Q3 2021 Mcdonald's Corp Earnings Call
Okay.
Hello, and welcome to Mcdonalds third quarter 2021, Investor call at the request of Mcdonald's Corporation. This conference is being recorded following today's presentation. There will be a question and answer session for <unk>.
Investors at that time investors only may ask a question by pressing star one on they'll touchtone phone.
I would now like to turn the conference over to Mr. Mike <unk> Investor Relations Officer for Mcdonald's Corporation.
Good morning, everyone and thank you for joining US with me on the call today are president and Chief Executive Officer, Chris Kemp, Shinskie, and Chief Financial Officer, Kevin Ozanne.
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.
Following prepared remarks. This morning will take your questions. Please limit yourself to one 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, Mike and good morning, everyone as.
As the largest restaurant business in the world, our size and scale or competitive advantage that we've built and nurtured for over six decades.
Our 40000 restaurants in over 100 countries are predominantly run by local owner operators connecting the business to the 40000 communities in which we operate.
These local connections and better level of agility that complements our size and scale, enabling local teams to adapt and adjust to operating conditions that vary by country community and even restaurant in real time.
It's what makes Mcdonald's special.
It's also how we're able to use scale and agility, how we can be both big and nimble to achieve something truly unique.
And thanks to the resilience across all three legs of our stool franchisees suppliers and the company.
The scale and agility that we deploy collectively I am confident in our ability to meet whatever challenges may confront us.
Some restrictions driven by new Covid variance to supply chain pressures in labor shortages across industries to any other unknown unknowns.
We're approaching the one year anniversary of accelerating the arches, which took shape in response to changing customer needs early in the pandemic.
Rooted in the inherent strengths of the Mcdonald system and brand, it's proving to be the right strategy with the right focus at the right time.
We're evolving the customer experience in ways, both large and small to meet changing customer needs and maintain our market leadership.
Our three growth pillars, known as our M. C D's marketing core menu and the three DS of digital delivery and drive Thru guide our business.
This includes amplifying contactless channels like delivery and drive thru and creating digital experiences that are seamless personalized and easy to use.
We've continued to make excellent progress this past quarter and I want to thank the Mcdonald's people all over the world who are performing under trying conditions.
Ill turn it over to Kevin to walk through our topline results.
Thanks, Chris.
Our third quarter top line results represent a continuation of our broad based business momentum around the world with global comp sales up nearly 13% or 10% on a two year basis.
Our international operated markets have continued to recover accelerating two year comp trends in the third quarter to nearly 9% as most markets operated with fewer government restrictions.
Theres still varied performance across the big five markets within the IOM segment.
Ranging from strong double digit two year growth in the U K and Canada to low single digit two year growth in Australia, Germany, and France as those countries have been slower to recover from the pandemic.
The U K continued to lead the segment in the third quarter driven by growth in delivery and digital channels as well as strong menu and marketing promotions like monopoly.
In Canada, the strong two year comp momentum was driven by successful marketing activity, including core extensions like the Grand Mac and spicy Nuggets and growth in the three DS of drive thru delivery and digital even as dine in restrictions have lifted.
In France, and Germany comp sales exceeded 2019 levels for the first time in the third quarter.
Germany's positive performance was supported by expanded deployment of delivery the national launch of our loyalty program My Mcdonald's rewards and a taste of Mcdonald's promotion featuring value offerings like <unk> chicken.
France benefited from continued strength in delivery and strong menu and marketing promotions with a focus on family.
Market conditions are challenging with the adoption of vaccine past restrictions for both customers and crew in France and several other countries.
Performance in Australia was impacted by significant stay at home restrictions affecting over half of our restaurants for nearly the entire quarter.
While comp sales were relatively flat for the quarter. The market was positive on a two year basis and continued to grow its delivery channel achieving record delivery sales for the quarter.
As we look ahead to the fourth quarter, we expect the IOM segment to maintain a relatively similar two year comp trend as Q3.
In the U S. We maintained our momentum with Q3 comp sales up nearly 10% or 14, 6% on a two year basis.
We continued to see positive comps across all day parts on a two year basis with sustained double digit comps at dinner and breakfast.
At the same time franchisees continue to achieve record high restaurant cash flow.
Our U S franchisees have never been better positioned to weather the labor inflation pressures, while still investing in growth.
Performance in the U S remains driven by strong average check growth, reflecting larger order sizes and menu price increases.
The big bets, we've made during the pandemic are paying dividends across the business and enabling us to maintain our <unk> leadership.
<unk> menu and marketing efforts with products like the crispy chicken sandwich and successful famous orders like the sweetie meal have elevated our brand and helped drive underlying sales growth across the business.
The launch of our loyalty program in the U S has exceeded expectations and is driving increased digital adoption in.
And just a few short months, we already have over 21 million members enrolled with over 15 million active loyalty members, earning rewards and we expect that number to continue to grow.
Chris will share more loyalty headlines in a few minutes.
We've reopened nearly 80% of our dining rooms in the U S. Roughly 3000 dining rooms remain closed and high risk COVID-19 areas as we continue to prioritize the health and safety of our customers and crew.
In restaurants, where we have reopened dining rooms front counter and kiosks sales remain below pre pandemic levels, but we're seeing that even modest increases in these channels helped to relieve operational pressure in the drive thru.
The strong performance in the U S has continued into October we're currently seeing low double digit comps on a two year basis, and we expect that to continue through the rest of the fourth quarter.
Turning to the international developmental licensed segment.
Comp sales were up nearly 17% for the quarter or about 5% on a two year basis for.
Performance was largely driven by positive results in Japan, and Latin America, partly offset by negative comps in China.
Japan maintained momentum in Q3 with comps up 13%, achieving an impressive six consecutive years of quarterly comp sales growth despite restaurants operating with government restrictions.
The market performance is being driven by our continued commitment to serve customers safely and conveniently through our drive through and digital channels as well as strong marketing and limited time promotions.
China continues to be impacted by both Covid resurgence is which restarted in June and lasted throughout the quarter and a softening economy.
While comps for the quarter were negative the market continues to build its digital presence as they now have over 100 million active digital members.
In addition, we've accelerated new restaurant growth in China.
With over 500, new restaurants already opened this year, we now expect to open roughly 650 restaurants for the year exceeding our original plan.
China remains a critically important market for us and one where we have confidence in the long term opportunity.
So we plan to get even more aggressive in opening new restaurants in this market.
With our strong overall sales performance for the first three quarters of the year.
We now expect systemwide sales to be up in the high teens in constant currencies for the full year.
Now I'll turn it back to Chris to talk more about mcd growth pillars, driving our global business.
Thanks, Kevin.
Our results are a testament to the focus of our teams on driving growth through our <unk> and we're confident that momentum will continue.
After playing a pivotal role in building out our fan <unk> strategy in the U S. Morgan Flatley is transitioning into the role of global Chief Marketing Officer.
Following the instantly iconic global campaign mortgage developed with Bts famous orders again cross borders with both Russia, and Spain launching successful campaigns with local celebrities in the third quarter.
These markets leaned into the idea that truly no matter, how big or famous you are or where you are in the world everyone has their go to Mcdonald's order.
As Morgan elevated to the global role we're excited to welcome <unk> to the Mcfann as chief marketing and digital customer experience officer for Mcdonald's USA.
I have known target for many years and I am confident target, we'll maintain our marketing momentum in the U S.
Behind our marketing success is Mcdonald's craveable core menu.
In the U S crispy chicken sandwich sales continue to exceed expectations. This translated into significant growth in <unk> chicken market share as we continue to support the crispy chicken sandwich platform with culturally relevant marketing.
In the U K, we launched Terminix, spicy sandwich, which generated the market's best chicken promotional results on record.
And in Canada, our spicy mcnuggets promotion had a halo effect on mcnuggets sales.
This quarter, we introduced the MC plant team, which in Austria, and the Netherlands as a limited time offer.
In both the UK and Ireland launched the MC plant in a limited number of restaurants with a goal to rollout nationwide in January.
Big planted available for other market to pull down based on customer demand.
As always we will do what mcdonalds does best listen to our customers. When people are ready for the <unk> plant will be ready for them.
Being customer driven is about more than just menu items. Its also about delivering feel good experiences when and where our customers want mcdonalds. So we can bring the golden arches to as many customers as possible.
That means continuing to increase our engagement across drive through digital and delivery as.
As we do that we're seeing an increase in sales mix across these channels.
Our top six markets over 20% of sales or about $13 billion year to date came through digital channels, whether it was through our app kiosks in our restaurants or delivery.
Our loyalty program has been an instant fan favorite and delivers great value to our most loyal customers.
It also creates another touch point to increase engagement and take our relationship with customers to more responsive more personalized places.
We're already seeing increased customer satisfaction and higher frequency among digital customers compared to non digital.
In September we launched our loyalty program in Germany quickly amassing millions of active rewards customers.
And we're on track to bring my Mcdonald's rewards to Canada by the end of the year in the UK and Australia in the first half of 2022, which means that by mid 2022 loyalty programs will be in our top six markets inclusive of French which has had a strong loyalty program for many years.
Deliveries in other bet, we made long before Covid and one that we believe will continue to be a staple for consumers for years to come.
Over the past five years, our delivery footprint has grown from just 3000 of our restaurants to more than 32000 restaurants across 100 countries.
As the needs of our customers have continued to change delivery has enabled us to increase our reach and gross sales around the world.
We're actively engaged in discussions with our largest delivery providers to support the extraordinary growth in our delivery business. We look forward to sharing more information on these global partnership soon but this is jet. Another example of where our scale confers upon us competitive advantages.
Lastly, our drive throughs with the drive thru presence that is second to none our drive thru sales across our top six markets continue to stay elevated versus pre pandemic levels, even as dining rooms reopen.
We've previously shared that we have been testing automated order taking in the drive thru at several restaurants in the U S.
This was enabled by our acquisition of <unk> now known as Mcd Tech labs in 2019.
These tests have shown substantial benefits to customers and the crew experience.
To enable development and scaled deployment of this program Mcdonald's has now entered into a strategic relationship with IBM.
In my mind IBM is the ideal partner for Mcdonald's given their expertise in building AI powered customer care solutions and voice recognition.
IBM will now acquire Mcd Tech labs to further accelerate the development of automated order taking.
We're in a strong position today focused on executing our plan running great restaurants, and taking advantage of our unique size and scale to feed and foster communities.
For more on our Q3 financials and our outlook moving forward I'll turn it back over to Kevin.
Thanks, Chris.
Our strong performance for the quarter resulted in adjusted earnings per share of $2 76.
Which excludes the gain as we completed the partial divestiture of our ownership in Mcdonald's Japan.
Our strong sales generated an increase in restaurant margins of about $500 million.
For the quarter.
G&A increased about 20% in constant currencies for the quarter driven by higher incentive based compensation expense as a result of company performance exceeding our plan this year.
We still expect G&A to be about two 4% of system wide sales for the full year.
Year to date adjusted operating margin was 44, 3%, reflecting the improved restaurant margins across all segments and higher other operating income compared to last year.
Foreign currency translation benefited Q3 results by <unk> <unk> per share.
Based on current exchange rates, we expect currency to have a minimal impact on fourth quarter EPS with an estimated full year benefit of 21 to 'twenty three.
As usual this is directional guidance only as rates will likely change as we move through the rest of the year.
And finally in September our board of directors approved a 7% dividend increase to the equivalent of $5 52 annually.
This marked 45 years of increasing our dividend for shareholders further reinforcing our confidence in accelerating the arches.
We also announced the resumption of our share repurchase program.
As a reminder, we had suspended share buybacks at the beginning of the pandemic as we took on additional debt to provide liquidity support to the mcdonalds system.
Since then we've been focused on returning to pre COVID-19 debt ratios that support our strong investment grade credit rating.
Going forward, we're confident that our operating performance will continue to fuel growth in our already strong free cash flow profile.
As a result, we're committed to our historical capital allocation priorities.
First to invest in new restaurants existing restaurants and opportunities to grow the business.
Then we expect to return all free cash flow to shareholders through a combination of dividends and share repurchases over time.
Now I'll turn it back to Chris to close.
Thanks, Kevin.
We've accomplished so much in the past 20 months and even though the pandemic has greatly altered so much in our business and our world. It Hasnt changed the simple fact that we're better together than we are apart.
For a long time, we had a bridge physical separation with technology in new ways of working.
But as vaccines have reached critical mass of people in the U S. In some places around the world, we're beginning to see a different future taking shape.
Finally, we're coming together again in our communities and cities around the world are beginning to open up and get back to a new normal.
The same is true for our global Mcfann Lee after being closed for over a year and a half the Mcdonald's headquarters reopened on October 11, and it was inspiring to see teams collaborating again in person.
To protect the health and safety of our staff, we required all U S based corporate employees to get vaccinated and we're continuing to monitor local data and seek guidance from public health officials.
Even though we've only been back for a few short weeks, we have found that working in the office together Spurs the level of collaboration creativity, and connectedness that simply could not be replicated from behind our screens.
And we're going to be doing the same thing with our global system soon.
Next April and Orlando franchisees suppliers and employees will convene for our worldwide convention in person for the first time in four years.
It's already shaping up to be an experience unlike any other.
Together, we will showcase Mcdonald's bright future will demonstrate the power of technology for our restaurants learn how innovation is enhancing the customer experience and discussed planned in the pipeline to drive our accelerated <unk> growth plan.
As I've said before is not only important that we grow it's equally important that we grow sustainably and in ways that positively impact the communities we serve.
Driving climate action has been a centerpiece of our long term strategy for a while now and our focus has sharpened.
In fact in 2014, we established public commitments intended to make our entire system more sustainable by 2020.
Among our goals were to sustainably source, 100% of key ingredients, including coffee and beef.
Looking back this was just the beginning of what would become a much bolder agenda that we're pursuing with urgency.
As the threats to our planet have grown we are responding with a more ambitious plan for ourselves and for the entire industry.
We achieved many of our 2020 goals ahead of schedule and we built upon that momentum to set new ambitious targets.
Just this past September we announced that we would reduce the use of conventional Virgin plastics and happy meal toys by 90% by 2025.
We recently announced our ambition to achieve net zero emissions across global operations by 2050, and we joined the UN race to zero.
And I look forward to sharing more of our sustainability story with climate delegates at the United Nations Climate change conference known as Cop 26 in Glasgow next week.
We believe we have both a privilege and a responsibility to help lead on issues that matter. Most in communities and there is no issue more globally important and locally impactful than protecting our planet for generations to come.
Why I continue to remain optimistic about what lies ahead for Mcdonald's accelerating the arches fortified by our purpose and guided by our values makes me confident not just in the future successes of our business, but also for the future of the communities that we serve with that we'll begin Q&A.
Thank you.
A reminder, if you our investor and would like to ask a question. Please press star followed by the number one on your telephone keypad, we do ask that you limit yourself to one question and re queue for any additional questions.
Okay.
Our first question is from Andrew Charles with Cowen.
Thank you, Chris or Kevin just wanted to ask about the staffing environment, you touched on it a little bit but to.
To the degree that it was a headwind in <unk>.
Very strong U S same store sales I'd be curious from what we're hearing it seems to be a bigger issue as the quarter progressed.
Talk about how if theres going to be low double digits same store sales in <unk>, you're seeing that October you're obviously very strong but does suggest a bit of a deceleration from the very strong sales you saw in the quarter. So curious if you can help with any numbers kind of help parse that out a little bit more.
Given it's a challenge for everybody and I would think that Mcdonald's is better positioned but not immune.
Sure I'll start and then let Kevin fill in.
The other point on this but certainly it's a very challenging staffing environment in the U S.
Less so in Europe, but it's still challenging in Europe.
In the U S for US we are seeing as I've mentioned, a few calls ago that there is wage inflation.
Our franchisees are increasing wages are over 10% wage inflation year to date that we're seeing in our macaco restaurants.
Were up over 15% on wages.
That is having some helpful benefit certainly the higher wages that you pay it allows you to stay competitive.
But we're also seeing that it's just it's very challenging right now in the market to find the level of talent that you need and so for US. It is putting some pressure on things like operating hours, where we might be dialing back late night for example from what we would ordinarily be doing.
<unk> it.
It's also putting some pressure around speed of service.
Where we are down a little bit on speed of service over the last kind of year to date.
And maybe even the last quarter. That's also a function of not being able to have the restaurants fully staffed but I would just I would tell you that it's not unsolvable, either and we are seeing in our my copco restaurants that.
Really strong focus on the shift manager.
And providing the training of the ship managers to keep engaged with the crew to keep the crew motivated that that can make a difference.
But certainly I was hoping and expecting that we're going to see the situation improved maybe a little bit more quickly than what's materialized and I think it is going to continue to be a difficult environment for the next several quarters. Kevin I don't know if you have anything you want to add just to touch on your point.
Point about Q4, two year comps for the U S.
I guess, the fact that they are decelerating a little bit from second and third quarter couple of things there I guess I'd say one would be.
I think we're pretty pleased to see two year comps in low double digits, that's certainly higher than our historical levels and if.
If we're able to sustain that for a long period of time, I think we'd be pretty happy with that certainly there have been.
Some changes that have gone on related to more of the full service restaurants reopening stimulus benefits unemployment benefits rolling off.
So we weren't sure how much that would impact our results and are pretty pleased that we're still able to.
<unk> achieved a double digit comps and so.
I think we feel pretty good about going into fourth quarter right now in the U S.
Our next question is from Eric.
With Keybanc.
My question is on pricing I'm, just wondering if you can comment on the current level of pricing in the U S system and maybe discuss what you think is the appropriate level in the current environment and whether youre seeing any consumer pushback.
Yes. Thanks for the question, Eric certainly pricing and cost pressures are a bigger focus over the last few quarters than they had been previously.
Last last quarter, I think I talked about how we were seeing roughly a 6% increase year over year in the U S.
We're still seeing that and that's pretty much the level, we expect for the full year 2021 over 2020 right around that 6%.
And that's really to cover both labor cost pressures and commodity cost pressures that we're seeing if we step back for a second obviously, we're all seeing the environment out there on a global basis, which is some pressure on commodities certainly some pressure on labor availability and cost.
<unk> supply chain disruptions et cetera that are all putting some pressure.
We haven't seen.
I'll say any more resistant to our price increases than we've seen historically, so that the 6%.
Has been pretty well received by customers. We do certainly have a very big focus to make sure that we are balancing cost pressures and being able to cover those with making sure that our value perception by customers continue to be favorable and we are continuing to see those.
Surveys in the scores for me value favorability perspective still positive from customers. So we'll continue to keep an eye on it.
A commodity perspective.
Commodities were up roughly 2% or so through the first nine months, but we expect for the full year for those to be up rough of roughly three 5% to 4%, which will put a little bit of additional pressure on the fourth quarter, obviously and then going into.
And next year from a food and paper cost perspective.
I would expect our cost to be up relatively in line with the industry right now that expectation is rough roughly mid single digits.
And so we will continue to keep an eye both on the cost side and the pricing side, both we and our franchisees over the last couple of years.
<unk> had been using a third party for pricing.
Advisory services, if you will using a pretty deep consumer based research approach and so we have I think more science built into our pricing decisions are taken into account market conditions competitive factors et cetera.
So like I said, we'll keep a close eye on costs and pricing, but right now.
So far it's been received okay by customers.
Next question is from Jared <unk> with Goldman Sachs.
Great. Thanks, so much for the question I wanted to shift the topic, a little bit over to the unit growth side of the equation and if you can give us an update on what youre seeing in terms of unit opens and the availability of both labor and equipment.
And construction and permitting across both the U S and international segments I think.
The IOM segment came in a bit light in terms of unit opens this quarter, but you also.
Increased net unit growth for for the year. So just any color on framing out some of the puts and takes there would be really helpful.
Thanks, Jeremy for the question I'll take that.
Think it is fair to say.
Again, just thinking about the global environment, there are certainly supply chain challenges across the world and various things related to kitchen equipment technology equipment.
I'll say pandemic related disruptions slower permitting times all of the things that you mentioned or are making it a bigger challenge I'll say to get restaurants. Open then historically for this year, we still expect roughly.
And our I O M and U S markets, it's down a little bit from where we were previously there has been there will be a few that will spillover now into 2022, that's more of a timing issue than anything else and so because of things taking a little bit longer some of the openings that we thought we may be able to get done this year, we will see.
Spill into beginning of 2022 going forward I think we're still bullish on openings, we still expect our openings to increase both in our wholly owned markets as well as our developmental license markets next year. The increase that you saw right now for 2021.
He is being primarily driven by China and a few other <unk>.
Developmental license markets.
So.
That's why the overall openings is up this year, but.
I would say.
Overall, it's a bigger challenge than it has been but our supply chain does a phenomenal job.
And then just managing the whole process, making sure that we've got contingency plans were in touch extremely frequently with all of our suppliers and.
I feel pretty good about where we are compared to where others may be just because of the strength of our supply chain, but I think it is fair to say that it's a bigger challenge than it's been historically.
Our next question is from Jeff Bernstein with Barclays.
Yeah.
Great. Thank you very much.
Just a question on the IOM markets.
Sounds like you mentioned the recovery is somewhat staggered.
Just wondering kind of your bigger picture thoughts in terms of whether you expect the comp recovery in.
You said, Australia, Germany, and France, whether you think those markets will ultimately accelerate to the U K and Canada levels may be provided in the next leg of comp growth or on the flip side are there reasons. Why you think those markets will continue to lag weather structural or otherwise any thoughts there would be great. Thank you.
Yes, sure I'll start off and then again, Kevin can pick up anything that I missed here, but I think overall, we remain very optimistic about our international portfolio in the markets, where we're seeing restrictions.
<unk> those businesses are bouncing back and bouncing back in a very healthy way.
The markets that you mentioned like in Australia like of France. They have.
Certainly had to navigate a more restrictive.
Covid environment, we did get a peak.
Earlier in the year when when things appeared to be getting better before the delta variant that those markets are.
We're poised to spring back so from our expectation.
As soon as the conditions in those markets start to become more favorable in terms of being able to return to normal operating conditions.
We expect that those markets are going to perform in a very healthy way because that's how they were performing pre pandemic. So theres nothing structural.
That would make us concerned about their ability to bounce back the only the only other thing I'd add is there are a couple of countries, Spain and a little bit of France also where they are more reliance on tourism. So as tourism starts getting back and returning a lot that should help those countries to but some of the slower countries.
To come back or.
Some of the more tourist heavy countries as well as having some of these vaccine passports that just.
Had some logistical challenges with.
Kind of checking customers coming in but as Chris said, there isn't anything structural that prevent all of those countries from coming back strong.
Our next question is from Brian Bittner with Oppenheimer.
Okay.
Good morning, Thank you.
You had a break out operating margin performance in <unk> in your consolidated EBIT margins year to date are now above 44% and so the question is how do you want us to think about the EBIT margin opportunity in that in a post 2021 world is there an opportunity.
D to keep expanding from this.
Elevated EBIT margin level, I know, there's more opportunity to leverage G&A and leverage DNA, but theres also a lot of inflation out there so any color would be helpful.
Yes. Thanks.
<unk> Brian.
Relating to our operating margins I think at our Investor.
Update last year, we talked about for 'twenty, one 'twenty two we thought operating margins would be pretty much in the mid to low Forty's I think thats still our thinking right now there will be some near term moderation potentially a restaurant margins as.
Some of the labor costs and commodity cost kick in but we also expect to get leverage as sales are improving.
Currently in the midst of working through our 2022 plan. So I don't have exactly specifics, but I think generally that mid to low 40 is the way we've been thinking about it both for this year and for next year.
Our next question is from David Tarantino with Baird.
Hi, good morning.
I was hoping.
You would elaborate a little bit more on the loyalty program and what you're seeing there.
And in the early stages.
And just in terms of kind of what it's doing to the business.
Currently and then also if you could give some perspective on how you are collecting data and what you're planning to use are to do with the data that you're collecting them as you move into the next few years. Thanks.
Sure what we're really pleased with how loyalty is starting off in the U S. We're seeing a similar very nice start to it in Germany and Canada.
We are the more we learn about laurel loyalty the more optimistic that we get about loyalty I think for us in terms of what that means for the business long term certainly the benefit you get with a loyalty program is the ability to increase frequency and in the markets, where we operate roughly 80% of the population visits.
Mcdonald's once a year. So it's not that we have a reach opportunity it's about driving frequency in this business than we've seen.
In the places that where we have deployed loyalty that it absolutely does increased customer frequency so for us.
That's really encouraging I think to the broader point of what do you do with the data we had set out earlier and aspiration, where we wanted to have 40% of our customers be known customers. Today that number is probably only about 5% of the customers, where we actually know who was the customer whether they buy when they buy previous.
Lee.
You can imagine all sorts of things that you are able to learn about customers and their preferences, when youre able to get more and more of your transactions, where you know who the customer is in loyalty is certainly the way that you get that customer to engage and share information with you. So for US I think we're just getting started on.
But very optimistic about what loyalty loyalty can do this business and by mid next year, we're going to have loyalty in our top six markets. So I think the ability to give you a better idea of what exactly it's doing for the business I think once we have that kind of scale.
Scale and rollout, we'll be able to talk with even more specificity about it.
Alright next question is from Dennis Geiger with UBS.
Thank you Chris just wondering if you could speak a bit more to the strong momentum that you've got in the U S and roughly how you maintain that momentum and the market share gains going forward I know you've been asked this question coming into the year and throughout the year and I think you can.
Instantly suggested the momentum would continue despite having to lap some of the strong results that you've gone up against and you folks have done just that so just kind of curious if you have any additional thoughts from here about how to think about that U S momentum going into 'twenty two.
Just perhaps you're framing up some of the key existing initiatives that maybe you've already touched on and then at a high level any kind of upcoming things that that will help support that Benjamin momentum as we go into next year. Thank you sure.
I think a shout out to the U S team and our owner operators for doing a great job of sustaining that momentum as you mentioned through <unk>.
Continues to be a challenging environment for all the reasons that have come up on this call labor challenges commodity inflation et cetera, I think the momentum that we're seeing in the U S business is not something that just came about in the last couple of years. This was something that started several years ago with the foundation that we've put in place in the U S.
And the foundation was around modernizing our state.
Proving the food, making investments in digital and delivery.
And I think the fact that we were able to get all of those things sort of embedded in the business.
Back in call. It 2017, 2018, and set us up really well for what none of us could have predicted which is what we have now experienced through through COVID-19. So I think for us what I feel good about with the U S. As we've got sort of the foundational elements in place.
For this business to outperform or perform quite well for extended period of time as to how you do that it's going to be back to the strategy that we have with accelerating the arches. It's a focus on great marketing are.
Driving core menu and outperforming on the three days of delivery drive thru and digital and so for us.
The message that I'm talking about to the teams internally as we have the right strategy. It's all about execution and we've got to execute at a really high level. If we do that on those three dimensions that I am confident.
But we also can't get complacent and I think there's a good healthy level of dialogue going on in the U S. Right now about just keeping that hunger keeping that momentum going and.
Once you've got it you don't want to give it up and Thats the mindset right now.
Next question is from John Glass with Morgan Stanley.
Thanks, very much first on delivery can you just update I know you gave the total digital mix what delivery makes up of that and maybe quickly since post COVID-19. There is an acceleration.
In that kind of where it stands now versus prior you'll also Chris talked about maybe being more strategic in your partner picking your partners in delivery I just wondered if you could expand on that.
And just finally can I just want to make sure I understand if youre selling that tech labs.
We're transferring it to IBM is there anything material, we should know about either G&A or anything that would impact the financials do that transaction.
We're trying to get all of them.
Yeah.
I'll do the I'll do that delivering question, while Kevin is going through his notes.
The other parts of this but.
So we don't share our.
Specific breakout on delivery, but suffice to say delivery for us continues to be a really important driver for our.
Our business has grown by billions and billions.
I think it's fair to share over the last several years and we're continuing to see even as markets reopen.
And things start to get back to normal in places, where they are able to get the dining room et cetera are back open delivery remains elevated and so for US I think what has become apparent is delivery was meeting a customer need that I don't think any of us fully appreciated.
Maybe a few years ago. So it's here to stay what we're trying to do with our partners.
The way that we had approached some of our delivery conversations previously with our <unk> partners. In many cases those were discussions that were happening at the market level and when you are a company the size and scale of Mcdonald's. We certainly have we believe a great proposition for <unk> partners on a.
Global basis, and so what we're trying to do through these conversations is leverage the fact that we are the largest restaurant.
Any in the world that we have.
And ability to drive traffic onto three P O apps.
That we think is second to none and that that should be reflected in the rates that we're paying with our <unk> partners. So those conversations are proceeding, but I'd say, there's a good recognition on both sides that we need each other and I'm optimistic that we'll be able to get to a good resolution on that in the next.
Couple of months.
And then just to follow up on your question related to the transaction with IBM.
The potential impact of that.
There shouldn't be much of a financial statement impact of that we had generally I forget maybe about a less than 100 people I think that were associated with that business and so.
Those folks will now go work with IBM really the reason we're doing this with IBM is to be able to have someone that can take how far we've gotten right now with the solution and be able to kind of finish the development and then help us deploy this at scale and so we're going to use their expertise certainly.
And and.
AI and AR.
Everything that they've learned from Watson et cetera, but it isn't it isn't a big financial statement.
Impact plus or minus I'll say going forward from that.
Our next question is from Chris Carroll with RBC.
Hi, Good morning. Thanks for the question. So just following up on the U S business you noted the benefit to average check from larger.
Order sizes and menu pricing, which you gave us some detail on a little while ago can you comment on your view of the sustainability of our recent average check drivers it seems like some of the.
Our recent guest behaviors are remaining consistent around group ordering maybe perhaps longer than expected. So curious as to your thoughts around your ability or focus on maintaining check growth and perhaps how digital helps drive this going forward.
Yes, I'll try and I'll, let Chris add.
So that's one.
A good question because youre right I think early on in the pandemic I think we believe that the average check would decline quicker than it certainly has.
And I think the reason right now at least is because the channels that much of our sales are going through which continue to be things like drive thru delivery digital as you mentioned.
People are still going through and ordering for several people if youre getting delivery you're getting it for your family or for at least a couple of people a lot of the folks going through drive through are getting orders for several people and so we are seeing those larger order sizes continue and I think it.
Lease some of that will be stickier than we originally may have thought so we don't anticipate certainly in the near term average check returning back to the level. It was at pre pandemic.
I think.
I lost my train of thought.
I do think we will.
Continue to see.
Uh huh.
The checks continue to to grow as those those.
Channels continue to grow.
And.
Like I said, we're not seeing any degradation of that check at this point.
Maybe just to fill in here a few things and I'll I'll go back and quote my CFO from something that he said several quarters ago, which is we are still selling more stuff.
We're still selling more sandwiches were selling and selling more fries and so from a unit standpoint in a while.
We certainly are looking at traffic the absolute volume of what we're selling is continuing to grow and for me.
That's a really good barometer about the health of this business I think you know why.
As to whether that sustains whether these larger parties a larger order sizes sustained we're going to follow the customer to whichever way they want to go with the customer starts to come back and.
Split the ticket and we have smaller check.
So long as we continue to focus on the execution will be just fine on that.
But certainly I think what youre seeing right now and.
What we're expecting is that some of the benefits that we're seeing around larger check and mix the channel mix that goes with that.
We're expecting that to continue.
Next question is from Lauren Silberman with credit Suisse.
Thank you I wanted to ask about the next plant.
Can you talk about what you've heard with respect to demand for plant based options and then from a franchisee perspective.
Oh for plant based options.
Given the current operating backdrop and it looks like the test is being conducted in diversity. So anything you can share on differences in demand across the market from the perspective of both consumers and franchisees.
Yes, I think in the U S. It's really early to be making any kind of read out on what we're learning I would point out.
Less than 10 restaurants in the U S. Its largely an operations test right. Now now there are other markets that are further along the U K.
As in 250 restaurants, and they're going to be planning on doing a full national rollout in.
In the U K in Q1.
That situation I think we have more evidence that it is filling an unmet need that certainly existed in the U K on their menu. So early results in the U K are very encouraging a couple of other markets as well.
In Europe have.
<unk> seen success with with MC plant and the rollout on that so I think this is one where we've said all along we're going to let the market decide when is the best time to pull it down based on what the customer.
Acceptance are interested in this concept I think certainly I can say at this point there are definitely a couple of European markets, where there is customer acceptance for it.
Whether that is a broad based acceptance in the U S. I think we will learn that over the next.
Several quarters.
Our next question is from Brian <unk> with Deutsche Bank.
Okay. Thank you I'll just follow up on the unit growth topics specific to the IOM segment.
Putting aside transitory related and timing related issues do you see any opportunity to go faster on development. There over the next few years versus what you might have previously been planning for prior to the pandemic.
And if you do see increased opportunity as there is there any kind of upper limit in terms of the number of gross openings that makes sense for that business is it just a function of managing the level of capex spend you're comfortable with or are there actual operational constraints to think about too yes. Thanks for the question Brian.
I think to be fair, we had started thinking about accelerating some of the openings internationally, even pre pandemic certainly nothing that's happened in the pandemic has changed our thinking at all related to that and if anything I think just reinforces that our opportunity to continue growing in.
Many of those international operated markets as far as any constraints I think the constraints really are.
From a from a market perspective.
There is kind of a sweet spot of what they can open in terms of.
Building, our pipeline, having the right real estate representatives.
Opening in a way that isn't disruptive to the rest of the market. So we do have a lot of tools that we use to determine kind of what the appropriate opening level is for the markets.
We do have.
Opportunity to open quicker and many of those markets than we have been and I think our expectation is that we will continue to grow in many of those international operated markets, where we still believe there is a lot of opportunity. We're just in the midst of going through our plans right now for 2020 twos. So I don't have specifics.
Yet for 2022, but I think it is fair to say that we would expect our openings next year to be higher than they are in 2021 and continue to kind of increase that level for a little while where we will we've talked about unit growth being about 1.5% to 2%.
Contribution to sales growth right now we're at the lower end of that though more of the one 5% and likely not a lot above that for 'twenty two because it really relates to 21 openings, but as we go on I would expect that to get closer to that 2%.
Contribution.
Next question is from John <unk> with Jpmorgan.
Yeah.
What about.
Drive through digital and delivery.
The question really is on dine in and as you've seen various consumers in various markets respond in a post COVID-19 environment in terms of their behavior.
What are you kind of thinking about using dine in longer term and you know do you have an opportunity to pivot that asset even further to focus more on the off premise.
Premise consumer as we think about leveraging all of the asset not just part of it.
Yes, it's a great question and it is one that we're thinking about it.
It's something that is now on the plate for a new study of our menu is.
As we announced.
I think last quarter. It was that he is the chief customer officer, and one of the things that fits in <unk> portfolio as he has both restaurant design operations as well as.
The customer experience and so thinking about what is going to be the consumer acceptance on a sustaining basis for dine in coming out of this and then what are the implications of that I would add we have a lot of play places in our restaurants are what is the implication for the play and play space.
So we are just now starting to think about that and think about a potential scenarios for how you might reuse the space if a dine in it doesn't come back to the level that it was pre pandemic, but I think right now it's still a little bit preliminary just because there is still.
<unk> in the dine in numbers that I don't want to do anything hasty here until we just get a better bead on what does a dine in sustained out, but it's certainly something for us to be thinking about.
The only other thing I'd add is on the international side certainly in Europe diners.
<unk> dining is a bigger percentage of our sales and is an important part of that business and we have seen dine in return I mean kiosk usage is getting back to.
Most where it was pre pandemic and so our families. Our family business is very important in Europe and so.
Christmas point, we got to be careful about what we do because it isn't the same around the world as far as dine in business and.
And how customers view that side of the business.
Our next question is from Sara Senatore with Bank of America Merrill Lynch.
Thank you.
Alright.
Go back a the technology piece.
In particular on on characters is big data.
I know you are partnering with IBM because of that they have expertise.
But you know as I think about loyalty one of the things that I think is emerges that's really about it.
It's not just the data just like you do with it are there opportunities to partner IBM or other tech companies within loyalty or maybe more broadly. Thank you.
See where.
That was my expertise would be useful and and maybe more specifically is this a signal as to how you're thinking about technology insourcing versus outsourcing, so where Mcdonald's should own the technology really has no specific expertise and maybe customer facing.
<unk> versus some of the the sort of behind the scenes.
Capabilities. So you know.
Just anything you can signal about that end and longer term as we think about your your technology budget.
This change over time.
Not just the French banks more broadly.
Yeah, Thanks, Sara and I think this is one where I would go back to the conversation you and I had.
I know it was probably several quarters ago now on this topic of how do we think about technology, what's in sourced what's outsourced and.
My thinking that is the same as my thinking now, which as you know there are certain times, where it may make sense for us to go acquire a technology. So that we can accelerate the development of that make sure that it is.
Boat to mcdonalds needs, but at some point.
That technology reaches a level of development, where I think getting it to a partner who can then blow it out and scale it globally.
Makes more sense and so I think what we did with a print day is very much consistent with that philosophy, which is we've had it for a couple of years I've been really pleased with how the team has progressed.
Development of that we're seeing some very encouraging results in our restaurants that we have it but theres still a lot of work that needs to go into introducing other languages being able to do it across 14000 restaurants with all of the various menu permutations et cetera and the.
That work.
Is beyond the scale of our core competencies, if you will and so I think in this case IBM as a natural partner for us.
Going forward, it's going to be very much on a case by case basis as to when we just we go from day, one with a partner versus where we might bring something in house for a period of time, but.
The nice thing about being Mcdonald's is where everybody's first call when it comes to our partner in the restaurant industry and and so we have a really good visibility to the various partners out there and.
Certainly our I think our overall view is we are bust on a long term sustaining basis to use others externally partnering but again there may be time to time, where there is a benefit for us from being able to accelerate and learn to have it in for a period of time.
Our next question is from Jon Tower with Wells Fargo.
Great. Thanks for taking the question I was just hoping to tie it into some earlier questions.
I was wondering if you could get into how your customer demographics may be shifting in the U S.
And specifically it seems like either through product innovation, obviously, new mediums in terms of ordering or even in marketing you're talking to a younger customer than you've been talking to for years. So I'm wondering if that's actually showing up in the data and if frequencies changing amongst that group, which is obviously.
A good lead indicator for longer term.
<unk> for the business.
You wouldn't mind, expanding that'd be great.
Sure well I think you know.
Not just in our industry, but across I'd say, most consumer industries are the youth and the preferences and desires of the U drive consumer demand, whether it's in apparel beverages at restaurant et cetera, and so it becomes a very natural demographic.
Target that 18 to 35 target as you know from a media standpoint, probably the most coveted the most expensive.
Demographic to reach because of the brand preferences that get formed at an early age and that sustain over the lifetime value of that customer. So I think youre absolutely spot on in observing that we have made a more demonstrable pushing against that demographic and I expect that that is.
To continue and it's one that we believe that Mcdonald's that we have a brand that can be part of culture.
And we probably have not in my view, we haven't done enough to lean into that.
The stature of our brand and culture and how we can connect to that and so I think finding properties finding a message that resonate with youth, but also resonate more broadly and culture for us is a big upside opportunity and we're seeing other markets. The U S started some of this but we're seeing other markets.
Russia like Spain.
Pick up on the famous orders concept and getting very similar results on that and it just to me it speaks to.
The ability of this brand and what we can do with it.
I think in terms of how is that changing the mix. It's still early days on this so I think we are seeing certainly the brand.
Brand sentiment improving.
But we're also having to.
Move a pretty big boat here and so we're not yet seeing it show up in terms of a big demographic shift within the business, but frankly, nor did we.
Something that I think for us is going to sustain over several years and it's again, it's about making sure that our brand is one that is as powerful in the future as it has been in the past.
For one last question from David Palmer with Evercore.
Thanks, Thanks for squeezing me in a quick technical question was there a gap between the company and franchise same store sales growth.
Particularly in the IOM and especially on two year I asked that because I remember you used to have a lot of company stores in urban centers, which I would imagine would be slower to recover but my bigger picture question was on free cash flow do you anticipate the free cash flow yield moving up overtime I would imagine that over 100% would be achieved.
Given the gap between depreciation and maintenance Capex on the on the owned real estate.
<unk> restaurants.
And if you agree.
Could get there and perhaps you could give us a window into how youre thinking about growth Capex of course, which would be in that answer.
Yes, let me start with your comp question I guess for the for the third quarter at least both the U S and I O M comps were a little bit higher in with franchisees than they were with company operated that's not dramatically different than historic.
I'll I'll say so for a while that's generally been the trend some of that is driven certainly in the U S. Depending on the location of where our company operated stores are versus others.
But in general our franchisees are running a little bit ahead of company operate on a comp basis and that that is what we saw both in the third quarter and on a year to date basis I'll say this year related to free cash flow. We've said we expect our.
Our.
Free cash flow.
Coverage to.
Conversion to be greater than 90% both for this year and.
Going forward.
I don't want to I don't want to surmise a winner if it could get to over 100% for now we're going to stay with that over 90%. I think we are seeing that we have a pretty healthy flow through that.
And our P&L that converts to free cash flow. The big question right now and again as I mentioned a couple of times, we are still in our planning phase to look at capital requirements and what that means related to some of the opening opportunities that I mentioned earlier et cetera. So we've got to take all of those pieces into it.
Count to figure out what the free cash flow profile looks for several years, we do expect free cash flow dollars to continue to grow and I would expect that free cash flow conversion certainly to stay at a at high levels.
Thank you Chris Thank you, Kevin and thanks, everyone for joining have a great day.
Thank you. This does conclude Mcdonald's Corporation Investor Conference call you May now disconnect.
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