survivor thrives by passing on fewer customers from one generation to the next so that's an important part of that and then the second is we have a really good understanding of what it's going to take for us.
To drive guest counts to positive view us it starts with breakfast.
Revpas is the only daypart in the industry that seeing traffic growth, we have to win in breakfast Theres, obviously, a lot of focus and attention that we're going to be putting on that in 2020 and then the second is a recognition that on rest of day deal a record day value.
That we need to be competitive on that so I think.
Great alignment with the franchisees between.
Really.
I think a pretty keen understanding of where we need to focus I feel good about that.
We did see in Q4.
Modest sequential improvement on it but for us.
They're certainly not it's too early to call a trend on this.
We've got to see this happened over four or five quarters.
And so it's going to be something we're going to be paying attention to what I'm sure you guys will be asking us about it as well so.
More to come on that.
Our next question from Eric in dollars with Keybanc.
Hey, Thanks, good morning, it seems like the industry has become a bit more promotional from started the year would you agree with that or is that typical for this time of year and then.
You have you changed at all in response to the current competitive environment in recent weeks as your competitor gets closer to rolling out breakfast. Thanks.
Yes, Thanks, Eric.
January is always a highly competitive.
Time of the years, so I think the activity that we're seeing right now I wouldn't characterize it as being unusually.
Pronounced I think again this is always.
Something that happened at the beginning of the year, but I think what you're talking about in what you mentioned is really a recognition that growth in this industry. At this point is going to have to come through stealing share.
Traffic in the Industrys pretty muted theres very little traffic growth. In fact, you are not growing units.
You've got a headwind there so I think thats, one recognition and certainly you're seeing I think.
Just a lot of people really wanting to make sure that they can get.
The growth that they need to be able to offset some of the cost headwind. So I think between those two things. It has been a competitive environment, it's going to continue to be a competitive environment, but I wouldnt say I'm seeing an uptick right now.
Our next question is from David Tarantino with Baird.
Hi, good morning.
My questions on some of the investments.
On the technology side.
Some pretty pretty big bets.
Across the last.
So.
It looks like you're sort of staffing up.
Fourth that technology.
So just wondering one are there are there more big investment on the horizon.
As needed and then to have you considered.
Keeping some of those investments are sharing some of the cost of your franchise.
Technology or something similar that that others have put in place.
Yeah.
Well as you noted we did due to acquisitions last year, we bought dynamic yield which was going to help us with our suggestive selling capability.
And we bought a friend today, which is for voice recognition through the drive through that capability.
I would say.
Our typical approach is partner not by and so both of those for somewhat different reasons, where I think unique situations I don't.
Foresee that.
Buying tech companies is going to be our approach going forward, but we do want to be.
Nimble enough, where there are situations that come up that we will make an acquisition I think in the case of dynamic yield what we saw there was really an opportunity for us to accelerate our rollout of suggest to sell across most of our major markets. There with what we believed to be kind of the leading.
Technology in the industry and so with the idea of really wanted to drive an acceleration and do it with the leading partner we made that acquisition of dynamic yield fast forward you know even less than a year later, we've got dynamic yield at all.
1000, plus U.S. restaurant with the drive through with fully rolled out in Australia, and we're seeing a comp lift.
Very consistent with what we had modeled when when the acquisition we've done.
Similarly, with the print today, we've got a friend today.
Test in a handful of U.S. restaurants.
And we remain optimistic about that so I think what you're seeing really is for us.
Just an emphasis on on.
We believe digital has the opportunity to really be a huge growth driver for us.
When we can partner with people and do it kind of under our traditional model that's always our preference, but if there are times that we need to do an acquisition, we're certainly not going to take that off the table I think your question about.
It was your model in terms of how that gets shared with franchisees I think one.
If it is when you get the lift that we are getting with something like dynamic yield. We obviously participate through rent service on that so I'd say the first part is all of these are meant to drive topline growth.
And when we see that we certainly participate from run service.
On the ongoing costs.
The ongoing cost do get passed through to franchisees as part of our normal tech fee.
We kind of separate tech costs between development costs.
And sort of the ongoing operating costs.
We will typically pay for the development costs on our own and then the ongoing costs or would get shared.
Through a tech fee arrangement with our franchisees. So that's been kind of our model.
For a long period of time, I don't see that model changing.
Our next question is from John Glass with Morgan Stanley .
Thanks, very much just following up on that in the U.S., Chris how comfortable are you with the check growth that you've experienced in 2019, it's more than 100% of the comp is it possible. We would see the same kind of check growth in 2020 or you less comfortable given that it may hurt the the value proposition for the brand and if you are will.
And to share what is that comp lift that you modeled for dynamic yields that you're experiencing currently.
Thanks, John .
One of the things that I do.
Feel good about with you US is when you look at the shut growth that we've gotten.
It's really come through a number of different things there has not been sort of.
One trick pony on that we're seeing the majority of that growth is coming through mix as opposed to just kind of straight menu price, but then as you decompose mix.
Got a number of factors that are at work there you've got delivery, which is delivering two times the average check of a regular order.
Dynamic yield, which is typically leading to add ons to an order.
We have our self order kiosks, where we know that people tend to have larger orders when they do self order kiosks, you've seen some of our promotional items like donuts sticks.
The 123 of the value, which are really driving add on activity. So.
I think you for me I do.
Feel better about how we went after check growth in 2019, because it was heavily mixed driven from that but there is a pricing element to this the inflation that we're seeing out there, particularly on the labor side.
That does it get price through and so I think as we head into 2020.
The conversation, we've been having with franchisees, which gets back to the opening question is.
We've just got to make sure that we have balance we need to have a balance between check growth and we need to get to transaction growth and that's what everybody knew us work.
And then regarding quantifying the dynamic yield lift we generally don't quantify specific components of our comp.
What I would say is it will be potentially different in different countries. So right now or certainly getting a bigger lift from dynamic yield in the us than in Australia in Australia. They had.
Hey, rudimentary suggestive sell already in the drive through so as we put in dynamic yield there wasn't as larger lift is where certainly experiencing in the U.S., but the but the big positive about dynamic yield is our plans would need to take that similar.
Turning engine tight logic and be able to use that.
Further in kiosk and global mobile App ultimately so that.
We need to continue getting further sales lifts and other.
Digital mechanisms also thanks.
Our next question is from Brian Bittner with Oppenheimer.
Thanks, Good morning.
Can you just talk a little bit more about the Capex strategy moving forward when we met in December in New York.
Sounds like there was somewhat of a pivot happening and how youre thinking about the capex strategy, even past 2020.
You are really starting to see areas you could invest in moving forward that would maybe keep capex elevated.
Can you just talk about this and ultimately what does your steady state Capex look like and what year do you expect that to occur.
Yes, Thanks, Brian .
So as we talked about.
We always said 19 and 20 would be similar so we had 2.4 billion in 2019 will have a relatively similar amount in 2020 and as we've indicated we expect capex to come down some it in 2021, the one area that we're currently reviewing and evaluating and our.
International business and potential unit expansion there as you know our international business is very strong we've seen very high returns on investments in new restaurants in those markets and we believe there's further potential for unit growth and many of those markets. So we're currently evaluating the opportunity.
And invested some of those new units outside the U.S., you'll see that we have gone up a little bit.
Our openings in 2020.
Growing about 1400, new units that should.
I mean those than the ones. We opened in 2019 contributing roughly a point to have to our sales growth.
So thats the one area, where currently evaluate evaluating I think as far as longer term.
We want to get through this evaluation and then we'll talk further about bad when we have our Investor day later this year.
Our next question is from Chris Ocull with Stifel.
Yes. Good morning. My question is about value it sounds like everyday value will be necessary to improve the systems relative market share. This year and I believe franchisees are only required debt feature a few items on the de 123 value menu. So how does the company convince franchisees to be more aggressive with everyday value.
Given the cost pressures are facing.
Yeah, I think it's not just everyday.
You bet.
That are as part of the equation. There is also what we would call deal value, which is sort of the post on and off type of value. So I think from our vantage point.
It's probably going to be more of the ladder in terms of how do we smartly and ended disciplined way a pulse deal value throughout the year on this.
And where are there opportunities for us to do it.
That in a way can drive both traffic and can protect margins. So we've been have a lot of conversations on that as you would imagine not im not going to.
Telegraph on this call in terms of how we actually plan to go about it but I think back to a couple of the earlier points that.
We've talked about here there is strong alignment with the owner operators in the U.S. that we need to be in a situation, where we're getting both transaction growth as well as job growth and so.
No it's up to us now to deliver on it but I do think.
Theres good alignment to it and it's probably going to come more through deal than it is certainly everyday value I think we've got a good everyday value platform embedded already.
Our next question is from Matt Difrisco with Guggenheim.
Thank you.
Theres been some reports about you guys closing some stores in China I Wonder I know you guys don't give specific guidance for the year, but can you sort of at least.
Help us understand how much exposure the MCB shareholders have to that market.
Whether that's in a worldwide revenue or your operating income.
Sure, Yes, it will obviously the situation in China is fluid in and it's concerning.
Right now as you would expect our priority is really on our employees on our customers.
Doing everything we can to make sure that they are safe and taking care of and so in that vein, we've been working a lot with the local authorities, particularly in that vein province.
We have closed all restaurants in the movie Province.
Which is several hundred restaurants that have been closed.
But importantly, we do still have about 3000 restaurants in the country that are still open. So several hundred close but 3000 that are still open.
We've also with the China team, we've put in place.
An epidemic prevention and control task force, which is something we're doing again in combination with the local authorities there.
And it's everything from using our kitchens to help provide meals too.
Care workers at hospitals, we are doing things in terms of giving medical screening for customers, who come to some of our restaurants. So.
Really at all hands on Dec effort from that vantage point.
China for US is a critical strategic market, but I think it's probably more because of the potential that we see in that market as opposed to with materiality to the did business today just to put in perspective.
When you think about China does represent about 9% of our global restaurant count, but it's about 4% to 5% of system wide sales.
And it's only about 3% of op income and so well again, China is a critical market for us and were.
Very concerned about the situation over there it's actual impact on our business is going to be fairly small assuming again that it stays contained to to China.
Our next question is from Sarah Sen with Bernstein.
Hi.
A question and also a follow up please so.
On the outlook for DNA.
I think at the Investor that last month.
Thank you reiterated just now that you know at the start of the case specific reason to make acquisitions I mean, how should we think about tech.
Then going for it I think the guidance Regina this year with it little bit higher than.
I would've expected I know some of that is the owner operator convention, maybe you could quantify that but just from that perspective.
He knows should we be thing Matt technology is a line item that grows.
Faster.
Going forward sort of in that mid single digit range.
Similar to labor then to other.
Investments I just your NIM.
Dissipate that and then the clarifying question wise.
You talked about franchisees, having record owner operator cash for this year, new as does that give you any more flexibility in terms of the value.
Thank you can address or are.
Franchisees more looking to kind of protect that after having added a couple of years of declining cashless. Thank you.
All right I'll talk about the DNA first then I'll, let Chris come back and talk about value, adding the franchisees.
Related to DNA, a couple a couple points, we've talked about how we've gotten more efficient with our day to day today, and we're investing in technology and R&D, so things like dynamic yield and print day.
And that things were investing in our either topline drivers or cost savings potential. So that's how we think about kind of some of these specific investments.
We have.
Decreased our overall DNA as a percentage of sales from around 2.8% in 2016% to 2.2% in 2019.
And roughly today roughly more than 10% of that Gnh spend is actually depreciation and amortization related to technology spend so.
Trunk of that DNA as non cash as it relates to prior year spent.
We do as you indicated we expect full year DNA in 2020 to be up 5% to 7% in constant currency due to those investments, but that's because I can lapping partial year on some of the acquisitions were now I'll have full year in 2020 so.
So that level of increase we certainly do not expect going forward.
But as we've talked about for 2020 or as I mentioned in my script first half of that of 2020 will be significantly higher growth rates than second half of 2020 and that I guess the only other thing I'd say is where in the midst of updating all of our analyses and long term models also with the DNA, but.
So far we haven't seen anything that significantly changes any of our thinking on June a long term. So we don't think about it any differently today than they did a couple of years ago, but I do have obviously to your point, we had an increase in 19, we have a little larger increasing 20, but certainly we don't.
Expect that increase to be a run rate increase going forward.
On the on the point about a question about it.
Franchisee cash flow.
It's exciting when you see the system set a record for franchisee cash flow and.
In 2019 in the U.S. They did so it kind of a resounding way they blew through.
The prior cash flow record and surpass that by probably another $50000 or something like that so.
It's a really good thing when you have a wealthy franchisees were making a lot of body because it means that there.
Mentality is to be aggressive to invest in the business that can take a number of different forms that can take investments in the restaurant and some of the capital investments that we've been doing it can take the form of putting more labor in the restaurants and it can take the form of value as you were talking about so.
To me, it's more about the point that are you us owner operators are in a really healthy spot right now I think thats also reflected in their sentiment.
And they want to keep it going and and so thats going to require staying aggressive on the business and I'm confident they're going to do that sorry, Sarah the one other thing you match asked about whats convention and they forgot about that the convention are.
Operator convention that we have every other year is roughly $25 million to $30 million.
Our next question is from Jeff Bernstein with Barclays.
Great. Thank you very much.
A question as we think about 2020 financial performance.
Chris I know you mentioned, we're starting the year strong topline perspective.
On the flip side, I guess, you're talking about maybe some elevated gionee and the short term. So I'm just wondering how you think about that in relation to your thoughts on achieving.
Your long term algorithm, which is for high single digit Dps growth I know you don't necessarily guide specifically at any one year, but just wondering how you see that potentially playing out whether this the year, where we could expect a more normalized comp.
Chris into long term growth and within that that return of cash that you mentioned I know you finished your three year target I'm, just wondering whether going forward. We should now just think of it as you've been returnable free cash in any one year versus perhaps given a target for one or multiple years. Thank you.
Thanks, Jeff.
Let me hit.
A couple different things, let me first talking about 2020.
If you do the math basically with all of the guidance we've given.
Hopefully you get to similar places, where we are which as we do expect EPS growth for 2020 to meet the high single digit target certainly a lower tax rate is hoping that growth rate.
And as you mentioned it may not be even growth rates quarter by quarter during the year because of some of the individual quarter pressures, but as we look at the full year, we do have an expectation of being within that high single digit EPS growth rate target for 2020.
Regarding.
Cash return.
You know, we're fortunate to generate a substantial amount of cash flow and be able to find a boat.
Investments that we want to make in the business still return a significant amount to shareholders.
As I mentioned in my remarks, our free cash flow with $5.7 billion in 2019, which was up over 35% free cash flow conversion was around 95%.
As we had internal discussions and discussed with several of our large shareholders.
We decided not to give a specific dollar target over a three year period.
Or.
Our cash return, but there is but I do want to reiterate our capital allocation philosophy, because there is no change to that as I mentioned the priorities remain the same first to reinvest in existing restaurants and opportunities to grow the business second to continue growing our dividend and third to buy back shares.
We do expect to continue to return all free cash flow to shareholders and in our modeling we anticipate net incremental debt of roughly $1 billion each year for the next few years. So.
That should give you an idea kind of where the cash return comes out to that thanks.
Our next question is from Chris Carroll with RBC.
Hi, Thank you so with so much attention focused on the morning, Daypart given the rollout of breakfast by large competitor how do you assess the opportunity to strengthen your competitive position in the other day parts as breakfast becomes more of a focus for the industry.
Yeah I think.
As you look at our business and then you think about our 2020 plan when I look at it irrs good balance I mean, we certainly have.
I think a pretty strong breakfast plan, we have a combination of.
Menu news at breakfast, we have some service things that we're really looking at driving at breakfast and then certainly we plan on remaining competitive from a value standpoint at breakfast.
But there's a lot of other things that we still have on the calendar.
And so if you think about a couple of years ago, we talked about really focusing on food and it was going to be a focus on burger chicken and coffee and I think you're going to see for us.
2020 that there's going to be Burger news, there is going to be things that we're doing there that continue to keep driving our QVC business, which really has been a standout performer for us to last couple of years.
Obviously lot of discussion about chicken don't want to get specifically into timing and what we would do there, but we're committed to really.
Updating and.
Competing in an aggressive way it into chicken segment. So you should expect something there and then we do see opportunities as well around beverages to search so.
As the year unfolds, I think you'll see us staying strong on breakfast, but it's not going to be at the expense of Russ today.
Our next question from Dennis Geiger with yes.
Thank you just wondering if you could touch a bit more on operations and throughput and the opportunities there specific to to drive through times I think you touched on globally, perhaps how that's been progressing but specifically in the U.S., maybe how much of an opportunity that is in 2020, and perhaps what part technology plays in improving the operations and those throughput times.
Thank you.
Sure.
Well I think in the U.S. I'm really pleased with the performance that the team put up in 2019 as we saw talked about in our comments were at record customer satisfaction scores in the U.S. driven by operations.
We're seeing it broad based across.
A number of Optimetrics that we're looking at.
The team did a really nice job in 2019 speeding up our drive throughs, we saw.
Good performance, there, but I think what we're also.
Excited about is we think there's more that we can do there we think that.
There are certainly.
2030, additional second to that we want to go try to get in 2020, and it's a combination of activities. It's a combination of menu simplification moved its a combination of training and really making sure. We have the right focus we're we're doing things.
To bring fund into the restaurant to create kind of that competitive rivalry there.
And then technology is a component to that I'd say right now in 2020, I don't see technology necessarily being a huge part of what's going to be driving cash flow, we're driving speed of service rather.
We have assumed timers, which is.
An internal thing that we use that really gives the team.
Very detailed breakdown of each kind of part of the customer journey as they go through the drive through as we can be very pinpointed on how to drive speed of service, but thats now deployed in most of our restaurants. So I think in 2020, it's going to be a lot of blocking and tackling longer term. We're obviously very excited about what technology can do to help.
Speed of service, which is why we've done acquisition like we did with the present day.
If we're able to get that commercialized and deployed that's certainly going to be something that helps us with the speed of service in the future.
We have time for one more question from Greg Francfort of Bank of America Merrill Lynch.
Hey, guys.
This is kind of a two parter, but just in terms of the the check I know, maybe beating a dead horse here, but.
And just how can you quantify how much of that is spend per customer versus customers per ticket as we try to think about maybe framing up like a 7% check is not actually that much on a per customer basis and then the other question I know you just touched on it on chicken and you don't want to get into timing of new launches, but can you maybe talk about.
Out.
Well, what your competitors are doing that Mcdonnell I guess I would think that theres nothing that Mcdonald's couldn't replicate that your customers are doing is the space constrained of getting new equipment getting the right flavors or something else you're focused on trying to improve the checking quality. Thank you.
So I'll cover that check real quick and then Chris can talk about chicken.
Couple of things that check so roughly right now 60% of check is mix and 40% as pricing.
So that's been relatively consistent I'll say throughout I think we probably fit roughly two thirds, but it's in that range really throughout the year for 2019, we are seeing in general we're seeing a little bit higher customers per ticket. If you think about the way that business is evolving between things like delivery.
Okay and the key they kiosks, we generally now have a little bit higher.
Number of customers per ticket so that is a piece of it but but even knowing that we have been able to grow guest counts in many of our international market. So I don't want to imply that that would say that we should be able to grow guest counts in the U.S. So.
The dynamics are changing but we believe we can still grow guest counts even with those change in dynamics.
And on your chicken question, you're right, we have a very detailed and intimate understanding of.
What our competitors are doing there I think for us it's really all about finding a product that works in our restaurants.
And and.
So that has on operations component.
Our menu is as you know is much more broad than some of our competitors.
So thats something we need to be mindful of in terms of how what we might do in chicken, what what knock on effect that might have on the rest of menu from the speed of service and then there are some equipment differences in terms of the equipment that we have in our restaurants versus what some of our competitors would have what we've been out testing we're in a test right now.
As you probably know, but we're testing a number of different approaches in terms of not just.
What you might do from a product standpoint, but are there things that we might want to do differently from an operation standpoint are there things we might want to think about differently from an equipment standpoint. So.
Like anything with menu in Mcdonalds is a little bit of Rubik's cube of what's the customer looking for what works operationally and then the business fundamentals under that but I think I feel good about where we're going to net add on chicken I think we're getting close to having something that we're excited to bring to customers.
Okay. Thank you, Chris and Kevin. Thank you everybody joining the call today have a good day.
This concludes Mcdonald's Corporation Investor Conference call.
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