Q4 2020 Mcdonald's Corp Earnings Call
It's a moment in which we proudly embraces both what we were going to do to write the next chapter of Mcdonald's growth and how we were going to do it.
We shared our new growth strategy accelerating the arches and articulated a clear vision of where we intend to make a difference in the world and need of community and connection.
We also acknowledged that between a once in a century pandemic.
Our record economic downturn and profound societal challenges it was the most difficult year Mcdonald's has seen.
While our new year brings new hope the issues and uncertainty that emerged last year persist.
As I reflect on all that has happened even since November.
Come back to something Ray Kroc once said.
Adversity can strengthen you if you have the will to grind it out.
Through all the adversity of the last year, we have seen and Don important things that reinforce why we are on the right path.
We have seen the incredible courage and resilience of our Mcfann Lee.
We know how to run great restaurants.
Our long legacy of execution prowess comes from the talent of our teams.
From franchisees to supply chain partners and employees I don't think it's an exaggeration to say that 2020 will be remembered as one of the most challenging get inspiring moment in the long history of this great brand.
By making safety and service a priori by.
By implementing the largest and fastest rollout of new safety protocols, and Mcdonald's history, and partnering with the Mayo clinic to review and refine our approach.
Maintaining supply without interruption.
Simplifying our menu.
And by continuing to put our customers and people first.
All three legs of our stool embodied our values in the best possible way by living them everyday.
And our customers have noticed global brand scores for consumer confidence in eating at Mcdonald's have risen significantly since the start of the pandemic.
We've seen the love people have for Mcdonald's and our food.
Even while the pandemic forced lockdowns and prevented customers from dining and most of our restaurants, we achieved over $90 billion of system wide sales last year.
Tens of millions of people every day continue to choose Mcdonald's for a drive thru contactless delivery takeaway and curbside pickup.
With more and more customers using our app.
And that commitment showed.
Despite resurgence of the virus and restrictions on restaurants in the fourth quarter. We continued to see sequential improvement as we delivered our strongest quarter of the year recovering nearly 99% of 2019 global comp sales.
Global comp sales for the full year were down seven 7%.
While there were challenges across markets some of our larger markets achieved positive comp sales for the full year, including the U S, Japan, and Australia and that was on top of strong momentum coming into 2020.
U S delivered its sixth consecutive year of positive comps.
The average U S franchisee restaurant operating cash flow reached an all time high in 2020 up nearly $40000 over 2019 and up about $100000 over the last three years.
Japan has achieved five consecutive years of positive comp sales.
And Australia posted its seventh consecutive year of positive comps.
We've seen the ability that Mcdonald's has to survive hard times and to do so while consistently investing to support both the short and long term.
One thing I admire most about our system is that no matter how difficult times get we never stop thinking about what's next.
The impacts of Covid on our industry have been significant it's been tough.
We were sober and realistic from early on while remaining committed to helping every operator and partner survive. This crisis.
We took prudent quick action designed to prevent not a single owner operator from failing due to the pandemic.
Why are we bolstered our cash position early in the year to provide nearly $1 billion in financial liquidity to support franchisees.
We also maintained our view on the long term as we invested $1 $6 billion of Capex to open nearly 1000, new restaurants globally and modernize another 900 in the U S.
Provided $200 million in incremental marketing support to accelerate the recovery.
And together with our franchisees, we invested over $1 billion in technology and digital initiatives.
All of which will help drive our next chapter of growth.
You've also seen our commitment to feed and foster communities take on new meaning this past year.
For so many incredible stories about how the Mcdonald's system, a stepped up to be there for our neighbors and communities this past year.
The name of few.
Together with our franchisees, we provided more than 12 million. Thank you meals to first responders and health care workers in the U S.
We donated extra food within our supply chain to communities in need around the world.
Gave millions of surgical masks to communities to help protect first responders.
And in November we announced our commitment to donate $100 million over five years to help families with sick children through Ronald Mcdonald House charities.
We were on the ground working to help local communities solve problems. While also looking for ways to use our size and scale to make an even bigger impact.
It was an important reminder, that brands like ours can help provide stability and even hope during difficult times.
Today brands are working through many societal issues that directly impact our businesses and the economy.
And we have a unique role to play in ensuring these issues get addressed.
It's true of Covid.
Hard to imagine that it was just a year ago last week that the first case of the coronavirus was confirmed in the U S.
Even while we celebrate a vaccine created in record time, we know that Covid is at its worst right now in many parts of the world.
That so many of the communities we serve are experiencing record high infection rates.
We all must play a role as part of the solution.
There was a lot of uncertainty ahead for us as individuals and for this industry.
Neither may change for some time.
We look forward to joining with other business leaders and working with the by the administration and congressional leadership.
As we have with every U S president throughout our 66 year history to address the challenges the country faces.
As we work to hopefully returned to some version of normal.
The needs of our customers have changed.
Dining in less than taking out more.
Hitting less in the morning, and much more for lunch and dinner.
And interacting with other people and brands less in person and more through digital.
Just as the investment in choices, we've made have driven broad based strength accelerating the arches will enable us to grow even more sustainably.
With a bottom up approach to our growth pillars, our M C DS.
M stands for maximizing our marketing.
Our significant marketing investment remains a true growth driver.
We're improving creative effectiveness and leaning into social and digital to drive customer engagement.
Teams remain focused on the right balance of sales activation with brand building as we work to optimize marketing returns.
We made an immediate impression in the closing weeks of 2020 with the launch of our serving here campaign in the U S celebrating the myriad ways, we feed and foster communities.
At the same time, many markets drove performance in the fourth quarter with successful sales building promotions like 30 deals in 30 days in Australia, and monopoly in Australia, France, and Canada, featuring customers' core favorites.
They are great examples of using our marketing muscle to drive sales without adding complexity to our kitchens.
P stands for our commitment to the core menu.
Our delicious core is something people rely on it and return to again and again.
Our core classics comprise roughly 70% of our food sales across our top markets, they drive growth and profitability and we saw that this past year.
Developing a reputation for great chicken represented one of our highest ambitions.
That's why markets are activating multi tiered strategy and holistic approaches that integrate great products strong sustained marketing.
And operations excellence.
We're building on the strength of core equities like chicken mcnuggets, and mcjunkin sandwiches, which have seen significant growth as we continue to focus on improving our large chicken sandwich offerings around the world.
In the U S. We're excited about the return of spicy chicken mcnuggets and the launch of the new crispy chicken sandwich at the end of February.
Markets are also making our delicious and popular 100% all beef burgers, even better with improved cooking procedures and new bonds.
Russia was the latest major market to rollout. These changes in Q4, driving meaningful lists and hamburgers sold.
We've also continued to create menu excitement that keeps customers engaged by bringing back limited time promotions like the grip and introducing new items like our bakery lying in the U S and the premium mix forget and signature recipe in France.
What's important is that our approach to our menu is thoughtful and judicious.
We've seen significant benefits with our streamlined menus and reduce complexity.
New items must earn their place on the menu.
Lastly, D Stanford doubling down on digital delivery and drive thru.
They were the difference maker when the pandemic hit and are at the heart of our combined efforts to create a faster easier better customer experience.
Digital sales exceeded $10 billion or nearly 20% of system wide sales in 2020 across our top six markets.
We're moving aggressively to bring my Mcdonald's with mobile ordering payment and delivery rewards and fund promotions like digital calendars to our customers as soon as possible.
We're on track to have elements of by Mcdonald's across our top six markets by the end of 2021.
Featuring loyalty programs in several of those markets, including a U S loyalty launch later in 2021.
We have big ambitions.
We've already shown we know how to meet big goals as we've proven with delivery.
The past four years Mcdonald's has expanded the number of restaurants offering delivery the nearly 30000.
And Covid has underscored how meaningful our efforts have been to our customers.
Many markets, including Australia, Canada, and the U S have doubled their delivery sales mix over the past year.
We continue to build out our delivery advantage much like we're expanding our competitive advantage on drive thru.
With over 25000 drive throughs around the World, we've made smart investments to bolster foundational elements like staffing positioning and order Assembly.
We've reduced service times each of the past two years, even as a greater percentage of customers went through our drive throughs during 2020.
While each pillar will further extend our leadership, what's especially powerful is the exponential impact when all three pillars come together.
Famous orders platform in the U S is a prime example.
The fourth quarter, we featured favorite menu items of Latin music icon, J, Belvin, and classic holiday characters, including Santa Claus and the Grinch.
With exclusive deals on our app customers rediscovered iconic core menu items like big Macs, and egg Mcmuffin and tried new items like cinnamon rolls.
And we drove digital adoption, including significant lifts Knapp registration and use.
That's our sweet spot.
That's how M C N D come together to drive demand sales and growth without creating additional complexity.
Our ability to navigate the past year would not have been possible without the incredible commitment of our franchisees our supply chain and agency partners and our employees, who have continued to focus and execute during this extraordinary past year.
When I think about everything our restaurant teams around the world have done to provide an essential service at the front lines.
Serving our customers safely every step of the way I can't help but believe that this amazing system is proving every day.
This isn't just a job.
To them and to us it's something bigger.
Our chance to make a difference for our customers and our communities.
I'll now turn it over to Kevin to talk in more detail about our financial results Kevin.
Thanks, Chris Chris.
Chris talked a bit about our full year results. So let me spend a few minutes talking about the quarter.
Global comparable sales were down one 3% in Q4.
Comp sales were positive in October as I mentioned on our Q3 call, but they returned negative in November and December as a result of the widespread resurgence says and the return of government restrictions, particularly across the international operated markets.
In the U S comp sales increased 5.5% for the quarter ending the year with six consecutive months of positive comps.
Sales grew in all major day parts, including breakfast and this is on top of prior year growth across these day parts.
Our strategic investments, including incremental marketing spend.
Fueled our momentum with strong national promotions like Mcquid.
I won't get one for a dollar or new bakery line in two separate offerings a famous orders.
Dinner continued to be our leading day part with strong sales of core items as customers keep coming back for familiar favorites.
And the IOM segment comp sales were down seven 4% in Q4.
And while performance varied across the countries nearly all of our major markets grew traffic share.
Strong positive comps in Australia, and the U K were more than offset by negative double digit comps in France.
There are many Italy and Spain.
Beginning at the end of October additional government restrictions went into effect across many of our markets, including limited sales channels reduced operating hours and dining room closures.
Australia benefited from strong menu and marketing news in the quarter, including the successful launch of our new chicken line with mixed spicy at its center.
Another example of great ideas and products traveling across our markets as mixed spicy has been a customer favorite and China and several other markets in Asia for awhile.
Since the start of the pandemic, Australia has also doubled their delivery sales.
The U K has achieved comp sales growth every month since August despite increased restrictions reintroduced in early November.
Quarter benefited from our focus on core menu as well as phenomenal growth in delivery.
And finally comp sales in the international developmental licensed segment were down three 6% for the quarter, reflecting significant improvement for most markets over Q3.
Japan once again delivered strong positive comp sales for the quarter and for the year as Chris mentioned.
The market is meeting customers' changing needs growing delivery and mobile ordering along with running successful L. T O promotions all while further strengthening trust in our brand.
And in China results have improved quarter over quarter since Q1.
Recovery continued on a steady pace with a marketing plan focused on delivery and digital along with new chicken offerings.
And despite the challenging year nearly 500, new restaurants were opened across the market in 2020.
Turning to January trends.
In the U S sales comps continue to be strong and are expected to be up high single digits with continued growth across all day parts and assisted by consumers receiving government stimulus checks.
IOM comp sales are projected to be down low double digits, given the government restrictions that remain in place in most markets.
Continued momentum in Australia is being more than offset by double digit negative comps in France, Germany, Italy and Spain.
We expect this trend will likely continue until dining resumes.
Adjusted earnings per share in Q4 was $1 70 after excluding gains on the sale of an additional 3% of our ownership in Mcdonald's Japan.
While global restaurant margins were down as a result of the pressure on sales. The U S grew both franchise and company operated margins up over $70 million for the quarter.
Consistent with the guidance, we gave on our third quarter remarks, G&A increases for Q4 were primarily driven by some one time investments we made in renewed brand activity, including the launch of our serving here campaign and our commitment to donate $100 million to Ronald Mcdonald House charities.
As Chris mentioned earlier.
Turning to our outlook for 2021.
As Chris talked about there's still a lot of uncertainty both today and as we look ahead.
We're confident in our ability to manage through this uncertainty.
And that are accelerating the artist strategy will continue to drive growth in the business.
We expect 'twenty 'twenty, one system wide sales growth of low double digits in constant currencies versus 2020 with new unit expansion contributing about 1%.
This reiterate the mid single digit growth rate off of 2019 that we mentioned in November.
We ultimately measure overall financial efficiency by our operating margin as it serves as the most comprehensive gauge of our operating performance.
We expect our operating margin percent to be in the low to mid Forty's for 'twenty 'twenty one.
In the U S. We expect higher depreciation expense of about $60 million versus 2020 in franchise margins related to our modernization efforts.
Depreciation will continue to be a P&L headwind for the next few years, even though it will have no impact on future cash flows.
In the I O M segment, while we expect improvement in our company operated margin percent over the course of the year, we don't expect to get back to pre COVID-19 levels in 'twenty 'twenty, one as a result of near term sales and cost pressures.
Turning to G&A.
As we become more efficient with G&A required to run the business, we're able to make strategic investments in areas like digital and technology to drive growth.
Looking ahead, we expect 'twenty 'twenty, one G&A to decrease about 2% to 4% in constant currencies over 2020.
Which reiterates our expectation that G&A will be about 2.3% of system wide sales.
Looking at other operating income and expense.
We expect our equity pickup to be slightly higher for 'twenty 'twenty, one due to improved results versus 'twenty 'twenty Harsha.
Partially offset by a reduced ownership in Japan.
Gains on restaurant sales last year were suppressed due to COVID-19, but we expect gains this year to be about double that of 2020.
And finally in 2020, we had some one time items included in the asset dispositions line related to store closings and bad debts.
Our 'twenty 'twenty, one we expect that line to get back to a more normal level of expense of roughly $100 million.
We're projecting our 'twenty 'twenty, one effective tax rate in the range of 21% to 23%.
And finally turning to FX.
Just on current exchange rates foreign currency translation would benefit EPS by about six to eight cents in the first quarter and 27 to 29 for the full year.
As usual this is directional guidance only as rates will likely change as we move throughout the year.
Moving to capital expenditures as we indicated in November we expect to spend roughly $2.3 billion of capital in 2021.
New restaurant development is an important driver of our growth as we see significant expansion opportunity, especially in the IOM segment.
These markets have driven strong growth over the past several years and deliver strong returns on new restaurants.
This year, we plan to open over 1300, new restaurants globally.
Of the 2.3 billion of capital, we will spend roughly half of that to open nearly 500 restaurants in the U S and I O M segments.
The remaining 800, plus new restaurant openings are across the IDL markets, including nearly 500 in China.
As a reminder, our strategic partners in these markets provide the capital for restaurant openings.
The remaining half of Capex spend will go towards reinvestment back into our U S and I O M restaurants, including about 500 million to modernize approximately 1200 restaurants in the U S.
We're nearing completion of our U S modernization efforts and expect over 90% of projects to be complete by the end of the year.
And finally, I want to conclude with our free cash flow profile.
With the improvements made to our business operating model over the last several years and the consistent strength of our global business, our free cash flow grew significantly through 2019.
In 'twenty 'twenty, even with significant disruption, we generated free cash flow of over four and a half billion dollars.
And free cash flow conversion, which measures our ability to convert bottom line earnings to free cash flow was nearly 100%.
In 'twenty 'twenty, one we expect to convert more than 90% of our net earnings to free cash flow and to generate free cash flow near 2019 levels or about five and a half to $6 billion.
Our capital allocation priorities remain the same.
First investing in the business to drive growth. This includes both capital expenditures as well as investments in technology and digital.
Second prioritizing dividends to our shareholders.
After that most of our remaining free cash flow for 2021 will go towards paying down debt to get back to pre COVID-19 leverage ratios by the end of the year.
As we start the new year I'm confident that the plans we have in place will position us to continue to deliver sustained long term profitable growth for our system and shareholders.
Now I'll turn it back to Chris to close.
Thank you Kevin despite.
Despite the uncertainties, we continue to face one thing is clear Mcdonald's is well positioned to emerge from this moment with competitive strength and we're confident we can keep capturing market share as we look to the future.
We're confident because we were growing share in most markets before COVID-19.
We're confident because we've continued growing market share during COVID-19.
And we're especially confident because we've gained important insights which will bolster the strategic vision, we set with accelerating the arches.
This clarity of purpose and strategy is the reason that in October we increased our annual dividend to shareholders.
Not only did it mark 40, plus consecutive years of increases it reinforced to our shareholders our confidence in the long term strategy.
It's also the reason we continue directing investments where they make the most strategic sense and build on our strengths.
We will uphold Mcdonald's commitment and legacy as a responsible and reliable choice for trusted delicious food.
And we'll do so while feeding and fostering community and continuing to create delicious feel good moments for everyone.
This is the mission that has always and will always animate our work.
Thus when it comes to our customers our employees, our franchisees and our suppliers. It doesn't just matter what we do it matters, how we do it Andy.
And now we'll begin Q&A.
Alright, thank you.
And just as a reminder, if you have a question. Please press the star key followed by the number one on the key patents.
Get yourself to one question and then reenter the queue.
If you have another our first question Sara.
Is from John Glass with Morgan Stanley.
Thanks, Good morning, everyone.
Chris Chris and Kevin can you talk a little bit more about the IOM markets and the tactics, you're using to drive sales I understand the dine in is more important is less drive through structurally but what are you doing to help sort of bridge. This gap to get to easier comparisons in the reopening is this end market for example, you might try.
Launching the mine Mcdonald's rewards earlier can you talk about maybe the world delivery of what Youre doing to delivery and things that can help obviously bridge. This gap when you've got such restrictions in place.
Hey, John it's Chris Thanks for the question and.
Iowa market.
As you know it is.
S markets tend to be more of a dine in business and so the biggest thing that we're doing with many of these markets having dining close as we are trying to do as much as we can to drive our drive thru delivery, our digital businesses and we're having good success with that.
Some of it though is frankly limited because in many markets.
There are our operating hour restrictions.
<unk> P M APM et cetera. So.
I think part of what we are trying to do is with our franchisees. So long as we are dealing with government restrictions around what you can open how long it can be open it's about supporting the franchisees as we said in the opening remarks here, making sure that all of our franchisees have the liquidity that they need to get through it.
As you come through though I think the plan that we laid out which is focused on driving core menu in the three DS. That's the way that we really come out of this I think in a very strong position and we've seen.
As we've gone through this one of the things for us.
We've discovered capacity that we didn't even realize we've had.
I think in the last year, we've moved something like 300 million additional cars through our drive throughs and you had asked me a few years ago I was thinking that we were.
Pretty pretty maxed out on drive through so I think our eyes are set up well to get after this but as we are continuing to deal with some of the short term restrictions it is challenging.
The only thing I'd add John is as.
As Chris mentioned, obviously, we're seeing both digital and delivery growing significantly in those IOM markets in the U K for example.
Over 20% of their sales in Q4, where delivery sales. So we are seeing some significant growth both in delivery and digital.
The other thing I would point out is.
This is nothing structural this is a temporary issue and the reason I think we're confident in saying that is if we can look back and even as recently as October we were relatively flat.
In I O M in October, but as the new restrictions come back that's when we see kind of comps going down again, so as soon as the markets start opening up again and easing restrictions I think we're pretty confident customers come back pretty quickly and we'll be set up well.
Our next question is from Eric Gonzalez with Keybanc.
Hey, Thanks for the question and good morning, I was wondering how you think fast food chains like yourself, Mike fares the world gets through the vaccine recovery phase and clearly there's been a high demand for contactless and wholesale solutions during the pandemic as evidenced by the increased average check, but Australia, which seems to be a strong performer as of late might be one area, where it seems like consumers are.
Closer to normal relative to the rest of the world. So he could speak to how the traffic and dinette attack traffic ticket dynamics have evolved in that country, perhaps that might give us some clues about how you might perform in some other countries posted vaccine rollout. Thanks.
Thanks, Eric and Australia as you note. It has been one of the few markets in the world that has.
I would say relatively unscathed by Corona virus as they've done a very nice job of containing the virus.
And that market is performing very strongly that our franchisees in Australia are going to have record cash flow in 2020. The businesses is doing high single digit performance.
So so I think it is for us a good indication of what the post COVID-19 opportunity for US can look like I think what we are expecting though is and what we've seen as we've gone through Covid and then resurgence of Covid recovery is that channels like digital.
Like delivery like drive thru, they do remain elevated we think that.
That is going to be kind of one of the more enduring parts of it doesn't mean that there's still isn't going to be a sizable dine in business, but I think the takeaway business is going to remain elevated.
Covid, including delivery with that and those channels. When you look at whether it's delivery or digital drive through those tend to be higher order sizes and so as the mix.
<unk> moves to that I think this idea of elevated check.
We're expecting that thats going to Kenneth continue, albeit not at the levels that you're seeing now, but I think it just there's going to be a channel mix shift that is going to continue to give benefit to average check going forward is our expectation.
Our next question is from David Tarantino with Baird.
Hi, good morning.
Chris There's they've spent a lot of media reports about friction between the franchisees and the U S. In the company and I was wondering if you could just comment on on the current situation and your plan to resolve some of that conflict is as you think about the short term or near term.
Term.
Sure Thanks, David well as you know.
I know the U S market, well, having having run that for three years and I'd say there are a few things that I just.
Learned during my time in the U S. The first is we have 2000 owner operators in the U S and it is very difficult to generalize sort of what is the overall.
Sentiment in that market, you have 2000, Ceos and president of their own businesses with a lot of different opinions perspective, So I would just caution.
To make any generalizations about the market the other thing that I would.
Would you say is the business is a very decentralized federated type of model all the action happens at the restaurant level and at the restaurant level. The U S. Our interaction between the company and franchisees remains strong and I think the evidence of that is just the operating.
Performance that youre seeing out of our restaurants in the U S. As we're putting up pretty strong comps.
Which if you look at it on a two year stack basis.
It was I think a 10, one and in Q4 on a two year stack. So so the business is performing I think at a very high level, we're seeing.
Service times improve but there is absolutely noise in there absolutely is our some disagreements that happen.
Right now between the National operator leadership, and our U S team I dealt with those when I was in the U S state flare up from time to time, we're certainly in one of those moments now, but I'm confident that Joe earlier in the U S team along with Mark <unk>, who leads the operator group at the national level.
We always find a way to work through these and I fully expect that that will be the case in the U S.
Our next question is from Dennis Geiger with UBS.
Great. Thanks for the question, Chris you've outlined.
I think a bunch of initiatives in.
In the U S and marketing plans and overall strategy for the U S. This year, just wondering kind of given the strong leasing momentum. The U S has seen I'm wondering if you could kind of just help frame some of those initiatives for the year that you kind of see as most impactful I'm sure it's sort of a collective effort, but in your mind, what's kind of the most impactful this year.
To help drive sales to help drive continued market share gains is it is it the marketing plans and some of the new products that you've highlighted aspects of the three DS just hoping you could kind of contextualize some of that perhaps thanks.
Sure well I'll go through kind of the M. C. D framework I think we've got to have great marketing, great marketing has to come to life on chicken and the loyalty launch.
That's where all three of those come together and our expectation is that chicken and loyalty are not.
Not just for 2021, but frankly for a longer term perspective, those are probably two of the most important things we need to get Don in a high quality manner.
2021, both for that year's performance or for this year's performance, but also setting us up for the longer term.
Our next question is from David Palmer with Evercore.
Thanks, and another question on the I O M. Just wondering how youre thinking about those international operated markets after the vaccine.
Mark has had most of their sales pre COVID-19 from on premise.
Ordering and some are even city center locations, perhaps more than the U S where you have a lot of suburban drive through so obviously more painful today, but I wonder if you're thinking that market share gains could be even greater because your competition.
Which is often local lacks Mcdonald's unit economics in the drive throughs that you have that are obviously, helping your profitability during the pandemic.
Could you talk about the outlook for market share gains in and if there's any sort of difference in the recovery that you foresee in these markets broadly than what we would expect in the U S. Thanks.
Yes, Thanks, David I'll take a shot at it and Chris can certainly chime in.
As you mentioned certainly our percentage of restaurants with drive thru and the international operated markets is a little bit less than what we have in the U S and Australia and Canada, its more around 80, 90%, but in France, Germany U K its roughly two thirds of their restaurants or so.
Have drive throughs.
So so the percent of sales that run through the drive thru is pre COVID-19 in those international operated markets was less.
We're certainly seeing during the pandemic a higher percentage of sales run through the drive thru as well as elevated digital and delivery sales, but I think.
Your point I think we believe we're well set up post pandemic because while the percentage of drive throughs is less than the U S. It's substantially higher than just about any competitor in most of those markets and so the fact that we're well set up with drive throughs will continue to own.
And up more drive throughs to your point there are some city center tourist travel locations right now that are.
Kind of getting hit harder than <unk>.
Certainly most of our U S restaurants, because of the pandemic, but theres nothing structural in the business that gives us concern that once the markets start opening up post pandemic, we felt like we should be in good shape to be able to pick up market share there are.
Still a substantial number of restaurants in many of those markets that are closed.
No not not Mcdonald's restaurants, I'm, just saying in the industry.
Unknown certainly is how many of those are temporary versus what's permanent but we think we're pretty well set up to be able to continue gaining market share, which we have done both in 2019 and in 2020 during the pandemic and those IOM markets to keep gaining market share.
Sure.
Our next question is from Jon Tower with Wells Fargo.
Great. Thanks for taking the question just first a clarification on the question Ken.
Kevin on the IOM margin I, just want to make sure I understand that.
Guidance, you had talked about I think you had said not getting back to pre COVID-19 levels in 'twenty and 'twenty, one I assume you're speaking about the full year not just on a quarterly basis.
Quite a clarification there would be great and then secondarily on the marketing side, you have the 200 million or so of incremental spend in 2020 across the U S. In the I O N. How how should we think about the company lapping this spend in 2021 meeting.
Are you anticipating that franchisee sales recovery will fill the void and therefore, your president and dollar spend will be similar year over year.
Yes, if you could just add a little bit of color there that'd be great.
Sure.
I'll start with the Io.
So so.
John to your point.
I talked about is yes annually I don't expect to get in 2021 that the IOM segment would get back to the kind of 20% margins that we've all been used to pre pandemic again, theres nothing structural that prevents that from happening a longer term.
We know for you know at least in the first quarter certainly.
Margins are certainly depressed a little bit still because of the sales and the restrictions going on so we do think as the year progresses margins will improve over where they were in 'twenty, but likely not get back for the full year to that 20% kind of level that we were used to prior to.
The pandemic.
And then on the marketing question I'll start maybe just with the math, which is as you know we do.
Fund marketing as a percent of revenue and so certainly as the business recovers and.
And grows.
We think at a pretty nice clip in 2021, there will be a benefit from an investment size that we can go do in marketing, but it's not going to be to the level of $200 million I think the bigger thing that I think about in the bigger benefit is this is a momentum business and when you have momentum in the business everything.
To work better including on your marketing side, So our expectation part of why we put the $200 billion in 2020 was to make sure that we could generate some strong momentum coming out of this and when you've got that momentum you get an outsized effect from what would be even a normalized marketing levels. So that.
The bet that we're making and why we're confident on the back half of the year.
Our next question is from Chris Carroll with RBC.
Hi, good morning, and thanks for all the detail provided so far and Andy I appreciate the detail on the most recent trends in January.
I did want to ask about the competitive environment in the U S. I mean, clearly a lot has been made around the growing competition around chicken.
But there also appears to be more of a focus on value as competition continues to ramp for traffic. So curious to hear your perspective on just broader industry competitive dynamics and in particular his thoughts on breakfast competition and share gain opportunities there. Thanks.
Sure well, thanks, Chris and it is a competitive market in the U S. Probably one of the most competitive markets if not the most competitive market in the world.
Back in November when we had our Investor day part of the M. Within M. C. D was that we needed to make sure. We had a strong focus on affordability and you're seeing just as we've entered into 2021, you've seen some of the value deals that are out there from our competitors. We've also had some programs that are that I think have performed well for.
And that's going to be a trend that continues all through 2021, our expectation is that you're absolutely going to need to remain competitive.
Competitive on value I think we've been able to back to the momentum point, we've been able to put ourselves through the investments we've made in modernizing our state.
Upgrading our brand.
Attributes I think we're in a better position than we were maybe four or five years ago in terms of just the consumer demand for our brands. So I think that.
For us it gives me confidence that this isn't going to be something that gets.
We're gonna have to chase down the rabbit hole so to speak.
On your question about breakfast, our breakfast business is performing well in Q4, our breakfast business grew.
We saw strong performance out of the bakery line.
So our expectation is going forward that breakfast day part we've been pleased with how we weathered through 2020 on that even with the introduction of one of our competitors didn't have a significant impact on our breakfast business and as we look to 2021, our expectation were setup.
Breakfast for us should be a good performing day part as people get back to hopefully returning to work and kind of a more regular routine, which certainly benefits traffic in the morning.
Our next question is from Jared Garber with Goldman Sachs.
Hi, Thank you very much a little bit of a follow up on the last question, but with maybe a different a little bit of a different spin wondering if you could talk about the state of the consumer in the U S and how you're seeing things play out from that perspective, obviously, given some stimulus benefit, but still high unemployment and challenges related to Covid and maybe I've.
To follow up on that point, how youre thinking about the balance of value and premium offerings and L. T OS throughout 2021.
Sure. Thanks Jared.
With the state of the consumer we do consumer tracking as you would expect on a monthly basis.
What we're seeing right now is that concern for economic uncertainty is by far the single most single biggest concern that exists with our consumers, which again gets back to why we think affordability is going to be one of the things that that all of us need to stay focused on in a prudent way in 2021.
Because of the level of stimulus certainly it is helping right now in the short term I think the industry, we're a beneficiary of that.
But the stimulus is going to roll off in it and I don't think that we yet fully understand or have visibility to as the stimulus rolls off sort of what is the underlying health of the consumer many people have talked about okay shape recovery the divergence between the stock market and the rest of the quote unquote real economy.
I think that's real so so we are watching closely what happens with the consumer but we think this concern about the economy concerned about it.
People's sort of financial health that that is going to be something that that persists through.
The balance of 2021.
Was there another part to that I think it was just the concept of balancing value premium and L. T OS which is a constant.
Our focus for us we need to balance all of those three L. T O us value and premium I think you'll see that continuing both in the U S and outside the U S. Because that is our normal we've got to make sure that we have offerings for all consumers depending on what they are kind of the change they've got in there Paul.
And at any given time, the one thing I guess I would just say on that if you go to the C. In our framework can be core menu is the primary growth driver for us in 2021, and we think for the next several years. So you know while there will be some L. T O activity I think all markets our U S. In our IOM markets in particular.
<unk> have raised the bar in terms of what an L. T O has to do to earn its way onto the menu. So I think you might see versus maybe what we had pre pandemic levels a little bit more moderate pace of L. T. O is because of this focus on core menu.
Our next question is from Jan I haven't co with J P. Morgan Hi.
Hi, Thank you I wanted to follow up on I guess, the supply question I O N, but maybe talk about it specifically.
Specifically by country, you know many of us have.
To these countries with you over the years, Canada, Australia, France, Germany.
Okay. So we do have a fine appreciation of as you defined the informal eating out market you know that you directly compete against.
You know in many of these areas and I guess you know many of the high streets, if you will.
Particular, so you know I mean, it through the market intelligence that you have and you know I mean, I think you know you define that market you know uniquely in terms of using the words I E over and formal eating out you know how much capacity do you think you know and again. This is really looking for your opinion its not necessarily a fact, but how much of that capacity do you think has come.
[noise] out permanently and I asked this question also in the context of you know government assistance. The restaurants are so different around the world.
Certainly different than the U S that you know maybe give you know a certain amount of survivability or I guess in some cases on survivability relative to what's happened for example through P. P. P. Here.
Yeah.
Yeah.
Yeah, all right I'll I'll take a shot and then again, Chris can always add in.
John as you as you know and you mentioned that you know obviously each country's a little different both in terms of demographic consumer demographics as well as competitive environment I think so things like high streets in the U K I think right now is a challenge certainly much broader than our business.
But there is a question of when and even at the height in the high Street and in the UK completely returns to kind of pre pandemic levels I think in general.
As I mentioned right now Theres a lot of outlets closed and many of the markets.
The unknown is how many of those are temporary versus permanent I do think certainly in many of those countries where someone has one maybe two outlets. That's a bigger challenge and I don't think we'd be surprised to see several of those outlets permanently closed we're seeing.
That in several of the countries right now where it looks like many of those outlet, let's will not be returning so that I think overall supply in general will shrink a little bit, which certainly is an opportunity for for us to continue gaining market share. That's our expectation that's what we're going after.
And I think we believe that we're well positioned to gain a lot of that share.
And our next question is from Andrew Charles with Cowen.
Great. Thank you just on the new Christie Chicken, Tim. It's just coming next month can you talk about the learnings in test markets, particularly looking to see what you observed in sales even if it's qualitative and also just operationally you know comparing two or three years ago when half the grille with launch where the performance was a bit subdued because of the longer than expected service times.
Sure well, we did have it in test market and we were encouraged as why we're rolling it out I think our focus in test was much more on the operation side, then having it be sort of an advertised type of test.
So for US it was about just getting the operation.
Worked through and confidence for us and being able to deliver it in a in a high quality way, we feel good about that I know Morgan flatley in the U S marketing team feel good about the campaign that we have so and and franchisees are excited about it. So we are optimistic as we head into February. Despite it was referenced earlier a lot of active.
In this space.
But we think we're prepared well too.
Generate demand from consumers on this one and then deliver on that as consumers come into our restaurants.
Next question is from Jeff Bernstein with Barclays.
Yeah.
Great. Thank you very much.
Just a question on the labor side of things and I guess, that's more sofa franchisees, but he mentioned working closely with the government on different initiatives. It seems like there's a lot of opposing forces them at least for franchisees, where you have the national minimum wage potentially gone up.
On the flipside, unemployment high which would historically and play ample labor so.
Maybe with that as kind of a backdrop, we'd love your outlook on labor cost and perhaps labor availability.
And what do you think the franchisees can offset that pressure, whether it's of course saves technology pricing how are those conversations going with franchisees regarding dealing with upcoming ongoing labor cost pressures. Thank you.
Thanks, Jeff.
I think the the.
Discussion about the minimum wage in and.
You know what that means in terms of cost of labor and while it's picked up with the change in the administration at the federal level I would say that it's been going on at the state level for the last several years and you've seen a number of states I forget if it's you know.
'twenty four 'twenty five states have passed some degree of a minimum wage.
Legislation, Florida was the most recent one in this past.
Oh election, where I think they have introduced a 15 dollar an hour a glide path towards $15 an hour. So we have.
This has been rolling into the states, we have seen in developed quite a bit of.
Experience with how this how.
How this works out I think is a positive for us has been so long as it's done in a in a staged way.
And so long as it is done equitably across the entire market without sort of any carve outs or special exemptions for people than we do just fine and we're able to.
Balanced between judicious pricing on the menu.
As well as just thinking about productivity savings that we we can manage through this I'll give you. Another example that gives us confidence there was a significant increase in the minimum wage that was passed in Canada, a couple years back and and that team are working with the franchisees did a spectacular job of working that.
Through.
Onto the menu through pricing through productivity. So so I think our view is the minimum wage is most likely going to be increasing whether that's federally or at the state level of it as I referenced and so long as it's done like I said in a in a staged way and in a way that is equitable for everybody.
Mcdonald's do just fine through that.
Our next question is from Lauren Silberman with credit Suisse.
Thanks, I believe back in June you talked about drive Thru service times, improving in the U S. By about 25 seconds to the patent that Mac, assuming that 25 seconds to hold to what extent do you attribute that to the simplified menu versus the other changes and how it would be as dynamic as this chat and Martin what are is impacting drive through time, and then just for 'twenty and 'twenty. One do you see any other.
Our opportunity for further improvement that is a broader rollout at the 10-K.
Yeah, I can give a shot to that Laurence.
So yeah, you know we've continued vote in 2019, as you mentioned, but as well in 2020.
Overall, we reduced drive thru times by roughly 30 seconds over the past two years in our major markets and I think that's a combination of a few things. One is one is menu simplification and the more limited menu that are that you indicate but also just a big focus on operations around the world.
Which includes some non sexy stuff like staffing and positioning of our crew.
Certain technology.
That would put it in our restaurants to help the CRU monitor at the times and so there's just some basic kind of running the operating our restaurants efficiently that goes along with.
The right menu and menu boards and so there there continues to be a big focus on drive thru operations, especially because we've seen drive through continued to be a bigger percentage of our business. So I would there's still opportunity to continue reducing those service times. So I wouldn't say that we are now.
Kind of the top level of what we can achieve there is still a big focus around the company on continuing to improve those service times.
Yeah.
Okay.
Have time for one more question from Greg Frankfurt with Bank of America Merrill Lynch.
Yeah, Hey, thanks for that can you maybe talk a little bit about store level margins in the U S and where you see them going kind of over the next few years.
It depend dynamic has helped kind of pushed that up quite a bit and I'm wondering how much those gains do you think you can hold onto them from an efficiency standpoint. Thanks.
Yeah. Thanks, Greg.
Certainly in the U S. We've seen the last couple of quarters that our store level margins are up I think that's a combination of a few things we've talked about higher average check.
Being larger group book size orders et cetera, again, I think as Chris mentioned some of that will stick maybe not to the level that we are today. So I think we do see some of the U S.
Margin, it'll probably moderating over the next year.
Conversely in the I O M. I think they've been hit harder than the at store level margins because they havent had the sales levels that we need in order to maintain high margins. So I think I O M. Over time, we will get back to where they were pre pandemic. You asked is probably a little bit higher in the last couple of.
Orders, then we should expect ongoing for 2021 at least.
Okay. Thank you, Chris and Kevin and thank you all for joining have a great day.
This concludes Mcdonald's Corporation Investor Conference call.
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