Q2 2022 McDonald's Corp Earnings Call
Ladies and gentlemen, please standby Hello, and welcome to the Mcdonalds second quarter 2022 Investor Conference call.
At the request of Mcdonald's Corporation. This conference is being recorded.
Moving to the expression presentation, there will be a question answer session for investors at that time investors only may ask a question by pressing star one on their touchtone phone.
I would now like to turn the conference over to Mr. Mike see Black of 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 <unk>, 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.
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, we 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 will turn it over to Chris.
Thanks, Mike and good morning, everyone I.
I'm proud to report that our Q2 performance was yet another demonstration of our broad based business momentum with global comp sales up nearly 10% and most of our major markets continuing to grow market share.
One thing is clear.
The World continues to move in fast and often unforeseen ways as it does the Mcdonald's brand indoors.
But before we get into the details of the past quarter I want to offer up a few words about Kevin who is in who is joining today's call for the final time as Mcdonald's Chief Financial Officer.
According to Kevin This is 30 earnings call as CFO , but who's counting.
To say that Kevin has had a profound impact on Mcdonald's is an understatement and I should note that this impact isn't coming to an end just yet.
But as he transitions from his duties as CFO , it's a perfect time to reflect on what he has done in this seat.
When Kevin first took the reins as CFO in Q1, 2015 comparable sales and guest counts were declining globally and across each geographic segment and they were real questions about the growth outlook for the company.
Rising customer and investor expectations demanded a clear vision and voice, which Kevin ably provided.
Kevin has been a constant and shepherding Mcdonald's through unprecedented change again and again.
From leading the company's financial turnaround in 2015, and helping create our last two strategic growth plans to navigating through a global pandemic and exiting a major market Kevin has seen it all.
During his time as CFO the company increased system wide sales by over 25% to more than $100 billion increase.
<unk> increased the number of restaurants worldwide by more than 10% to nearly 40000 restaurants and returned over $50 billion to shareholders through dividends and share repurchases.
As just one barometer of Kevin's impact Mcdonald's stock has appreciated 150% during his tenure.
Anyone who has worked with Kevin knows his leadership is as much about what he does is how he does it.
As insightful strategic approach of the business is matched by his ability to make human connections at all levels and with all stakeholders across our system.
It's safe to say that Kevin is one of the most beloved senior leaders in our organization.
But like I said, Kevin is that going in and we're just yet he has been promoted to a new elevated role as our senior executive Vice President of strategic initiatives, where he'll work closely with me until his retirement next year.
I'll look to his counsel as we execute against our accelerating the art just strategy and identify areas, where we can continue to evolve this strategy to meet the needs of customers long into the future.
I expect we'll be sharing more down the road with all of you.
Kevin This isn't goodbye not by a long shot but on behalf of the entire Mcdonald's system. It's an opportune time to say thank you.
Now onto the business operating environment.
As we entered the year, we knew we were facing rising inflation a surge in COVID-19 cases, and the return of government restrictions in many markets exacerbating labor shortages and supply chain challenges.
Over the last six months the macro uncertainty has only increased we now face war in Europe inflation is running at its highest level in 40 years interest rates are rising to levels. We haven't seen in years. All of this is contributing to weak consumer sentiment around the world and the possibility of a global recession.
We're mindful of these risks and we're planning for a wider range of scenarios.
And while our Mcdonalds business continues to perform well. This is a very challenging environment from a family from restaurant teams to franchisees to suppliers.
But we are United in our purpose to feed and foster the communities in which we operate to provide an affordable destination for a delicious meal.
Now more than ever that is what our customers are seeking which is why we feel so well positioned and confident in our continued success.
Our global system is aligned behind a comprehensive strategy that is centered on the customer.
This is strengthening our brand, which is driving broad based market share gains.
I mentioned during our last quarter that we would provide an update on the state of our business in Russia.
It became increasingly clear the Russian war against Ukraine meant that mcdonalds wouldn't be able to continue to operate in Russia in a way that would be accretive to our business objectives are aligned with our values.
That's why in May we announced that we would exit the market and sell our restaurants to our Russian buyer to be operated under a different identity.
While the Golden arches, no longer shine in Russia, we are continuing to support our people in Ukraine and remain ever hopeful for resolution of this conflict.
Now for more on our Q2 numbers, let me turn it over to Kevin. So he can give his 30th and final quarterly earnings readout Kevin.
Thanks, Chris and thank you for the kind words.
As Chris mentioned global comp sales were up nearly 10% in the second quarter, demonstrating the continued resilience of our business despite the challenging environment.
In fact, when we look at our three year comp growth with the U S over 19% in our IOM and IDL segments, both more than 15%.
We see that our business around the world has been extremely resilient through the tumultuous last few years.
Our quarterly results reflect strong underlying sales growth across all segments. A direct result of remaining customer focused and executing against our strategy.
And our international operated markets, we continued to gain <unk> traffic share as markets showcased our iconic core equities and further capitalized on our digital channels.
This field comp sales growth of 13% for the segment with positive comps across all markets.
Recovery in Germany, and France continued as remaining government restrictions eased early in the quarter.
Germany built on their successful launch of a loyalty at the end of last year and ran a big Mac celebration campaign using mobile App offers to further drive digital adoption.
In France, we highlighted our core burgers with strong marketing behind our triple cheeseburger, helping grow <unk> market share to another record high level.
Canada continued to prioritize convenience as the market accelerated digital momentum with always on loyalty messaging.
We also featured a summer drink days promotion, highlighting our strong value proposition across all day parts.
Australia built on their first quarter launch of loyalty and accelerated digital engagement across the market with a strong lineup of mobile App offers.
And we partnered with Australia and pop Star The Kid Leroy who is famous order was available exclusively through our mobile app and Mick delivery.
In the U K the return of the mixed spicy chicken sandwich, and big Tasty promotion drove significant incremental sales.
Daily Digital sales calendar also helped build our digital customer base, leading up to the recent launch of loyalty.
While the exploration of <unk> benefits impacted our quarterly comp sales in the market, we continue to grow <unk> market share.
Moving to the U S. We posted positive comps across all day parts in the second quarter led by breakfast.
Overall comp sales were up nearly 4% due to higher average checks supported by strategic price increases.
We continue to focus on everyday affordability that customers are looking for across both our everyday value menu and digital offerings.
Turning to the international developmental licensed markets comp sales were up 16% in the quarter largely driven by strong comps in Japan and Latin America.
Japan achieved an impressive 27th consecutive quarter of positive comp sales with strength across our delivery and digital channels.
And our growth at the dinner day part continued with popular limited time offerings across both chicken and beef.
Recovery in China remains challenged with negative double digit comp sales in the second quarter due to ongoing COVID-19 resurgence as and related lockdowns across key cities.
This resulted in temporary restaurant closures throughout the country for most of the quarter.
While operating conditions are challenging restaurants remained focused on the consumer offering core menu favorites and targeted digital coupons and now I'll turn it back to Chris.
Thank you Kevin.
Mcdonald's is one of the most recognized and beloved brands on Earth.
Today, our opportunity is building on this recognition to keep up with customers and communities around the world and on every platform.
It's our global mobile App, where social media.
I am proud of Mcdonald's industry, leading digital and marketing initiatives that allow us to connect with even more customers in entirely new and creative ways. So we can strengthen our relationships better connected culture and meet customers where they are.
The investments, we're making in digital one of our biggest opportunities for growth are beginning to bear fruit.
And our top six markets digital sales, which include mobile app.
He asks can delivery represented over $6 billion or nearly a third of system wide sales in the second quarter.
With the launch of my Mcdonald's rewards in the U K. This month, we now have loyalty programs in nearly 50 markets, including all of our top six markets enrolment and participation continue to grow.
And our loyal customers are highly engaged with us nearly $22 million of U S. Loyalty members have been active in the last 90 days.
My Mcdonald's rewards has consistently driven more frequent visits and incremental sales in each of the markets as we've launched.
Each rewarded customer redeems in each preference our customer shares helps us power our personal touch we can use this deeper understanding of our customers to create content and offers relevant to them through the channels. They prefer.
By tailoring messages, our customers feel more connected to mcdonalds ultimately driving engagement that increases both spend and frequency.
It even means we can reunite with customers, who havent visit us in a while.
We're also strengthening our iconic core menu.
As I've mentioned before in markets around the world.
We're taking our leading burgers and making them, even better by implementing enhanced cooking procedures and new bonds, resulting in hotter juicier and tastier burgers.
Spain was the latest market to launch these taste and quality improvements driving incremental sales and giving our customers yet another reason to keep coming back for more.
We will also keep coming up with fresh bins on our classics, creating craveable moments for a new generation of Mcdonald's fans.
In Germany, strong marketing and core menu campaigns, including the Big Mac celebration, featuring double Big Mac drove strong comps for the quarter.
In Australia, we leveraged the strength of our Mcafee brand with the launch of the Australia Onno coffee in the second quarter and continue to grow our share in coffee.
Of course, there is no better example of combining classic with modern relevance than our transformational marketing.
And that's not just my opinion, it's the consensus of the marketing industry.
Mcdonald's was repeatedly recognized this quarter for advertising the captures both hearts and minds.
At the Cannes Lion last month Mcdonald's in its marketing partners received multiple awards, while simultaneously being named the most effective brand on the work effective 100 for the third year running.
We swept the global Effie award and were recognized as the number one most effective brand and marketer in the U S.
Over the past few months, we've continued to turn cultural moments into creative pedestals for the Golden arches.
And Mei Mcdonald's commemorated Queen Elizabeth Platinum Jubilee by recording a new version of our World famous I'm loving it jingle, making headlines and history.
As Kevin mentioned, Australia launched our latest famous order with pop Phenom the Kid Leroy.
And we created significant brand moment in Canada with our annual Mcafee day campaign, raising nearly $6 million for Ronald Mcdonald House charities, and lifting sales and brand perceptions in the process.
Our creative excellence has expanded our reach and made Mcdonald's not just more recognizable but more relevant.
And it's this customer connection that is continuing to drive our business in new and exciting ways.
Now to talk more about our second quarter financial performance I'll hand, it back to Kevin.
Thanks, Chris.
Our strong top line performance resulted in adjusted earnings per share for the quarter of $2 55.
An increase of 15% in constant currencies.
This adjusted EPS excludes $1 $2 billion.
Of charges related to our exit from Russia, and a gain of $270 million from the sale of dynamic yield.
Adjusted EPS was hurt by 16 cents of currency as the dollar strengthened significantly in the second quarter.
That was double the amount we estimated in our first quarter earnings call based on exchange rates at that time.
Our G&A costs increased 10% in constant currencies for the quarter, reflecting higher investments in restaurant technology and incremental expenses related to our worldwide convention and proxy contest.
As expected company operated margins were hampered by significant commodity and wage inflation as well as rising energy costs.
Given macroeconomic conditions, we expect these inflationary pressures will continue to impact margins for the remainder of the year.
Our company operated margin dollars for the quarter were also negatively impacted by our exit from Russia, which was a heavily company owned market.
Even with these cost headwinds and our exit from Russia are strong system wide sales growth contributed to healthy flow through to operating income.
Total restaurant margin dollars grew $270 million in constant currency as a result of sales driven growth in franchise margins, which now make up nearly 90% of restaurant margin dollars.
This resulted in an adjusted operating margin of 45% for the quarter.
Lastly, based on current exchange rates, we expect FX to reduced third quarter EPS by about 14 to 16.
And full year EPS by roughly 40 to 50.
Again double the impact that we estimated on our first quarter call.
As we certainly saw last quarter. This is directional guidance only as rates will likely fluctuate as we move through the year.
Before I pass it back to Chris I want to take a moment to say thank you.
It's been an absolute privilege to serve as CFO of this iconic brand for over seven years.
During this time I've met many people who are on the call. This morning from analysts who follow our industry to investors in our company.
I've had a lot of thought provoking conversations with many of you.
You offered your opinions and challenged me and my interactions with you over the years helped make me a better CFO and helped make Mcdonald's a better company.
I am extremely grateful for your engagement through the years and for the confidence you've placed in us with your investments.
I look forward to passing the baton to Ian Borden, who I worked closely with our senior leadership team for many years.
We will continue to work together to ensure a smooth transition.
Thank you again and now back to Chris.
Thanks, Kevin.
As we reflect on these results for the second quarter I feel tremendous pride in the entire mcdonalds system.
I believe there has never been a better time to be part of the Mcdonald's brand, we have the right leadership and the right strategy at exactly the right time to take this iconic brand to even greater heights.
As we announced over the past few weeks, we continue to assemble the right members of our global senior leadership team to help lead the next chapter for brand Mcdonalds.
Building on the successes made because of the outstanding contributions of former leaders.
Because of Mcdonald's ability to provide a variety of opportunities and experiences at one of the world's most recognized and respected brands.
Our ability to recruit top talent and develop a deep bench is unparalleled in our industry.
This only builds our confidence in executing on our strategic plan for the long term.
As Kevin mentioned stepping into the CFO role next is 30 year Mcdonald's veteran Ian Borden.
Currently president of International Ian has worked literally around the world for Mcdonald's in a variety of capacities at.
He brings a great mix of financial and field experience into the CFO role and it'll be great to have him now based in our Chicago headquarters.
Additionally, Joe Mcdonald will be returning to Mcdonald's as president of our international operated markets.
Jill began her career as a marker eventually leading global marketing at British Airways.
Joe then joined Mcdonald's as Chief Marketing Officer for our U K business in Northern Europe , and later became the managing director for our UK business and president of Northern Europe .
Joe is a seasoned veteran of the consumer industry, having served most recently as CEO of Costa coffee.
Our strong customer focus passion for creative excellence and commitment to innovation aligned well with my priorities and I am confident Joe will help accelerate the next phase of the IOM segment growth.
I'm also happy to share that <unk> will continue to lead our international developmental licensed markets as president of audio.
Joes responsibilities will now include our large fast growing China business, which currently reports to Ian in his capacity as president of international.
Meanwhile, Francesca Debiase will be retiring as global chief supply chain officer after more than three decades at mcdonalds and over seven years in this role.
I'm, especially grateful to Francesca for Stewarding, our world class supply chain through unprecedented disruptions and for spearheading sustainable solutions that are now standard practice throughout our system.
While we'll miss Francesca, we're happy that Marion growth will now be stepping into this role.
Maryann has been with Mcdonald's for 29 years, most recently as chief supply chain Officer of Mcdonald's North America.
Im not going to be surrounded by such great leaders, who are also such good people.
That's what Mcdonalds is all about which is why we call ourselves imac family.
With that let's begin Q&A.
Thank you as a reminder, if you are an investor and we'd like to ask a question. Please press star followed by the number one on your telephone keypad, we ask that you limit yourself to one question and re queue for any additional questions.
Our first question is from David Tarantino with Baird.
Hi, Good morning, first I wanted to congratulate Kevin on a great career.
You'll be missed by the investment community.
And then secondly, I guess, Chris I wanted to ask about the situation in Europe , specifically again, and I know you called out a lot of macro challenges and I was just wondering if you could.
Comment specifically on whether you are starting to see any consumer behavior changes in your European business. As a result of some of those pressures and then I guess Relatedly. You mentioned that you are planning for a lot of scenarios and I was wondering if you could comment on what mcdonalds light.
If we were to see a more material downturn.
Tumor spending thanks.
Thanks, David.
You saw the announcement, we continue to have broad based.
Growth in our.
European business overall is performing quite well I'm actually very happy with how the European business is performing there's a few things that we're seeing consistently across that we are seeing.
That we're gaining traffic and comp sales share.
Every market major market, where we operate we feel great about that we're gaining share in beef and chicken, which were priority areas for us.
We're doing quite well in delivery and I expect digital, particularly as we bring on.
K is going to be a performer for us so.
One is Europe .
Doing so doing very well for us I think what is weighing on our mind and we're certainly attentive to is consumer sentiment as one area and a number of markets in Europe , France. As an example, Germany is another market, Spain is another market, we're seeing consumer sentiment.
And in many cases down at record levels. So that's one area of concern and the second is.
We do know that the inflationary pressures in Europe .
Our.
Elevated even beyond what we're seeing here in the U S and that has an impact on sentiment, but that also has an impact on.
We're needing to do from a menu board standpoint in pricing and so.
I think what we look at Europe , right now and we're seeing strong results.
It is a challenging situation is challenging for our franchisees.
As you think about what we plan for under a variety of scenarios it goes too.
Essentially what are our marketing leavers.
And what are our investment scenarios and do we need to lean into harder for example, the value end of our menu platform that could be one scenario on the other hand if.
If it continue.
Continues at its current pace, maybe we don't need to lean in as hard as that.
So these are things that happen at a market level.
On a country by country basis, but I think the way our teams are looking at it is.
Because of this uncertainty around consumer sentiment, we're just having to plan for more different scenarios and that means having more flexibility on the marketing calendar to pivot if need be.
Our next question is from John Glass with Morgan Stanley .
Thanks, Good morning, and Kevin Let me just add my congratulations and best wishes as well and my question is similar but to the U S last quarter, you talked about a little bit of trade down in the U S is maybe early evidence that consumer is changing.
Does that stand now and what is the conversation now about pricing with the franchisees pricing has been used obviously to cover inflation, but maybe is there are you coaching them now to be easier on that factor just given the changing dynamics in the U S. How do you view pricing today versus maybe 90 days ago. Thank you.
Why don't I have Kevin hit this set the top and then ill cover anything he misses yes, I can take it and thanks, David and John for your China comments.
Let me, let me talk about the U S and the comp and what drove the comp and I think that'll help talk about some of the trade down that youre talking about.
Q2 comp of a little under four was driven completely by higher average check our guest counts were relatively flat. So it really was check driven.
And that average check was driven.
Obviously, mainly by price increases year over year in the second quarter, our menu prices were up.
Digits relatively consistent with what I talked about in the first quarter, a little bit higher than that and we expect for the year to be in that high single digit range for the full year. What we are seeing still is.
Flow through similar to what we've seen historically is still a strong flow through of roughly 70% or so so if you think about an.
9% price increase with a 70% flow through the difference between that and our comp of a little under 4% was driven by two main things.
One of the things I started talking about in the first quarter was a decline in units per transaction.
It's partly driven by a reversion in the number of people per pay for transaction Youll recall during Covid. What happened is we had a significant shift in channels from front counter to things like delivery and drive through and that increased the number of people per order.
What we're now seeing in the U S. But also around the world is a little bit back to some normal channels as restaurants open up so delivery is still a little bit elevated versus it versus where it was pre COVID-19, but drive through percentages are pretty much back to where they were pre COVID-19.
So we're seeing number of people per transaction.
Go down we knew that would happen at some point, we didn't exactly know timing.
Their thing to a lesser extent and again I mentioned last quarter is that we are seeing some trade down we're seeing customers and specifically lower income customers trade down to value offerings and fewer combo meals. So those dynamics are kind of what's driving.
Both the comp and our pricing we do as we've talked about historically, we do work closely with our franchisees on pricing we use a third party.
Visor that advises the franchisees as well as the company on pricing.
As a consumer based research approach and I've talked before about and specifically this year. How we are taking smaller more frequent price increases because it gives us the flexibility to be able to see how consumers are reacting and then adjust for.
When necessary.
One of the one of the most important things that we keep an eye on is.
Obviously, there are cost pressures, both on the commodity and labor side, but we have to balance that with continuing to provide value for our customers and there is a couple of key metrics that we look at one called good good value for money, which is one of the customer score as we look at and then.
There is affordable options that I like and we still continue to do well on those metrics, which is the most important thing to make sure that our customers still are perceiving our offerings as value.
Yes, the only thing I would add to what Kevin said is.
We track I think many of you do as well food at home versus food away from home and right now we are seeing.
<unk> GAAP in fact that we think by our measure it's the largest gap we've ever seen and while it has seen in 50 years between food at home and food away from all meeting that food at home has increased pricing significantly faster than what food away from home Mcdonald's and others in our industry have done.
I don't know what the impact of that is but certainly we expect that there is some benefit that we're seeing.
As part of that and the other thing I would just add as Kevin's comment about.
Looking at good value for money, we look at that around the world. One of the things that makes me feel confident is in almost every major market, where we operate.
Theres, just two exceptions, China in Spain, but in every other market, where we operate we are leading.
Amongst any of our peers from that for a value for money standpoint, So we're still even though we're pushing through pricing the consumer is tolerating it well and we're still doing very well from a value score standpoint.
Our next question is from Andrew Charles with Cowen.
Great. Thank you and Kevin Congrats on a very successful tenure as CFO and best view best of luck to you in your new roles. My question for you Kevin is just around the modeling the IOM segment.
Help us think through what is a fair segment EBIT dollar embedded in your guidance just given the many moving pieces at the Russia sale and the company operating Ukraine market, that's still largely closed on a temporary basis, that's just making it very difficult segment to model.
Yes, Thanks, Andrew.
Let me give you a perspective on Russia.
We're in our comp through first quarter and then they wouldn't be in our results our comp beginning second quarter, Russia represented.
Roughly 2% of system wide sales.
About 7% of revenue and about 2% of operating income. So if you use that.
For modeling purposes that should get you kind of hopefully the adjusted numbers.
Should be representative of our trends going forward.
Alright next question is from David Palmer with Evercore.
Thanks, Kevin Congratulations on your career at Mcdonald's just a follow up for you on pricing and inflation could you talk about inflation relative to pricing in the U S. In AUM in the quarter and how you see that gap progressing through the year to the degree that it might be closing that would be <unk>.
<unk> and I sense that that gap is relatively larger for IOM that it is in the U S. And then Chris if I could just squeeze one more in I just love to get your take about aside from getting ready for the need for value. What are the biggest improvement areas for the company that you see on the horizon kind of thinking out a couple of years.
You've teased out things like menu with chicken in beverage and technology benefits in CRM and the operations, but love to get your sense about what's most important on the horizon. Thanks.
Okay.
I'll start with inflation and then I will go back to Chris on your second question.
So let me give a perspective.
Right now second quarter year over year in the U S.
Our food and paper inflation.
Well, let me let me talk about it this way for the full year in the U S. We expect roughly 12% to 14% inflation was a little higher than that in the second quarter likely a little higher than that in the third quarter and then we expect to see it moderate some in the fourth quarter, obviously thats based on what we know today.
Hey.
That's on food and paper on the labor side, we're probably seeing a little over 10% labor inflation right. Now part of that is we had strategic wage rate increases and our company operated restaurants kind of mid last year. So we won't start lapping those until the second half of the.
A year so more of that inflation was hit in the first half of the year than the second.
To your point on the international side.
Right now.
The range is probably similar on average the 12% to 14% for the year, but a couple of things there one we're probably at the higher end of that range on the international side too, there's probably a wider range of scenarios like Chris talked about and three.
Different than the U S. We don't see that moderating their increases will actually likely be higher in the third and fourth quarter than they were in the first and second quarter. So to your point Europe is getting hit harder on the inflation certainly on the food and paper. The other thing I would just say it certainly varies by country you have.
Some countries that are getting hit dramatically by energy prices based on.
Kind of Russian oil et cetera, and so it really is a country by country dynamic, but in general the international side, we will get hit a little bit harder than the U S and it will last a little bit longer later in the year than the U S right now.
Yes to answer your second question in terms of what I think are the biggest priorities over the next few years, if I use our mcd framework under accelerating the arches and start with with the.
I think we have an opportunity to continue to improve on the marketing front and just get more consistent consistently excellent around the world.
From a creative standpoint.
Jill Mcdonald's is going to be a part of helping to do that I think we've made a lot of progress in the U S. I think there are still opportunities for us too.
To improve our creative and.
Some of our international markets, So Thats one area.
Second is as you move to the sea.
Core menu chicken for US continues to be I think a significant opportunity for us to improve our chicken portfolio and we've got some great global equity is already in our mcnuggets and with chicken, but we also have some equities in the crispy and spicy that we think we've got an opportunity.
Do more with globally, so that's going to be a priority area and then digital and we talk about digital being a multiyear journey, but I'm incredibly encouraged by what we're seeing in digital and just to give you.
<unk> of what I think the opportunity is if you look at.
Germany, France, UK, China being digital is over half of the sales in those markets in the case of China, It's over 80% of the sales in those markets.
Compare that to the U S compare that to Canada, where its maybe a quarter of the sales. So there's a big opportunity for us in North America to increase digital as a percent of sales and then what happens when you do that is your percent of identified customers goes up very dramatically and that opens up.
All range of things from service opportunities pricing opportunities et cetera. So.
I think digital for US is we're starting to see the benefits, we just need to go harder and faster against that and we have a few other ideas part of what I wanted Kevin to help me with in this next phase of his next role that he is going to be it is just working through a few other ideas.
That we think might put a little top spin on the plan. So we'll come back at some point later and talk about that.
Alright next question is from Dennis Geiger with UBS.
Great. Thanks for the question and Kevin Congratulations and best of luck of course.
Chris you talked about a bunch of the strategic opportunities in Europe that you and the team are looking at.
Curious if most of the levers that you mentioned are kind of similar to the U S.
Thinking about how you navigate some of the challenges in planning for different scenarios or are there differences in the U S and how you're thinking about navigating U S macro challenges and if so could you touch on some of those at all.
Okay.
There is probably more consistency than not.
When I think about Europe , one of the.
Things that we're seeing in Europe is we're seeing that that was a business that was largely a dine in business that through COVID-19.
We are seeing that the diet or takeaway portion of the business continues to be elevated and we're seeing.
Much greater traction on digital as being one of our service channels. There that I think creates some opportunities for us that we need to get after that are probably different than what you would see in the U S. Because the U S has always been more of a takeaway market, but what does that mean for Europe . So that's one area.
For Us I think we've got more to do and that I think when we look also at what's going on in Europe .
We've got.
A very strong coffee business in a number of markets and I think driving that and using that particularly as a way to drive transactions. I think that's also an opportunity for us.
Other things that.
Europe is focused on leg chicken as an example, those tend to be more consistent if you move over to the U S and the U S team has done a great job over the last several years and.
And it's showing up in AR.
Strong multiyear run in comp sales. So I think a lot of what is currently in flight in the US. It's just continuing to do that and I've talked about in a number of different occasions and it was in our press release around this it's execution execution execution.
Part of that means that we need to make sure that our restaurants are properly staffed it needs to make sure that we're getting our crude trained.
And make sure that we are operationally delivering on things like service times that we know can have a big impact on customer satisfaction. So those are the priorities for Joe and the team in the U S.
Our next question is from Lauren Silberman with credit Suisse.
Thank you.
Kevin I also echo my congrats follow them as value commentary can you expand on how youre thinking about everyday value and balancing the elevated costs in the U S. Whether that's dollar dream.
<unk> three menu I guess, what's the franchisee appetite for value should we see a more challenging environment.
And then related you offer an array of promos to the App. How do you think about your composition of value offers as it relates to digital versus in store.
Are we getting to a point, where personalization might be something on the horizon.
Thank you.
Yes. So when you think about value I think you've touched on a number of things here, which is you have to think about value in a very targeted way and there are.
Different products with different elasticities in different geographies I think thing that I get excited about particularly as we move more of the business to digital.
The ability for us to be much more targeted in how and where we deliver that value. So in the past go back maybe 10 years ago, we didn't have the ability to deliver that sort of precision value and you would end up having.
Kind of a national deal that would hit everybody, but we know that that's going to there's a lot of waste in that that there are people that you are delivering value to under that scenario, who probably would've still bought without it so well.
We're looking at doing and with the U S team along with our pricing advisors.
Exactly which products on the menu do you need to offer value to what degree and then went through through what vehicle is it through an offer is it through a menu price adjustment or is it through some sort of promo that you do so it ends up being a much more nuanced way that we're able to look at value, but I think part of being more nuanced than it is.
Is how we're able to push through this pricing without seeing a big falloff in the pass through numbers that Kevin was talking about.
So it's tough to talk about value these days and kind of a one size fits all approach because the beauty of I think what we're transitioning to.
A much more targeted tailored approach to our value, but Kevin I'll, let you pick up on the only thing I'd add is just that.
Just to demonstrate what Chris was talking about if you think about this transition or evolution. Historically, we would have had a big national value menu today values, primarily driven at a local level.
Specifically at the breakfast day part so we do have a dollar 123 nationally advertised value platform, but it's really complemented with a localized approach that allows the individual field offices too.
To promote products that makes sense in their local markets and based on their competitive set we will continue to have some national programs, whether it's <unk>.
Two for $6 a buy one get one but we've moved really more to a local approach, which then becomes ultimately a personalized approach as Chris talked about so we're in the middle of that evolution going from national to local to ultimately really more personalized.
Our next question is from John <unk> with JP Morgan.
Hi, Thank you I wanted to get back to the comment on labor.
The stores and this is both U S and IOM our staff to extent that you can properly meet demand in other words do you have unmet demand.
The system because of your staffing levels at the store and that is the case I mean are there any comparable ROE technology type of investments.
Coming years that could allow you to reduce your demand for labor, while increasing overall customer service.
Sure well, if I start with and I'll just use U S. As an example, copco is showing the way on how to do this our <unk> business in the U S.
Is over is outperforming our U S average and if you look at them Macaco business.
Despite all the challenges they are at sort of our target roster sizes.
And Theyre seeing speed of service improvements that are ultimately driving customer satisfaction. So we know from our <unk> business that it is possible to do it it's not easy it takes a lot of work, but it is possible for us to get after that the people are out there and part of why we put in the EVP.
Graham that the U S team did is to make sure that we're able to talk more consistently as an employer to get people to come into our restaurants. So headline is we do think we've got a formula and a playbook that if deployed can ensure that we've got our restaurants properly staffed and like I said, but copco is a great example of that.
Thinking about longer term theres a lot of interest around what can you do from an automation standpoint, I've talked about in the past. We've spent a lot of time money effort looking at this.
There is not going to be a silver bullet that goes that addresses this for the industry. The idea of zero of robots and all of those things.
While it may be as great for garnering headlines it's not practical.
In the vast majority of restaurants, the economics don't pencil out you don't necessarily have the footprint and there's a lot of infrastructure investments that you need to do around your utility around your HVAC systems.
Going to see.
That is a broad based solution anytime soon there are things that you can do around systems and technology, especially taking advantage of all of this data that youre collecting around customers that I think can make make the job easier or things like scheduling as an example.
Ordering as another example that will ultimately help rich.
Do some of the labor demand in the restaurant, but I think your question was is there a big automation solution and youre not going to see like I said robots in a restaurant and we've got to kind of get after this the old fashioned way, which is just making sure we're a great employer.
<unk> our crew a great experience when they come into the restaurants.
Our next question is from Jeff Bernstein with Barclays.
Great. Thank you very much Kevin congrats on the upcoming moves and ultimate retirement.
I had a bigger picture question just on franchise relations, Chris I know you mentioned Mcfann Lee in your closing remarks, and it seems like it's a <unk>.
And on balancing act considering the very strong performance through the pandemic I know you mentioned franchise profits at all time highs to closed last year.
And now obviously seemingly some pressures to profitability and theres more headlines in the press on changes in contracts. Some frustration from our franchisees side. So just trying to get a sense for.
Whether you think there's any been any change in how you think about the relations.
As it relates to that just because China is a.
A big franchise market is there any reason for concern on your end on the underlying fundamentals of the business. So do you really think it's purely COVID-19 and therefore, the recovery will will follow suit as Covid concerns. These thank you.
Okay.
Yeah. Thanks for the question, let me start with that at a macro level, we have about 5000 franchisees globally.
So when you think about franchisees that I've talked about this in the past it's hard to talk about them.
As one group of franchisees, because we have like I said.
<unk> 5000 franchisees of different sizes of.
Different construct et cetera around the world I think if I get underneath your question you are probably asking about some of the headlines that are ethical occurred in the U S of late and I would just point out a couple of things our aspiration as Mcdonald's frankly, one of the things that we pride ourselves on.
We absolutely believe that we're the best franchise or in our industry and we think we've demonstrated that over the last seven plus years.
Only get to say that if you continue to have the best franchisees.
And the moves that the team announced in the U S are designed to ensure we continue to have the best franchisees in our industry, which then make us the best franchise or in the way that they're going about it as two ways, they're going about it in some areas raising standards.
And in other areas improving access for people, who want to join our system and I would say that the announcement that the U S team made recently it connects to an earlier announcement that we made that I think maybe many of you saw which was our commitment to put $250 million into financing options to be able to continue to.
Tracked new people to become franchisees, many of whom we hope our crew working in our restaurants to them become franchisees. So.
Everything that was announced is about for us continuing to make sure that we are going to be the best place for the best franchisees you only get to make those announcements in my view when youre doing it from a position of strength and that's what we've got in the U S. Right now earned over the last several years through our performance.
And the position of what it has given us it has given us a very nice situation, where the demand for our restaurants significantly outstrips the supply.
If you get our current franchisees the vast majority of our current franchisees are continuing to look for ways to grow their organizations by buying new restaurants, and they're also looking for ways for their children to continue to run and continue in the system. That's a good thing.
At the same time, we've got strong external demand, especially with the support on financing for people, who want to come into our into our system and become franchisees. So from my vantage point.
Excited when I see demand for our restaurant outstripped the supply I think that makes us a better business. There are people that are exiting the system that's been written about as well.
I would say what theyre doing at this point is they're taking advantage of the strong health of the business to get multiples of eight to 10 times when theyre selling which is the best that we've seen and.
I think anybody's recent memory on this so there are some people looking at taking money off the table right now, but they're doing it incredibly strong multiples.
If you step back on this and think about it again im talking more about the U S. But.
Everything that we've announced if you are.
Our strong performing franchisee youre going to be excited about this because what it means is that youre going to continue to have the opportunity to grow and youre going to have stability around your equity.
I think where there is concern is if you are maybe not one of our stronger performing franchisees.
This probably does some of the announcements of the team made probably does raise your concern.
But the U S team I know is committed to helping improve there.
And I would be delighted to see that.
If we can get improvement and maybe some of the lower performing franchisees, but broadly I would say are our relations with our franchisees globally. The 5000 franchisees is.
As strong and.
When we're when we're a great franchise or with great franchisees. This business tend to do pretty well over time.
And then.
On China your question related to China.
I think we still believe theres huge opportunity in China, we're still committed to our China business. They certainly have had a rough couple of years with all of the stops and starts with Covid, but we still expect to open roughly 800 restaurants this year.
And hopefully the the economic environment can get back to their to something relatively normal because we're still big believers in the opportunity in China and have a lot of confidence in our business there.
Our next question is from Sara Senatore with Bank of America.
Thank you, yes and of course, congratulations everyone on their new roles.
Great to see Jill coming back and excellent readmission.
I have two.
Two questions there about the outlook.
The first is just a unit growth in the U S coming.
Coming in slightly lower end of the previous range is that because of challenges in the supply chain and we hear about constraints around equipment or labor and staffing it doesn't seem like it's a access to capital issue given the multiples that you.
Our historically high and then also on the guidance you talked about mid <unk> operating margin can also slightly higher than the prior is it a function of mix less company operated or better topline because again, we're seeing costs coming very high. So just trying to understand is relatively minor changes.
Yes.
Yep. Thanks, Sarah.
I'll take a shot at both of those.
The unit growth in the U S. You are right, it's come down a little bit.
That's mainly due to timing some permitting is taking a little bit longer in some areas.
We do still expect net unit growth in the U S. This year for the first time in several years, but it's certainly not an access to capital.
As you mentioned it really is just a timing thing and we are finding that openings are taking a little bit longer between some supply chain challenges and some permitting just timeframes I think theres a back-load, that's making just getting through all the government processes take a little longer.
And on operating margin, we up to that guidance a little bit right. After the Russia announcement. It really is a function primarily of selling our Russia business.
The Russia business as you know was primarily company owned and actually had a operating margin below our global average so by taking them out now actually helped improve the operating margin.
So it is just a function of mix in the near term, we do still believe that longer term, there's leverage to be gained both in operating margin and specifically on the G&A side that should help that operating margin longer term not in 2022, but longer term that should help improve that operating margin.
Going forward.
Our next question is from Jared Garber with Goldman Sachs.
Hi, Thanks for taking the question just sort of two for me I'm curious on day parts, if youre seeing any shift in day part usage across the U S system.
You talked about them.
Maybe some easing on the lower income side of the consumer but wondering if youre seeing anything specific to any of the day parts, whether that's breakfast lunch dinner and late night that you'd like to call out and then also wanted to know if you could help quantify or provide some incremental color on the gains that you're seeing either on average check or frequency from the loyalty program now that we've sort of effect that we launched.
One year past the launch and the last one year since the launch in the U S. Thanks.
I'll start with Dave part and then let Kevin address any check.
Commentary that we wanted to do around loyalty, but.
The great thing I think about the U S performance is the growth that they are seeing is broad based it's across all day parts and in fact breakfast was the strongest performing day part in the U S comp, which we feel good about it it's a change.
If you remember a few years ago I think there were a bunch of questions about breakfast. If you also sort of zoom out and you look at our performance our deep our performance on a three year stack.
In the U S incredibly consistent U S.
Breakfast lunch dinner.
Both north of 20% that we saw with a three year stack from a day part standpoint late night being the one area that we saw.
Significant impact over the last three years so.
I would say generally we feel very good about the balance that we're seeing from a day part standpoint, and probably not any noteworthy color that I would offer around differences by day part Kevin I'll, let you handle the loyalty question, yes, I mean loyalty as an interesting.
Dynamic related to check loyalty is really about driving frequency and increasing frequency and we are seeing.
Definite increase frequency everywhere, where loyalty is gone and if you take into account redemptions on the loyalty.
Actually see a little bit lower average check because of the redemptions that occurred there, but it is significantly driving frequency. So when you look at it in total it's clearly additive to.
To sales, but if you just look at an actual average check and take into account redemptions, you end up with a little bit lower check because of that.
As we near the.
Bottom of the hour, we have time for one more question from Nicole Miller Regan with Piper Sandler.
Thank you so much good morning.
Can you talk a little bit finished up the conversation essentially you're just having about.
Cohorts can you do that a little bit by income so let's say the lower income you said a few times now is coming a little bit less.
How much less you know does that matter so by <unk>.
Cohort of income.
Who comes the most or spend Cmos such that we can't really understand.
When youre, saying they come less like what is the impact of that if that makes sense.
Yeah I know the question I don't have the degree of precision on the data that I think youre looking for but I would say generally what we know is happening is that there is a.
The challenge on the lower income, but that we are getting trade down out of things like full service restaurants getting trade down at a fast casual that's helping.
Offset any of that impact net net what we saw in <unk> nine and.
And what we expect is going to continue is that we're going to be a net beneficiary on all of that Thats. Our planning expectation is that while there is going to be some shifting within the cohort Judy to describe it.
Net net our value positioning our value scores, we expect to be a winner out of all of that.
Okay. Thank you Chris Thank you, Kevin and thanks, everyone for joining have a great day.
This concludes Mcdonald's Corporation Investor call you may now disconnect.
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Yes.
Yeah.