Q2 2021 Mcdonald's Corp Earnings Call
Hello, and welcome Tim Mcdonald second quarter 2021, Investor Conference call at the request of Donald's Corp. The conference is being recorded Bubbling todays presentation.
There will be a question and answer session for investors at that time investors only may ask a question by pressing star 1 on their touchtone.
I would now like to turn the call over to Mr. Mike <unk> Investor Relations Officer for Mcdonald's Corporation. Mr. <unk> you may begin.
Good morning, everyone and thank you for joining US with me on the call today are president and Chief Executive Officer, Chris <unk> and Chief.
Phones will officer, Kevin over them.
As a reminder, the forward looking statements in our earnings release and 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 along with their corresponding GAAP measures.
Finance following prepared remarks. This morning, we will take your questions. Please limit yourself to 1 question and then reenter the queue for any additional questions.
Today's conference call is being webcast and is also being recorded for replay via our website.
And now I'll turn it over to Chris Thanks.
Thanks, Mike and good morning.
At the heart of Mcdonald's is the experience we offer and for 65 years, we've created iconic experiences for billions of people around the world.
Along the way we've always focused on following our customers' needs finding the most convenient and engaging ways for them to enjoy Mcdonald's.
At our founding the restaurant experience.
It's really simple.
Customers would walk up to the front counter placed their orders and get hot delicious fresh food served to them quickly.
In the early 19 seventies, Mcdonald's pioneered the drive through as a new service channel for customers.
And in the last few years, we've added even more service channels with delivery curbside pickup.
Up kiosks and table service.
At the heart of each of these innovations with our global mobile App, which has evolved our customer experience from the physical world to the digital world.
Yeah.
As this evolution continues our digital offerings will become even more important to serving interacting with and delighting our customers around the world.
Was wrong and the insights generated from these platforms will help us further improve their experience.
Our marketing power and scale will continue to be critical throughout this journey.
Turning to various customer touch points into a holistic and compelling brand experience.
But our aspirations are even higher and to reach these goals we need.
Need to create a more frictionless customer experience across all our service channels.
Our customers should be able to move seamlessly between the in store takeaway and delivery service channels. So that we offer even more convenience and better personalization.
That's why we were excited to announce earlier this week the creation of a.
A team that has oversight for the end to end customer experience under the leadership of our first chief customer Officer, Mcdonald's history Menu's Stockyard.
Manu will oversee everything from the physical restaurants that we design and build to the digital experiences that we embed alone each step of the customer journey.
We finished the global rollout of OTF Madhu and his team will now be focused on what's next to drive a new layer of sustained growth for our system that leverages the foundations that we've built.
For the past 18 months, our digital customer engagement global marketing data analytics and restaurant.
<unk> teams have worked to standardize our infrastructure and align the system against some common frameworks.
These efforts ultimately pave the way for my Mcdonald's rewards, our first global digital offering that we are now deploying across our largest markets.
My Mcdonald's rewards at just the first example of how we will lead.
Lead at a digital innovator by leveraging our scale and engaging with our customers and a truly integrated way.
When he was the ideal choice to integrate these teams and take their work to the next level with an intense focus on driving incomparable customer centric innovation.
He has been an important part of the Mcdonald's system for.
20 years at every level.
And who knows these teams well and has an incredibly deep understanding of the needs of our customers.
1 route in his early experiences a crew member and his parents Mcdonald's franchise in his native Belgium.
We believe that connecting these teams will enable us to deliver the seamless omnichannel experience.
For more than that our customers want and only Mcdonald's can provide transforming the way customers connect with interact with an experience our brand.
Further strengthening our ways of working to better serve our customers is 1 of many ways. We are working to accelerate the arches today.
This compound.
Complements the work underway to accelerate the arches with investments in customer centered creative marketing that only Mcdonald's can offer so fully.
That marketing made a measurable impact in the second quarter with the global W of our incredibly successful famous orders marketing platform.
I'll have more to say about that a bit later.
We're accelerating the arches by committing to our core menu, we're tapping into customer demand for the familiar and making the chicken burgers in coffee our customers love even more delicious.
We're borrowing from what has worked well in other markets like the growing success of the mix spicy chicken sandwich.
Mike Spicy launched in China over.
Years ago and customers can now enjoy this great tasting sandwich in multiple markets around the world.
Late last year, we launched <unk> spicy in Australia as part of their new chicken Sandwich lineup and earlier. This month. It debuted in the U K to great fanfare.
We also continue to leverage our familiar favorites and create new ones.
20 year, our menu even more craveable.
In the U S. The momentum from the successful launch of our crispy chicken Sandwich continued into the second quarter as we supported the platform with culturally relevant advertising.
Just 1 more way that our beloved core menu continues to drive growth, while anchoring a customer experience that is.
To make none.
We also know that the customer experience today reaches beyond the physical walls of our restaurants.
And that's why we're accelerating the arches to better serve our digitally connected customers.
To give you a sense of the growing digital connection we have to our customers. We have the most downloaded <unk> app and.
Second to states.
And earlier this month, we were proud to launch our new loyalty program My Mcdonald's rewards in the U S.
The loyalty of our rent Mcdonald's, France has been unmatched for 65 years and with these new digital connections, we're able to do an even better job of rewarding them for it.
We already have.
Have over 22 million active my Mcdonald's users in the U S with over 12 million enrolled in our new loyalty program My Mcdonald's rewards.
And Thats before national advertising for loyalty, which began earlier this week.
Well it is a good example of how our core menu and personalized marketing.
In the United come together through digital channels to build a stronger relationship with our customers.
Our digital system wide sales across our top 6 markets, where nearly $8 billion in the first half of 2021.7.
70% increase versus last year.
And that's why we are moving aggressively to bring my Mcdonald's rewards to our.
Marketing fixed markets.
We currently have loyalty programs in place in France, and the U S Germany.
Germany, and Canada planned to launch my Mcdonald's rewards before the end of this year, followed by the U K and Australia in 2022.
We're just as excited about our drive throughs through which much of our business has come from this.
Tops and about delivery.
Over 80% of our restaurants across 100 markets globally now offer delivery.
We're excited about our success with multiple <unk> partners.
And as I said last quarter, we continue to innovate.
Overall, our recent successes show that our <unk> growth.
Pillars working in concert can deliver unmatchable experiences for our customers and drive growth unlike anything else in customer retail.
Of course, our work to accelerate the arches is built on the foundation of the very core of Mcdonald's success running great restaurants.
As we open our dining rooms.
This year or in a regular hours and get back to full staffing, we know that world class execution will be more important than ever.
While the Delta Varian has brought more stops and starts to the Covid story around the world people are venturing out and establishing new routines.
That includes a return to in person dining.
Today about 7.
Andy percent of our dining rooms in the U S are open by Labor day borrowing resurgence as it will be nearly 100%.
Internationally. The majority of our restaurants are now operating all channels, including dine in but many continue to operate with limited hours or restricted capacity.
We're working hard to get back to normal.
When our customers are ready to come back to dining in our restaurants, we will be more than ready and eager to welcome them.
Not only are we more resilient today than we were heading into the pandemic as Kevin will tell you. We are building from a position of strength Kevin.
Thanks, Chris I'm.
I am pleased to share.
That global comp sales were up 40% in the second quarter or 7% on a 2 year basis.
Our performance is continued demonstration of the broad based strength and resiliency of our business.
We have surpassed 2019 sales levels for the second consecutive quarter and now at <unk>.
Accelerated rate.
Turning to the segment performance for the quarter.
We grew comp sales across all segments versus 2019 levels as business recovery progresses at varying degrees around the world.
In the U S. Our momentum continued with Q2 comp sales.
Up 26% or 15% on a 2 year basis, our strongest quarterly 2 year growth in over 15 years.
And we saw double digit positive comps across all day parts on a 2 year basis.
While at the same time franchisees continue to achieve record high operating.
Cash flow.
Our performance in the U S. As the result of an accumulation of decisions that we've made over the last 18 months.
This includes bold marketing initiatives investing in the core menu and strengthening our digital offerings with an underlying focus on running great rest.
Restaurants.
As customers in the U S began to venture out more during the second quarter. We continued to see strong average check growth driven by larger order sizes and menu price increases.
That's been bolstered by growth in delivery and digital platforms as well as robust menu.
Operating getting programs.
This includes an advertising reheat of our crispy chicken sandwich, which continues to perform at an elevated level and the success of our Bts meal.
Both initiatives attractive customers and drove incremental sales in the quarter.
And.
And Martin International operated markets segment, which has been historically strong recovery is taking hold.
Comp sales were up 75% in the quarter or nearly 3% on a 2 year basis as we lapped the peak in 2020 restaurant closures.
Remember in some cases full country operations.
In our in a shutdown in Q2 last year due to the pandemic.
Although we're continuing to monitor recent resurgence of Covid in countries around the world Western Europe begin to reopen during the quarter, allowing us to bring back indoor dining still with some restrictions in place.
Iowa.
<unk> segment comp sales began exceeding 2019 levels in may.
Strong performance continued in Australia, the market benefited from continued growth in delivery and successful marketing and core menu news, including the Bts famous orders and 50.
It's a big Mac promotion.
While Australia produced strong results for the quarter outbreaks of the COVID-19 Delta variant throughout the country have led to recent lockdowns and reduced customer mobility.
Momentum accelerated in both the UK and Canada in Q2.
But in the U K the national Lockdown ended and the market reopened dining rooms in mid may.
The markets are record digital engagement with a significant portion of sales coming through digital channels, where customers place delivery orders and you self order kiosks as dining rooms reopened.
Canada.
Canada benefited from strong marketing activity, featuring our core menu, including the Bts famous orders meal.
In France, and Germany comp sales were still below 2019 levels for the quarter.
While some restrictions are still in place indoor dining reopened for both markets.
In June and we've seen steady improvement since then.
As we look ahead to Q3, we expect comps to surpass pre pandemic levels across all of our big 5 international markets.
The past year has shown us that when markets reopen customer demand for Mcdonald.
<unk> since returns quickly.
Comp sales in the international developmental licensed segment were up 32% for the quarter are relatively flat on a 2 year basis.
Performance was largely driven by positive results in Brazil, Japan and China.
Donald Japan maintained momentum in Q2 with comps up nearly 10% achieving an impressive 23 consecutive quarters of comp sales growth.
The market's performance was driven by strong menu and marketing promotions delivery growth and our ability to continue serving customers.
Favorites safely and conveniently throughout state of emergency waves across the country.
In China comps were strong for the quarter, but have yet to return to 2019 levels due to COVID-19 resurgence is in southern China, resulting in operating restrictions.
Or is there if the market continues to build its digital member base with a successful Mike Mcdonald's App launch and focused delivery expansion and the breakfast and evening day parts.
In addition, China surpassed the 4000 restaurant Mark in June and is now on pace to open over 500, new restaurants this year.
Given our slightly quicker recovery and continued momentum around the world. We now expect full year system wide sales growth in the mid to high teens in constant currencies how.
However, there is still some uncertainty as we continue to see pandemic related stops and starts in markets around the world.
World, especially now with the Delta variant.
Now I'll turn it back to Chris.
Thanks, Kevin.
As we look ahead to the rest of 2021, we're finding ways to capitalize on our strengths.
As we've seen the growth pillars of accelerating the arches are deeply interconnected reinforcing and bolstering 1 another.
It is at the intersection of our Mcd's that we continue to deepen our connection with customers and create a consistent and enjoyable experience proving that the whole is greater than the sum of its parts.
Which brings us back to our famous orders platform.
When it launched in the U S last year, our goal was to create an.
And ambitious marketing campaign.
1 that would leverage our customers' favorite core menu items speak to a new generation in authentic ways and increased digital engagement without adding any restaurant complexity.
Paul while positioning us for the longer term.
The famous orders platform was based on a simple idea.
What unites all of our customers, including famous celebrities is everyone has their go to Mcdonald's order.
The Travis Scott then Jay valve and famous orders broke records in the U S.
This quarter the Bts famous order took that ambition global connecting our marketing core menu and digital.
<unk> strategies in 50 markets.
It was our first famous order with custom packaging in App exclusive content.
It has been to borrow a bts lyric dynamite.
We saw significant lifts and mcnuggets sales and record breaking levels of social engagement.
Mcdonald's customer.
In Bts fans all over the globe downloaded our app.
<unk> chicken mcnuggets with delicious, sweet chili and cage, and dipping sauces and posted about it on social media, leading Mcdonald's to trend number 2 on Twitter globally and number 1 in the U S.
And then the Bts Army took it a step further and memorials.
Customer partnership, creating shoes accessories and frame memorabilia from our packaging.
They were so appreciative of the meal that the Bts Army went out of their way to prepare snacks for our crew and managers in Malaysia, the Philippines, and Vietnam to support them on launch day.
The famous order platform is the M a C and D.
Realize that action.
Both famous orders and my Mcdonald's rewards are also reminders of the unrivaled convening power of Mcdonald's.
And this is just the beginning of the digital customer journey at Mcdonald's.
As we create more personal and seamless Mcdonald's experiences and make it easier for our crew to connect with our customers.
And we're giving customers multiple reasons to continue to come back to Mcdonald's.
By using digital will also leverage our advantages and value and convenience day, part and menu breadth and our biggest advantage our size and scale.
Now for more on the financial performance in Q2, well pass it back to Kevin.
Thanks.
<unk> Chris.
Adjusted earnings per share in Q2 was $2.37.
Which excludes a gain on the further sale of some of our ownership in Mcdonald's, Japan, and a onetime income tax benefit in the UK.
And year to date adjusted operating margin was 43% reflecting improved.
Thanks, Chris sales performance across all segments and higher other operating income compared to last year.
Total restaurant margin dollars grew $1.3 billion in constant currencies with improvement in both franchise and company operated restaurant margins, mostly driven by higher comp sales as a result.
Proves COVID-19 impact last year.
Company operated margins in the U S were strong as we continue to see topline growth driven by higher average check.
In the IOM segment company operated margins improved significantly in Q2 as sales have recovered to pre pandemic levels.
G&A decreased 1% in constant currencies for the quarter, primarily due to lapping our $160 million incremental marketing investment last year.
Offset by higher incentive based compensation and increased spend in restaurant technology.
Our adjusted effective tax.
Rate was 21, 7% for the quarter and we're projecting the tax rate for the back half of 2021, and the range of 21% to 23%.
And finally foreign currency translation benefited Q2 results by 13 per share.
Based on current exchange rates.
We expect FX to benefit EPS by about 3 to 5 cents for Q3 with an estimated full year tailwind of 'twenty to 'twenty 2.
As usual this is directional guidance only as rates will likely change as we move through the year.
Now I'll turn it back to Chris.
Thanks, Kevin.
I'm proud of all that we've accomplished during the past 18 months. It is a remarkable testament to the resiliency of the Mcdonald's system.
But as we turn our focus to the incredible opportunities that lie ahead of US. It's also reminded us of where we must go.
For 65 years, the 1 unassailable truth about Mcdonald's is that we get.
Get better together.
There is a reason why it's 1 of our core values.
Continually finding ways to better ourselves and our system is how we keep our business relevant not just for this generation, but the next.
How do we get better together today.
We get better together by focusing on our people.
In this highly competitive market for talent successful employee recruitment and retention is fundamental to drive growth.
It's why in May we announced a 10% increase in the average hourly wage at our company owned restaurants in the U S with the goal to get to a $15 an hour wage by 2024.
We get better together through diversity equity and inclusion.
Today, 23% of our U S based suppliers come from diverse backgrounds more than double the industry average.
We have set a goal to increase purchases of goods and services from diverse owned suppliers by 10% over the next 4 years.
That.
<unk> is in a position where a quarter of our U S spend is with diverse owned suppliers by 2025.
And we've committed to doubling our national advertising spend with diverse owned media here in the United States between 2021 and 2024.
We get better together by serving our.
That will push but also serving a larger purpose in communities across the world.
As part of our ongoing efforts to support communities through the pandemic. We recently partnered with Baidu <unk> administration to make access to information on vaccines easier for the millions of customers, who enjoy Mcdonald's in the U S.
Our part in the National we.
We can do this campaign continues this month with Mcdonald's Hottman Cafe Cups, MC delivery seals stickers, both of which lead customers to vaccines dot Gov.
In Canada, we're doing something similar around this is our shot to.
It's a national campaign through which Mcdonald's will supply information in restaurant.
Restaurant and drive thru orders, while supporting a digital campaign to replace vaccine hesitancy with confidence.
Finally, we get better together through our commitment to our planet.
In May of 2014, we were 1 of the first major corporations of our size to publicly commit to our sustainability frame.
Okay.
We promised that we would report on our progress against our 2020 sustainability goals by the fall of this year.
As we prepare to have released our impact report I've never been prouder of the difference we're making in the world.
We are working closely with partners across the globe today to source.
<unk> food locally and responsibly to expand our use of sustainable packaging and to power our restaurants with renewable energy sources.
It's the Ultimate example of our 3 legged stool in action for owner operators suppliers and employees each play a critical role in our efforts to protect the planet.
Frame, we're working everyday to set ambitious goals and to hold ourselves accountable to be no not just for what we do as a company, but how we do it.
It's part of our broader commitment to transparency and.
And to following clear science based guidelines from the experts.
We know we still have much work to.
<unk>.
But our internal strategy and the external landscape are converging to create a moment unlike any other.
We are aware of our unique role in the world. We are inspired by all the opportunities that lie ahead.
Over the back half of this year I'm looking forward to getting back into the restaurants around the world and spending more face.
To do with our people.
I'm amazed with everything that our system has accomplished over the past 18 months and we can't wait to write the next great chapter of the Mcdonald's story together.
With that we'll begin Q&A.
Thank you and as a reminder, if you werent investor and would like to ask a question Kevin.
Please press star.
By the number 1 on your telephone keypad, we ask that you limit yourself to 1 question and re queue for any additional questions.
Our first question is from Andrew Charles with Cowen.
Thank you, Chris you talked about delivering a more frictionless.
Time with variance and just given the pledge to engage guests in new ways and in the backdrop of the challenging industry staffing situation. The U S is this prompting you to accelerate implementation of our <unk> voice ordering at the drive thru I was hoping you could provide an update on your ambitions for rollout of the drive through technology over both the near and the medium term. Thanks.
Thanks, Andrew.
When we announced earlier this week the creation of the Chief customer officer job. It was with the idea that as we are introducing more service channels.
We have an opportunity to.
Design it in such a way that it feels like these things all.
All happened at the same time as opposed to in reality, how they happened which was kind of 1 came after the other so my newest charter.
It's about making this so that the customer feels that this is a completely seamless experience in the restaurant I think that the point that you're raising about <unk> is related to it but it's not central to it I.
We announced.
Maybe it was about a month or 2 ago that we were seeing good progress with the <unk>. It's in 10 restaurants.
But that is going to be a significant effort that takes us a number of years.
We were able to deploy that in the U S. So I wouldn't read or interpret anything around menu's announcement.
I think related to accelerating our print day, there's still a lot of heavy lifting associated with getting our <unk> ready for deployment across the U S and eventually the globe.
Our next question is from Eric Gonzalez with Keybanc.
Hey, Thanks, and good morning, Mike questions on Labor I was just wondering if you can comment on.
Staffing levels now versus maybe earlier in the quarter and whether you've seen a material improvement across the system, particularly in some of those states that have ended the government benefits early and then maybe if you can comment on the strategy of the franchisee to be used to successfully attract talent and how the recent labor shortage might've been packaged drive thru speed and whether that's become a drag on sales.
Thanks, Eric.
It is certainly still a challenging staffing environment not just in the U S. We're also seeing in Europe, where staffing is challenging in part because some of the limitations of movement of people across borders.
But if you focus on the U S. A while it is a challenge it is getting better I don't want.
I declare by any means that its easy, but we're certainly seeing some improvement we're seeing applications have increased pretty significantly applications in states that have.
Ended early the federal stimulus those have tended to do even better. So I do think that there's evidence that there's the.
Federal stimulus rolls off that you'll see an improvement in the application rate.
And I think youre seeing wages go up as well I mean, we.
We made our announcement I think broadly, we're seeing wages going up about 5% or so.
In our U S restaurants, and that is also helping improve the situation.
<unk> I would just point out for us and our macaco restaurants. After we made our announcement.
Back in April.
We're getting close to full staffing levels are what we would do.
Seem to be kind of our full staffing level levels in arm, a copco restaurants. So it is possible the situation is improving I think.
The tools and some of the idea that you are seeing our franchisees out there deploying whether it's things like a free childcare sign on bonuses et cetera, that's the power of the Mcdonald's system at work in the power of our sort of local franchisees innovating and coming up with ways to ensure that.
They can staff the restaurants in the short term right now there is a there hasnt been a negative impact on staffing and service times as you May remember, we've improved service times over the last few years by about 30 seconds more recently, we've seen service times decrease about 3 seconds. So we don't.
Love.
But a big part of it is certainly associated with.
The staffing challenges in the restaurant, but also the demand that we're seeing in the restaurants. So.
I'm I'm constructive and positive on the staffing outlook in the back half I think we're going to continue to make progress, but it certainly is a challenge.
<unk> next question is from Dennis Geiger with UBS.
Great. Thanks for the question, Chris you've got strong momentum in the U S and what sounds like a solid strategy and plans to enable continued growth over both the near and the longer term, but it is more difficult compares to approach how are you thinking about maintaining.
Painting that underlying momentum going forward and maybe if you could kind of help us frame up sort of existing and perhaps emerging drivers that help you to support further gains over the coming quarters in the U S. Thanks.
Sure.
So I think the strategy that we've laid out the accelerated the orchard strategy.
I had 3 growth pillars that for us we're gonna be multiyear drivers of this it was going to be the EM, which was marketing to see which was core menu in the 3 DS of digital delivery and drive through so I don't think you're going to see a deviation from those 3 pillars as being what drives sort of the next layers of growth.
I do expect what you will see is that you will see us.
Continuing to find ways within those to move the business forward, so starting with the famous.
Famous orders has been a nice idea for us.
My challenge to our marketing team here Mcdonald's is what's the next great idea and we think there's certainly more we can do with.
Gross orders, but we've got to keep coming up with new ideas from a marketing standpoint, So I think that's gonna be something.
That's on us to deliver with core menu.
We're rolling out in a number of markets we've been rolling out.
A new way to cook or 10 to 1 patties.
That is delivering.
Hotter and fresher burgers were seeing nice lifts in Canada, and Australia, when we've done that.
We call it rapid turnover.
We're going to deploy that to the rest of the market as well I think that's another thing for us and we're seeing in chicken certainly had a lot of success with the chicken sandwich in the U S. So far.
Spicy is IRA.
I referenced in my opening remarks, that's something that we're taking out so moving there and then lastly, we're in the early early stages on digital and I'm incredibly encouraged by what I'm seeing so far with the loyalty rollout.
Seeing very good customer adoption for us to be at $12 million royalty users before we've.
Turned on the advertising is I think a great start there and just a testament to our customer sort of pent up demand for this type of offering for us. So.
Any 1 thing that I would point to the strategy is still very much intact, and we're going to execute and you're just going to see us continue to come.
Come out with ideas within that that are going to continue the momentum Kevin I don't know if you want to give any kind of outlook about sort of how we think about Q3 and beyond just as we think about Q3 I guess both for U S.
U S. As we've talked about obviously, we had a great 2 year trend in the second quarter as we.
We've even little bit ahead to the third quarter I think we would think we would see it moderating a little bit in the U S. On a 2 year basis, but still being double digit and certainly very strong the IOM segment on the other hand will continue its format continue accelerating its momentum.
Several of the markets as we mentioned just.
Open then reopened in May and June and so we anticipate a strong momentum continuing in the I O M for the rest of the year.
Yeah.
Our next question is from David Tarantino with Baird.
Hi, Good morning, I have a follow up to that last comment about iOS.
I O M. I guess on the last call you had expected.
2 year comps to stay negative in the second quarter, and obviously you did much better than that so I wanted to ask kind of what what surprised you to the upside and and then secondarily do you think.
As these markets reopen.
You are picking up outsize share relative to your key competitors.
Yes, Thanks, David.
So yes in the first quarter I think I said that we expected not to get back to flat for the IOM on a 2 year basis.
Obviously to your point, we did better than that certainly at the time 1 of the things that we're guessing or work guessing is when each of the markets would reopen based on regulations going on at the time with no end date or knowing exactly when they they'd allow markets to reopen so some.
And our markets were able to reopen a little bit earlier than we had originally anticipated.
Whether that's certain channels are all channels.
And the other thing that we are seeing is that when we do reopen.
Business comes back quickly and so there is certainly a pent up demand in some of those markets.
Some of them had shutdowns again, primarily in Europe, and so we are seeing when those markets reopen there's significant demand that's waiting to come back whether that's through the drive through whether that's in the store and as you know.
A higher percentage of in restaurant or in store business.
Business in Europe than we do in the U S. So it was really important to get the dining rooms reopen throughout Europe and so.
That demand and reopening plans I'd say have gone a little bit better than we were first anticipating in the first quarter and now our expectation is.
But as long as we don't go backwards on Lockdowns again, which obviously is a.
Still a little bit of a risk but.
Assuming that none of the markets go back through Lockdowns, we feel good about continuing the momentum that in all of those markets.
Our next question is from John Glass with Morgan.
Stanley.
Thanks, very much Chris and Kevin if Youre Investor event in December you laid out some targets for G&A and Capex and some of that was associated with some technology spending.
Is it upgrades.
Has your thoughts involved on how much you need to spend to achieve these goals I'm thinking about technology are you better.
And outsourcing some of it just given how fast it moves versus in sourcing which has been a pressure on the G&A line.
Updated thoughts on that particularly as you see dual journey has gone 6 months further versus when you last talked about those targets.
Yeah, I'll start off John and then pass it to Kevin.
Better or any other thoughts, but I think.
If you go back to what we announced and certainly we were anticipating in some of our guidance there how we expected the business to evolve over the next 3 years or so and so I think from a G&A standpoint, we're very much.
For I think on track with G&A I do think that there is probably a balance toward.
Maybe getting a little bit more that we outsource versus in source on that and it's about for us ultimately, giving the best customer experience. So it's not.
You know for us driven by trying to hit a.
A number per se, but it's about delivering the best customer experience. So I think when you can pick best of breed suppliers from out there in the industry our experience has been.
But that does tend to work a little bit better. We referenced previously we do think we'll probably be on the higher end of capital spend from the guidance standpoint.
Point, just because of a unit growth opportunity out there.
But I don't think you're going to see anything that's dramatically different from what we talked about last year, Kevin I don't know if you have anything.
Just reiterate that what we talked about for 2022, we obviously haven't done our kind of detailed planning.
Yet for 2022, but the initial guidance, we gave both for G&A and capital I think still is pretty much intact, which is a kind of the G&A as a percent of sales and the.
Total capital envelope of around $2.3 billion or so so.
None of that has changed.
And then I think as we talked about at the Investor event, we would expect to get leverage certainly on G&A as a percent of sales longer term because what we're seeing on the technology spend is.
I don't think spend the actual spend levels will go down, but I don't expect it to go signature.
Really up either so we as sales grow certainly we should get more leverage as a percent of sales, but but I think that technology will require a significant amount of ongoing spend going forward, which is why we believe we've got an advantage just from the size and scale aspect.
Our next question is from Jeff Bernstein.
Bernstein with Barclays.
Great. Thank you very much.
Back to the.
Inflationary environment topic.
Really the franchise model helps to insulate corporate.
Just wondering how we think about your outlook for the system in terms of commodities and labor will be over the next 12 plus months.
<unk> the system your size I would think you'd be a pioneer had pretty good visibility the pressures are outsized, which I would presume I'm just wondering how you.
How those conversations go with franchisees and then you mentioned that the cash flow profitability that peaks, but.
Do you think the messages that you prefer to maybe take a hit to the.
The theme of strong sales momentum or other incremental cost savings that is considered incremental menu pricing. Just wondering how you think about that based on what your outlook is for commodities and labor over the next 12 plus months. Thank you.
Yes sure.
In 2021, where we're seeing pretty muted inflation.
You know call it 1% to 2% now we're hedged in a lot of our categories. There. So we're benefiting from that.
It's probably a little too early for us to give an outlook to what 2022 looks like we typically have.
I have that number that we started talking about with franchisees in October.
And we certainly hear and recognize some.
Some of the challenges.
That are out there from an inflation standpoint, but we also have as you mentioned in your question.
Things to our advantage around our size and some of the relationships that we have with our suppliers that we think that there are gonna be ways that we can perhaps offset some.
Some of that so I think it's right now a little bit premature.
To say necessarily that we're gonna be in a significant inflationary environment next year I'm hopeful that we're gonna be able.
To manage that to something that is a little bit more in line with kind of our historical range that we've seen on that we are seeing.
[laughter] challenges related.
Related to some of the supply chain issues.
Issues, but it's on the equipment side, particularly so its equipment getting equipment manufactured in Asia getting that over into markets that maybe have bigger unit growth.
Aspirations were also seeing the chip shortage Ah.
Something that.
Thats rippling through a little bit on the equipment side. So we are.
Closely monitoring what's happening with equipment and just making sure that we've got.
The plans in place there because that tends to be a longer lead item on things from a pricing standpoint, I would lastly, just say you know the pricing.
We've taken this year.
Roughly around 6% or so I think in the U S.
That is.
About in line, maybe a little bit ahead of where.
The overall inflation is when you add in the labor inflation with with food inflation. So I think our our system is being disciplined and they certainly.
<unk> that we know is that we can't get ahead of where the customer is and we've got to make sure that we stay competitive on pricing the only thing I'd add is.
Of that 6% that Chris just throughout that year over year second quarter. This year versus last year. Most of that was pricing that was taken over.
We recognized a year, because we only increase prices about half a percent actually in the second quarter.
And as Chris mentioned, a lot of that is being driven by labor inflation pressure along with some food cost increases, but as he said, we're pretty we're pretty locked in with price cost commodity cost for this.
So we feel good about that certainly if the inflation pressures continue into next year.
Would impact everyone, including us, but right now I think we felt pretty good about where we are.
Our next question is from Greg Frankfurt with Guggenheim.
Hey.
Thanks for the question, maybe just a follow up too.
This year.
I know you're a company margins in the U S were up 400 to 600 basis points, but then I assume the franchisees are probably similar how do you think that trends over time do you think franchisees will underpriced peers to try to take share does that get reinvested into labor.
Or.
Or do you kind of run it out at a higher margin rate permanently Andy I'm, just trying to think about how that dynamic plays out.
Of reinvestment over time thanks.
Thanks for the question, Greg a couple of things.
Excuse me couple of things.
On margins I guess, let me start with company margins because.
Thank you guys maybe use those as a proxy for how the franchisees are doing certainly we had very strong company margins in the second quarter here some of that being driven by.
The higher average check.
I think as we progress we expect that to moderate a little bit 1 from the <unk>.
Higher wages that just began in the second quarter.
And we will continue obviously and 2 we think there may be some moderation on the average check although we haven't seen that yet, but I think we're anticipating average check potentially to come down a little bit from the franchisee side as I mentioned, they're still they still.
Record operating cash flow.
Through through May of this year, they are up over $100000 in their cash flow over last year. So they certainly have the financial strength to be able to continue to reinvest in the business and I think.
In general on pricing both.
Still have reenter our franchisees take a more consumer research based approach than we would have several years ago and so.
It's based on consumer research and its looks at local.
Prevailing market conditions it looks at the compare.
<unk> set within each area and and then franchisees and the company, obviously, each make our own pricing decisions after that but.
I think overall, we felt pretty good about the margins, but I would expect the U S to moderate a little bit from where we were in the second quarter.
Our.
Next question is from Pizza Lane with D T I G.
Great. Thank you.
To ask about the dining rooms, and the reopening of dining rooms. I think you guys said, 70% of dining rooms are open today and you expect a 100%.
By Labor day are you guys getting any.
<unk> back from.
Some franchisees on this issue given the ongoing staffing issues and really the record cash flows that they're experiencing I'm just wondering if they see any reason to reopen their dining rooms.
I think our franchisees recognize that the dining experience is an important part.
Part of what we offer at Mcdonald's and certainly as we look at our competitors. We're also seeing you know that they have in many cases their dining rooms open. So I think our franchisees certainly understand that we need to get the dining rooms open I think the question.
You are kind of referencing here is just about the pacing of it we're 70.
Percent opened today.
And on our way toward getting to a 100%.
There is difficulty as I mentioned earlier about some of the staffing. So that is I think 1 thing that maybe is a little bit of a moderating effect on the pace that we've been able to get our dining rooms open but.
<unk> theres not pushed.
It was not.
Anybody kind of questioning why do we need to have dining rooms open. It's a key part of what we offer here at Mcdonald's. We just have to work through some of the kind of what I would call. It transitory issues right now to just be able to get there by September.
And it is helpful. Obviously to just relieve some pressure in the drive thru certainly.
Back to open the dining rooms, we are seeing.
Not sales levels go back to where they were in the dining room pre pandemic, but certainly some of the drive.
Drive thru sales are transferring over to dining rooms, when we do reopen those when I would just maybe last thing on this I mean, we are seeing a lift.
When you open the dining room, you get a sales.
And I think that more than anything is probably what will motivate franchisees to get the dining rooms open.
Our next question is from Lauren Silberman with credit Suisse.
Thank you Doug digital U S offer such great convenience and access with 95% drive thru, it's across the asset base.
Lift and then your confidence in being able to drive an increase.
Peter Wilson through your direct digital channels, given already that's great access.
And is there anything you can share on the frequency of an average Mcdonald's customer where do I exactly I think the transactions are impulse buys versus planned purchases.
So on the first what gives us confidence I think it's just what we're seeing with customer reaction to loyalty already.
We have as you've referenced a great drive through business, but consumers and particularly younger consumers increasingly are looking at the app is as sort of the way that they wanted to be interacting with.
With Mcdonald's and so.
Our ability to actually have the app connect through the drive through to be able to have loyalty be embedded in part of the drive through experience I think all of these things are part of the vision of the these different service channels different ways of accessing Mcdonald's they all have to work kind of seamlessly.
They are on that and we're seeing good uptick I mean, we had targets around where we wanted to see digital guest counts in restaurants, not just in the U S, but around the globe and.
And we are either meeting or exceeding the growth that we're looking for in our digital guest counts so that the customer is responding to.
To get us excited about having a digital relationship with Mcdonald's and they see the power of what the App can do for personalizing their experience. So that's what gives me confidence is just the numbers that we're seeing as a part of this.
As to the question around drive through maybe I'll have that be something that Kevin answers.
<unk> and just purchase impulse.
Well, the only thing I'd say.
Is like the loyalty program that obviously, we just launched what we saw in our pilots are the loyalty did drive digital adoption and also shorter purchase cycles are greater.
<unk>, we can see a visits if you will of loyal customers. So we have seen that the digital engagement will generally drive people to the loyal customers certainly to return more frequently than they would've otherwise. So the digital engagement has just been another as another piece of the whole ecosystem as Chris talked.
Talked about.
And there are people that are do plan. The outings. In addition to obviously the impulse drive thru sales and as we said in the release you know we had 8 billion of digital sales in the first half of the year its up 70%. So again it goes back to the point what gives me confidence is just that the business results that we're seeing and the customer.
Our response to it.
Our next question is from Jan I haven't co with J P. Morgan.
Hi, Thank you.
2 related questions related points I guess yeah.
Certain markets like France have talked about you know vaccine passports I mean, I guess beginning in September I think what do you understand that to actually.
I mean, if you were to actually have to enforce that you know in terms of how that could potentially you know.
Impact.
In store consumption of your product is kind of the you know the first point and as we think about these franchisees that you know maybe you need to put some technology and staffing around that.
Is there any thought that some of.
Of your increased technology spending that you've been talking about things that are obviously very value added for the franchisee could over time be offset by some increase in the franchise revenue that you receive.
Yeah.
So I think your first question about what's happening at the country level a vaccine.
Vaccine passports.
I would hate to even hazard a guess because it seems like it's changing by the week.
Sometimes by the day on that I think what we've shown though through the last 18 months is the ability of our system.
When they're having to deal with different things at the local.
Paul.
For our ability to respond to the system and I think that's just again goes back to being a franchise business, having local owner operators that are able to kind of make these adjustments and pivots. There. So again I would hate to hazard sort of you know what.
What's going to happen, where and when and how that impacts us I.
I'll just point out again that we've done a pretty good job I think of navigating.
A whole bunch of changes over the last 18 months and that certainly gives me confidence.
As we look forward on.
Sort of what the next phase of this looks like from a from the standpoint of you know.
The things that we're talking about and in ways to deliver value to the franchisees I think for US we're certainly not.
Looking at any of these things from the land through the lens of.
Who get who pays for what and.
You know an opportunity to maybe go after.
I would anything on the revenue side, there from a franchise standpoint, because frankly, we're too far away from any of that so it's a print there earlier.
<unk> is still going to require a significant work to go from 10 restaurants.
2 what ends up being hopefully 10000 restaurants in the U S and as you get a better sense of what that.
After liver is labor savings, what the cost of that be in all of those things we need to learn a lot more before we would ever contemplate.
What that means between the profit split with us and franchisees so premature for us to have any thoughts or conversations on that.
Our next question is from David Palmer with Evercore.
That Mike.
Thanks, Ian just wanted to ask for a clarification on the previous point on the drive thru times and in the U S. And then I have a question on on your macaco margins broadly.
You mentioned, how the drive thru times that improved by 30 seconds or so and that I think you mentioned that.
Much of that had gone away my understanding that a good bit of that might've been because of the loyalty launch if you're talking particularly in recent weeks.
So I'm wondering if you could maybe speak to that and if your experience that improves in the test markets as you get through the launch phase that would be helpful as well.
And then with regards to Mike Copco.
70% or so of your macacos stores or in the IOM and clearly that's a market. That's just getting going you had you know near peak levels.
<unk> margins in the second quarter I guess my question is.
Where can that go broadly do you think youre going to.
And then new peaks in macaco margins on a global basis.
Are their productivity reasons for this beyond what's just going in terms of like the dining rooms being temporarily closed and I'll stop there. Thanks.
Yeah, I'll do the service time, and then I'll, let Kevin handle the macaco margin.
So on service time just to be clear.
As I mentioned, we saw a 32nd improvement over the last few years more recently the 3 second slowdown that's that's off of the 32nd improvement So call. It a net 27 seconds improvement on that the opportunity for US is as you may remember at the end.
Sure. So we did your David when we had our Investor day, we set an aspiration of getting another 20 seconds or so of speed improved service time through the drive through and the staffing changes.
Have slowed some of the trajectory of improvement that we're seeing there, but but I certainly expect that we're gonna be able.
I'm glad to get back on continuing to Whittle away at service times I know, that's what all the markets, including the U S are focused on so it's more of just a slowing down of the improvement there is certainly no.
Its meaningful going backward on this thing and it's just the gains were too hard fought nobody's nobody is.
Gonna be willing to give up on service times, Kevin Yeah, and then on of KEPCO margins. A couple of things as you mentioned, obviously a lot of our macabre goes or over in Europe, and the IOM segment.
And we had strong margins certainly in the second quarter I would expect improvement.
And in IOM margins over the course of the rest of the year I don't know that we will get back to pre COVID-19 margins yet for this year, just because obviously first quarter was still obviously pretty low as a lot of them a lot of the restaurants, we're still had some restrictions whether completely shut down or not I do think.
Going forward there there is opportunity to continue growing those international margins.
At least back to historical levels and potentially even a little higher because of some of the efficiencies you've talked about as well as <unk>.
Average check is still a little bit elevated and those 2 things combined.
We're helping both the USA and our Internet our I O M. A copco, so I do think there's opportunity to potentially.
Potentially on a global basis exceed our historical high margins, David Let me come back your friend, Mike see blood here make sure I answered. Your question in full you had a question also about loyalty.
And impact on service times. So we are seeing when we introduce loyalty. It has a modest impact on service times about 10 seconds.
But over kind of 6 to 8 weeks as both customers and crew get accustomed to it we're able to pretty much whittle that back down to neutral on that so.
There is an initial service time impact, but again over 6 to 8 weeks, we're able to work that out of the system.
We have time for 1 more question, we'll go to Jared Garber with Goldman Sachs.
Hi, This is Michael on for Jared 1 quick last question here you guys have spoken a little.
Importance of dine in reopening to the business more broadly, but with the increase in the digital side of the business and you know the strength and drive through and some of those tech enhancements I guess thinking at all about new formats, whether that's domestic or internationally, maybe to help accelerate unit growth in the future non traditional et cetera. Thanks.
Well I think that's going to be 1 of.
The big areas for a minute to think about and look at is do we need to think about format innovation is being.
Part of how we offer a more seamless customer experience.
Got different things out there in different markets looking at you know no dining room as an example.
About the delivery and drive through only.
Restaurants, I know several years ago, we talked to you about MC originals in France, which was a limited menu. So we've always got things that the markets are kind of experimenting with from a format standpoint, but part of the news mandate is going to be to take a look at all of that.
To understand the customer experience, we want to provide an and if new formats needs to be a part of that to be able to introduce that I do think if we do anything on new format, it's going to be smaller footprint lower cost.
Then what we have today, but again Madhu, we'll probably at some point in the future be able to share with you more on that.
Okay that completes our call. Thank you Chris Thank you, Kevin and thanks, everyone for joining and have a great day.
Thank you. This concludes the Mcdonald's Corporation Investor call you May now disconnect.
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