Q3 2022 McDonald's Corp Earnings Call
Hello, and welcome to Mcdonalds third quarter 2022, Investor Conference 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 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 <unk> Investor Relations Officer for Mcdonald's Corporation. Mr. <unk> you may begin.
Good morning, everyone and thank you for joining US with me on the call today are president and Chief Executive Officer, Chris <unk>, and Chief Financial Officer, Ian Gordon.
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 our 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.
I'm proud to report that our Q3 performance demonstrated our broad based business momentum against an evolving macroeconomic backdrop.
Mcdonald's unmatched scale and operational resilience powered by our three legged stool has enabled us to deliver strong results this quarter.
Global comp sales were up nearly 10% and most of our major markets are growing share, which gives us confidence that we are operating from a position of strength even during difficult times.
As the macroeconomic landscape continues to evolve and uncertainties persist we continue to consider a wider range of scenarios as we look ahead.
As I've said before our base case scenario going forward is that we expect to experience a mild to moderate recession in the U S and one that will be potentially a little deeper and longer in Europe .
That said, we operate in more than 100 countries around the world in varying economic environments.
This has provided our teams valuable experience as Mcdonald's has proven to be successful in just about any business environment.
I remain confident in our accelerating the arches strategy as our teams around the world continue to exit queued at a high level.
And thanks to the resilience of the system and our continued investments at scale, we're laser focused on meeting the changing needs of our customers.
Before we get into those details I want to introduce Ian Borden on his first earnings call as our Chief Financial Officer.
Ian brings a wealth of experience to this role having spent the past several years as a member of our global senior leadership team.
First joined our system in Canada, and $19 94, and from there went on a bit of a Mcdonald's World Tour.
Over the past 30 years. He has served as CFO for Asia Pac Middle East and Africa region, and CFO for Russia and Eastern Europe .
He has also held several leadership roles across our markets and regions. Most recently as president of Mcdonald's International.
I am thrilled for E&P stepping into this new role and I will now turn it over to him to share more on our Q3 results.
Thanks, Chris and great to be with everyone. This morning for my first earnings call.
So let me start with a few headlines on our overall performance our global comp sales of nine 5% for the quarter are a testament to the continued resilience of our business.
It goes without saying that we are seeing global macroeconomic challenges that havent been experienced in many years.
Inflationary pressures and related interest rate increases taken by central banks are combining to put significant pressure on the consumer and our industry.
Despite the challenging backdrop.
Our systems focus on accelerating the arches that ive seen it work across more than 100 countries gives me confidence in our ability to navigate these challenges.
The power of our strategy has brought to life through our actions against our M C and D framework working together with the customer at the center.
In the third quarter, we remain focused on delivering delicious and affordable food with the convenience Mcdonald's is known for which is now more important than ever to our customers.
This continued to drive our market leadership and strong underlying sales growth across all segments of our business.
In our international operated markets comp sales grew eight 5% for the quarter with positive comps across all markets.
This demonstrates the underlying strength of the IOM segment, where we continue to gain market share.
In France, we are operating from a position of market share strength.
Particularly with families as French consumers have resumed more normal routines.
And we continue to grow loyalty in the market with a record mix of our transactions coming through our mobile app.
By utilizing global mobile App offers in combination with traditional value offerings, Germany further highlighted our affordability and accelerated loyalty adoption at the same time.
This drove strong growth in digital sales, which now represent more than 50% of system wide sales in the market.
Australia showcased our beef equities with a winter together and loving it campaign.
Tapping into the role of Mcdonald's plays in making everyday moments special.
The campaign featured both the Angus and quarter pounder sandwiches and resulted in a meaningful lift in beef sales.
And with the UK launch of mine Mcdonald's rewards in July we now have loyalty programs in place across all of our top six global markets.
The UK built on the successful rollout driving additional adoption with exclusive app offers throughout the quarter.
And with the monopoly promotion in September the team developed an innovative incentives that allowed customers to virtually appeal there gameboard pieces right in the App.
Our focus on driving digital engagement paid off as our active loyalty members grew to over $3 million in just the first three months.
While the exploration of benefits impacted our quarterly comp sales in the market, we continued to grow <unk> market share.
Although our business performance has remained resilient as I mentioned earlier, we recognize that this is a challenging environment.
The inflationary impact on costs is putting pressure on restaurant cash flows for our franchisees, particularly in our European markets.
Similar to actions that we took during COVID-19, our financial strength puts us in a position to be there for franchisees that may need temporary and targeted support to ensure our system is financially healthy and aligned on continuing to drive growth.
Moving to the U S. The efforts and investments by our franchisees employees restaurant teams and suppliers over the last several years are paying off.
The modernization of our estate combined with strong discipline and execution across our core menu and backed by our award winning marketing is connecting with customers and driving results.
In the U S third quarter comp sales were up more than 6%, marking our ninth consecutive quarter of growth and achieving positive comp sales in 22 of the last 23 quarters.
Higher average checks supported by strategic price increases and positive guest counts contributed to performance.
Loyalty remained a significant growth driver for the quarter in part fueled by the camp Mcdonald's promotion.
A year after the launch of my Mcdonald's rewards in the U S. We continue to increase digital customer frequency quarter after quarter.
Of the customers that have engaged with the app over the last year about two thirds have been active in the last 90 days.
Turning to the international developmental licensed markets comp sales were up nearly 17% for the quarter with strong sales growth across all geographies in the segment.
Japan delivered strong growth at the dinner day part with popular returning limited time offerings across both chicken and beef.
We also highlighted our off premise channels further elevating customer convenience with an emphasis on MC delivery.
It continues to be a challenging operating environment in China.
With ongoing Covid resurgence and government restrictions consumer confidence remains low.
While comps for the quarter were slightly negative the market continued to grow share leaning into the strength of our delivery and digital business with the team on track to open about 800 restaurants, this year and all time high.
And now let me turn it back over to Chris.
Thank you Ian over the last few months I've visited markets around the world hearing from employees franchisees and restaurant teams about how the challenges we face globally impact our restaurants locally.
<unk> came through loud and clear.
There is increasing uncertainty and unease about the economic environment.
The resilience of the Mcfann Lee alongside our scale and efforts to build a more connected and convenient mcdonalds set us apart.
Our franchisees remain confident that we have the right business plans to work together and drive growth as a system.
We see this in real time.
Even as UK customers grapple with cost of living and energy impacts our customers are coming back to Mcdonald's because of the value we offer.
And in Germany as customers deal with the highest inflation on record our teams continue to focus on branded affordability.
No matter the issues our customers face we are dedicated to meeting their needs.
Ray Kroc said it best when we look after our customers the business will look after itself and I am proud that our business can be there to provide a warm space in a hot meal for families when they need it most.
Accelerating the arches is our playbook that is guiding our business and driving growth.
By focusing on executing our strategy I am confident that Mcdonald's will continue to show up for our customers across our <unk> and DS.
Our foresight to double down on digital and delivery to execute culturally relevant marketing campaigns across the world to highlight our core menu capabilities and to invest in our asset base is really paying off.
Our size scale and financial results put us in an advantaged position as we head into more volatile times and we will lean into these strengths as a system.
Digital is a primary driver to improve the customer experience reduce complexity and drive profitability.
And our top six markets had now represents over one third of system wide sales fueled by over 43 million active customers on our app in the third quarter.
In the U S. Our digital business is powered by over 25 million active customers driven through my Mcdonald's rewards.
Our loyalty program is driving growth and exceeding expectations.
Delivery also remains a key driver of our business to enhance convenience, we're integrating a new feature where customers can earn loyalty points order and pay for delivery within the Mcdonald's App.
The streamlined and more rewarding experience is available to customers in the UK and is currently being rolled out in the U S.
Further implementation of this solution will only enhance our strong performance as the third quarter was one of our highest delivery sales quarters ever in the U S.
Each reward customer redeems in each preference at customer shares on our App helps power our personal touch.
We are using this deeper understanding of our customers to create relevant content and offers through the channels. They prefer.
By tailoring messages, our customers feel more connected to mcdonalds, ultimately driving engagement and increasing frequency.
It also gives us more ways to reunite with customers who haven't visited in a while.
Our markets are also using digital to drive engagement with our fans through exclusive Activations in Australia. The success of their digitally exclusive monopoly program speak to the endurance of our marketing platforms and our ability to adapt existing equities to meet our customers where they are.
The team incorporated loyalty into the monopoly promotion in order to make it even more rewarding for consumers and the promotion drove significant incremental sales for the market.
Marketing has been an important growth driver for us our creative excellence is making our brand not just more recognizable but more relevant to our fans.
I can confidently say that the mcdonalds marketing team is truly firing on all cylinders.
Earlier this month through collaboration with Cactus plant flea market in the U S. We tapped into one of the most <unk> Mcdonald's experiences enjoying a happy meal as a kid and repackaged it to make it relevant for adult fans.
This promotion re engage our fans to our core food, including Big Mac and chicken mcnuggets.
It's fair to say that this sentimental experience was a success as 50% of our supply of collectibles was sold in the first four days of the promotion.
These increased visits also drove the highest weekly digital transactions ever in the U S business and we expect October comp sales in the U S to be in the low double digits.
The heart of this marketing idea taps into emotional connections with our fans, adding the fun of collectibles with irrelevant artist.
All of these campaigns featured our core menu items and build upon our successful marketing platforms, which kept operation simple and brought our customers closer to the iconic menu items They love.
Speaking of our food as we come up with fresh spins on our classics were creating new yet craveable moments for our new generation of Mcdonald's fans.
In Italy, we drove strong comps for the quarter as we highlighted simple yet compelling core menu items paired alongside great marketing with a big Mac event, featuring a chicken big Mac and a bacon big Mac.
We're also focused on growing our business through chicken by leaning into the strength of core icons like chicken mcnuggets.
At the same time, we are very confident in new global favorites like the crispy chicken sandwich, and we will look to bring a select number of these new equities to scale.
Canada, and Germany launch them at Crispy in Q3, and it launched in our most recent market the UK just last week.
Australia recently promoted a spicy event, featuring spicy mcnuggets, and then mix spicy chicken sandwich.
Spain promoted mix spicy in July and is planning future spicy events to bring relevant taste and flavors to their customers.
Chicken is a strong growth driver of comp sales in the quarter across our major markets and we will remain a focus for us as we continue to grow our global market share in this important category.
Our success wouldn't be possible without the incredible dedication of our restaurant teams that ISR inaction and heard from directly during my travels.
The people that bring the Mcdonald's experience to life in our restaurants are truly the face of our brand.
That's the promise of a new advertising campaign for best Burger in Belgium that highlights the individuals, making our delicious food versus just the juicy burgers themselves. The people in our restaurants are truly our secret sauce and the ingredients. We are most proud of.
Thanks to the resilience of the system and our continued investments at scale in the Mcs and DS were staying relevant to our customers as their needs continue to change.
Now I'll turn it back to Ian to finish walking through the financials.
Thanks, Chris our strong performance during the third quarter resulted in earnings per share of $2 68.
This reflects an adjusted increase of 4% in constant currencies after excluding the prior year gain for the partial divestiture of our ownership in Mcdonald's Japan.
Company operated margins remain pressured by significant commodity and wage inflation as well as elevated energy costs. We believe these pressures will continue to impact margins for the next several quarters.
G&A costs increased about 7% in constant currencies for the quarter driven by a combination of continued investment in growth driving initiatives, such as restaurant technology and inflationary pressures on costs for.
For the full year, we now expect G&A to be between two 3% and two 4% of system wide sales.
This is primarily due to the inflationary pressures I just mentioned as well as a stronger U S dollar, having a greater impact on sales, which are predominantly outside of the U S. Whereas most of our G&A expense as U S dollar based.
However, despite these headwinds our year to date adjusted operating margin percentage has grown and is now in the mid Forty's.
Our effective tax rate was 21, 9% for the quarter.
The strong U S. Dollar I, just mentioned created a foreign currency headwind to quarter three earnings per share of <unk> 19.
And based on current exchange rates, we expect foreign exchange to impact fourth quarter earnings per share by between 14 to 16.
But the full year headwinds totaling about 50.
As always this is directional guidance only as rates will likely change as we move through the remainder of the year.
And transitioning to capital expenditures, we now anticipate spending about $2 billion and adjustment from our previous guidance due to foreign exchange rates and slightly lower spend.
A few weeks ago, our board of directors approved a dividend increase of 10% the company's 46th consecutive annual increase.
As we've talked about today the accelerating the arches plan is driving strong financial results and cash flow.
As we continue to execute against this plan, we remain very confident in our ability to deliver sustained long term profitability for our system.
All of which is reflected in the recent dividend increase.
Before I close and hand, it back to Chris I, just want to take the opportunity to personally congratulate Kevin on his successful tenure as Mcdonald CFO .
He has been a great partner to me as I've transitioned into this role and I look forward to building on the strong foundation that he has put in place.
It was a pleasure to meet so many of you last month as I mentioned, then I expect that Youll find a great deal of consistency between Kevin and myself, particularly when it comes to the financial priorities of our business.
While the environment remains dynamic and challenging times May lie ahead, I remain incredibly confident in our strategy our business momentum and our system.
I look forward to meeting and working with all of you and with that let me turn it back over to Chris to close.
Thank you Ian before we closed and head into the Q&A portion I wanted to take a moment to acknowledge that next week marks my third year as CEO of Mcdonald's and therefore, my third year of discussions with many of you in this capacity.
And some of our first conversations in late 2019, I highlighted three areas that I expected to focus on as CEO .
The need to elevate our marketing with programs that are culturally relevant and accretive to our business the.
The need to develop a digital strategy to drive frequency retention and engagement at scale.
And the need to ensure that Mcdonald's attracts and retains the best talent in the world.
You saw much of this come to life and are accelerating the <unk> growth strategy, which provided a roadmap to focus the system across our <unk>.
Since our conversations first began and then many we've had over the last three years I am proud of what Mcdonalds is accomplish on these fronts, all while navigating an increasingly complicated world.
Our investments in digital are keeping us relevant to customers and creating business momentum.
In addition to what Ian shared I'll, just emphasize that delivery now is in over 100 countries and our loyalty program is now in over 50 markets around the world driving growth and exceeding expectations.
Our marketing programs have enabled us to recapture the imagination of our customers.
Bringing new joy and excitement to their interactions with our brand.
With fresh approaches we are staying relevant to the fans we serve across generations, we're driving meaningful contributions to our business.
And when you look at the leadership team that the global segment and market levels I am proud of welcome and promoted leaders, who infused new energy new perspective, deep values and strong capabilities to the mcdonalds system.
Looking forward my focus and responsibility is to ensure that Mcdonald's uses its position of strength that we find ourselves in today to create even more value for our stakeholders.
We will do this by continuing to work, even more collaboratively and effectively in a world that is only moving faster.
We will do this by building on our inherent strengths.
Our competitive advantages and investing in innovation that allows us to deliver on our brand promise to consumers.
And we will do this by focusing collectively on solving the needs of our customers.
That is ultimately how we will ensure that we are unleashing the full potential of Mcdonald's to those we serve.
I'd like to extend a wholehearted things to the Mcdonald system for these collective successes and everything that we will continue to deliver in the future.
Thanks to all of you for the discussions that we've had up to this point now we'll begin Q&A.
Thank you and as a reminder, if you are an investor and would like to ask a question. Please press star followed by the number one on your telephone keypad.
Ask that you limit yourself to one question and re queue for any additional questions.
Our first question is from John Glass with Morgan Stanley .
Thanks, and good morning all.
Hi, Good morning can you hear me okay.
Yes, we can area John Thanks, Greg.
Great Good morning.
I was curious about the IOM markets and your comments about the economic pressures there having evidence of trade data wouldn't seem such given the same store sales that may be underneath that is there evidence of consumer strain and maybe it's trade down or what have you.
And can you also talk about or update your inflationary expectations for that market.
<unk> were strong, but you also talked about the need to support franchisees given their cashless situations. So maybe just an update on where you think inflation in the back half for fourth quarter and into early next year leads Youtube in the islands.
Hi, John It's Chris.
If you focus on our IOM markets right now.
Lee we are not seeing significant trade down happening in our menu I think we do.
We do believe we're benefiting from trade down that happens as perhaps people coming out of other.
Parts of IPO into <unk>. So we do think that were perhaps seeing some of that benefit but within our own business in Iowa.
We're not seeing significant evidence of trade down there as.
As far as.
How we're thinking about the market, it's mostly right now showing up just in sentiment.
We're seeing consumer sentiment.
In Europe remained slow.
Obviously, a lot of that is driven by the inflation that theyre seeing cost of living increases related to both food, but also energy and so thats what it.
Is weighing on our mind, you've seen also the central banks in Europe .
I think this morning, the ECB raised interest rates another 75 basis points. So all of that is factoring into what we think is going to be a challenging <unk>.
<unk> in Europe , but it certainly as we mentioned in our comments, putting some pressure on the P&L of our franchisees as far as outlook.
How are you thinking about that I'll, maybe just having an give you his thoughts.
Thanks, Chris and good morning, John So maybe just a little bit of a build on on what Chris talked about it I mean I think <unk>.
Certainly in Europe .
We're seeing higher levels of inflation I think you've heard us talk to that before.
In food and paper.
And also in energy prices, which obviously are impacted particularly in Europe , knowing some of the European markets were quite dependent on Russia and.
In energy source and have had to obviously look for alternative supply. So I think you've got the combination of those.
Pressures hitting some of our European markets, what I would say about Europe is it's obviously a wider range of scenarios because the context is not consistent there are differences across.
The European markets that we do business and I think if I took a step back though I just go to the when you look at Io M&A, 5% comp in quarter, three I mean, I think as Chris talked about we continue to see strong broad based and consistent momentum across the business I think we are.
We've got some inherent strengths in Europe as I'm sure you've heard us talk about previously.
Is the fact that we've got a modernized asset base. We've done a lot of work I think on marketing and around our Mcd framework.
There are less competitive activity.
Across a number of our European markets and so our business and our brand is in a position of strength.
And I certainly think that's.
Our strong.
Tailwind for us as we kind of head into this more volatile period that Chris referred to.
Alright next question is from Dennis Geiger with UBS.
Great. Thanks for the question.
Great. Thanks for the question and I wanted to just ask a similar question as it relates to the U S.
If anything different from a behavior perspective, and I guess more with your customer and then I guess more importantly, given you've got positive guest counts in the U S. Maybe one of the only brands.
Seeing that right now and the strength that you've seen over the last few quarters that last several years is there anything more you can say about the customer now has.
Evolved at all Chris.
On your under your.
Tenure.
More than <unk> of that customer how it may have changed and what that means kind of on the go forward. Thank you.
Sure well I think the biggest thing thats changed over the last several years with the customer is just this focus on the.
Kind of takeaway part of the business and that shows up.
Whether it's in delivery.
The significant growth that we've seen in delivery.
Digital has been a key enabler on that and so.
So for US I think thats been the biggest thing that we've seen certainly we still have a dine in business, but it is.
Less pronounced than it was pre COVID-19 and we're certainly expecting that that's going to sustain in terms of just this focus on drive thru and what we're describing as the three DS.
So I think that's been one.
Broad based change that we've seen I do think that.
Because of the environment that we're in right now and the investments that we've made previously.
Feel very good about sort of what is the Mcdonald's value proposition that shows up when we look at consumer scores around value for money affordability, we are seeing in the U S that.
We continue to lead in this and it's allowed us to push through some of this pricing, but I think because of the strength of the brand and the proposition.
As evidenced by the results that consumers are willing to tolerate it and I think they are willing to do that because of again all of the other things that we've done to just strengthen.
Our offering the brand proposition et cetera, So I think that for us as we look out forward. It gives us confidence that yes, we're going to continue to have inflation in through 2023, both food and paper as well as labor.
We like our position relative to competitors in terms of where we stand.
Alright next question is from Eric Gonzalez with Keybanc.
Hi. Thanks. My question is on the U S business, you're clearly gaining share in executing against what is certainly not the easiest macro environment. So I'm. Just wondering if you could isolate maybe one or two things that youre doing better than your peers and discuss why you believe that is a sustainable moat.
Staffing is it your ability to hire retain talent is about real estate, perhaps speed of service or maybe any other factors that you think you have to have contributed to your relative performance gap versus peers.
Yes, I'm going to maybe take you back to where we were several years ago in the U S, where we talked about and we were in a different time and performance was a little different place than we talked about.
Needing to do a number of things to improve our relative position, we talked about needing to invest in our asset base.
As you know we have cumulatively invested about $9 billion over the last five or six years between us and the franchisees.
In updating our asset base in the U S. We talked about improving the quality of our food and crew and improving our operations, which we have done where speed of service is faster today than it was in 2019.
We've been able to do that despite a more challenging labor environment.
And I also talked about the <unk>.
<unk> and digital so for us at least the way I look at it and I think the U S team, we'd look at it.
Not any one thing that is the answer to the fact that we've been able to move over a number of years on a number of these things that gives us the momentum that the <unk>.
Team is driving right now.
Of course I want to acknowledge also just a great partnership we're getting from our franchisees and from our suppliers in the U S.
It's certainly a team effort.
Our next question is from David Tarantino with Baird.
Hi.
Good morning.
I have a question about Europe I think you reference that you may need to provide support to some of your franchisees.
Hoping that perhaps you can elaborate on what you mean by that and how extensive that support might need to be in the current environment, just kind of frame up.
I guess, how is the health of the system in general.
Good morning, David So.
So thanks for the question let me.
Let me try and hit on that one.
Look I think what I would start with is part of our strategic advantage as our system is our scale and financial strength and I think as you heard me talk too.
In my remarks, and Chris alluded to it earlier, our franchisees in Europe are seeing.
Elevated inflation, particularly obviously in food and paper and energy prices energy prices as an example, and some of our European markets would be up.
Two to three times from what they were 12 months ago. So when you put the combination of all those impacts together theres a fair bit of headwind in some of our European markets on our franchisee cash flow I think.
Using our financial strength.
To provide support to certain franchisees, who may need it.
Targeted in a temporary way.
I think as we think of that obviously to keep our system financially healthy.
But also to keep the system aligned and focused behind the things that are going to drive growth and investing behind those initiatives that are going to continue to drive growth certainly think of that as a strategic advantage and so.
You may remember back drilling.
The Covid period.
We made some decisions around providing temporary and targeted support and I can tell you just from my old role, leading our international business I think those were critically important strategic decisions that were a key factor in the acceleration and momentum that our system add as we came out of.
That COVID-19 period, and so we've got the capability to do that if we need to do that and I think that as I said as a strategic advantage that we carry with us alright.
Alright next question is from Lauren Silberman with credit Suisse.
Yes.
Thank you I wanted to ask about the marketing strategy. So can't Mcdonald's in July the partnership with free market more recently, how are these partnerships, helping you either reaching new audiences or increase engagement with your audience. I guess, what changes are you seeing in terms of their consumer base and do you generally see when you get the increase in digital utilization with lot of these programs.
Thank you.
Yeah. Thanks for the question.
For us.
One of the things that I have certainly believed about our brand is Mcdonald's is one of those brands that actually.
Is very much a part of culture and you see it when you just look at social media and all the ways that consumers will talk about on their own mcdonalds in their Mcdonald's experience and I think what we in the past maybe didn't do enough of us lean into our relevance and how our brand is a part of culture.
And so I think what you've seen over the last several years for us.
Credit to the marketing team and our agency partners on this is just finding more ways that we can connect our equities that we can connect our experience to what's also going on in culture, and whether its famous orders or Cam Mcdonald's are now more and more recently the adult happy meals.
The.
The grip coming back in just all of these different things.
Shows to us and just as a reminder, that we are charged with <unk>.
Shepherding and Stewarding one of the most fantastic equities in the world and.
That we've actually got to find ways to continue to keep it fresh and in terms of evidence of it is just little things. So when you when you see actually that we're selling out of our adult happy meal that is happening in days not weeks.
That is a real proof point when you see that people are posting on social media.
The fun ways, where they've got their buckets and ready to go out and do Halloween at all of those are proof points for us in what I say to our team as well as if youre, if youre, having to sort of look with a microscope to see the impact of marketing on your P&L, then it's not big enough and I think what we're starting to see now is <unk>.
Starting to see marketing and our marketing program show up is significant meaningful comp drivers for us and that's what gives us confidence about that we're finding that right engagement with consumer.
Our next question is from Jared <unk> with Goldman Sachs.
Great. Thank you for the question I wanted to ask you about the health of the U S. Consumer obviously the trends you posted remain.
Really strong and encouraging.
I guess two pieces one can you help frame maybe the level of price that's running through the system right now as a component of the comp.
With that encouraging sign of positive traffic and then wanted to see if youre seeing any sort of delta or differences between day parts as the consumers increasingly pressured by by the macro and if youre seeing any consumer behavior changes related to that just yet thank you.
Let's have Ian maybe just take the first couple of parts to that and then I can maybe offer just a few more general.
Thoughts on it.
Yes, thanks for the question Jared.
Let me.
I think you've talked a little bit about pricing and just kind of I think.
The reactions that we're seeing in the U S. Just knowing the U S is a little further along and I think our data is a little clearer there.
So I think if you look at our quarter three comp in the U S at just over 6%.
That was obviously largely driven by average check but as you as you noted we had a slightly stronger positive contribution from guest counts in quarter three than we saw in quarter. Two so again the majority of that check growth continues to come through price.
Year over year and quarter three our price average price increase in the U S was just over 10%.
And that's roughly where we expect the kind of the full year pricing in the U S to be we continue to see pretty good flow through in the U S about 70%, which would be close to our historical range and so if.
If you think about.
That price increase of roughly 10% flow through of about 70%.
The difference between that and the average check growth that we're seeing was really continues to be driven by two factors that we've talked about previously the first one.
Would be less units per transaction most of that is being driven by kind of a reversion of ordering channels. So obviously during COVID-19.
We saw elevated ordering through kind of off premise channels like delivery and drive thru.
Getting obviously more traffic now back in restaurants for example drive through is basically back to kind of what it was pre COVID-19 in terms of percentage of sales obviously, we continue to see.
Elevated delivery ordering but in total we still see more units.
Per transaction than we were seeing pre COVID-19, but <unk> had a reversion to more traditional ordering channels and then the second factor, but to a lesser extent would be we are seeing some trade down that trade down is mainly with our <unk>.
<unk> income consumers and we're seeing that shift from.
<unk> to get to that net average check growth.
I think to the second part so I would say in total we're getting pretty.
Pretty healthy continued flow through I think it was which is a good sign that we're getting.
The base pricing between balance right with our U S consumers I think on the second part on day parts.
What I would say is we're seeing pretty consistently strong comps in the U S business across all of the day parts I think dinner and breakfast would be a little better but.
As I say pretty consistently strong and again that gives us a pretty good indication.
What we're doing is resonating with consumers pretty broadly.
Yes, nothing to add in handled at all so.
I think we're ready for the next our next question is from Andrew Charles with Cowen.
Great. Thanks.
Ian I appreciate the FX guidance for <unk>, but just given the extraordinary strengthening of the U S. Dollar in recent months and unusual FX circumstances can you perhaps comment on the impact of current exchange rates on 2023, EPS or Matt just somewhere around a 25% to 30 <unk> impact and just wanted to see if we're thinking about that correctly.
Yes, Thanks, Andrew.
Look I'm not going to get into talking about 2023 today to be honest, we're still in the midst of working through our 2023 plans. In fact, we've got our managing directors coming into Chicago and a couple of weeks to take us through their plans for 2023. So I think thats something that we can give you more texture around when we get into our.
Quarter four earnings call.
Our next question is from Chris Carroll with RBC.
Hi, good morning, Thanks for the question.
So maybe following up on some of the earlier questions I did want to ask about the competitive environment in the U S. Maybe both for the Burger category and just broader fast food.
And specifically I mean, do you see potential for increased promotional activity here going forward.
Or are you expecting the industry and peers to kind of remain largely rational here going forward, just given the still dynamic and evolving backdrop here. Thanks.
Yeah, certainly our expectation is that the industry is going to stay rational from a pricing standpoint, and I think part of that is just going to be.
Born out of self interest, which is everybody is experiencing the food and paper inflation, everybody is experiencing the labor inflation and some of our competitors.
Their franchisees are not in the same position as our franchisees.
I think even if there is a desire to try to get more promotional in some areas to address maybe any traffic headwinds that somebody might face I think youre going to run into a lot of resistance from franchisees, who are just not going to be in a position to gauge in that so our expectation is.
Environment is going to continue to stay.
Rational I think the other thing Thats going on right now as you just have food away from home versus food at home you still have significant gaps there I think we are in 2022.
The gap between food away from home versus food at home.
It's the widest gap that it's ever been so there is still a benefit that the industry is getting.
Relative to food at home that I think is keeping everybody.
Being smart about.
Pricing and then the law.
Last thing I would say for us and I mentioned, a little bit earlier for us is that.
What we look at it is we just look at our value and affordability and industry wide the industry overall.
Is doing well on value and affordability and we also like our relative position I mean, we are leading the industry as we have historically.
Our value and affordability of the gap versus the industry. So those are all things that we monitor and look at but the expectation is certainly that the industry is going to stay rational.
Our next question is from Jeff Bernstein with Barclays.
Okay.
Great. Thank you very much.
Shifting gears maybe too.
China, specifically I think you mentioned opening a record 800 units this year I'm.
I'm wondering whether that's safe to assume that's accelerating into 'twenty. Three I think you mentioned that comps were slightly negative.
Trying to assess whether there is any reason for concern on the underlying fundamentals of the business or do you really believe it's purely COVID-19 kind of updated thoughts on the region, especially with the most recent political environment in China, creating some some incremental headwinds. Thank you.
Okay.
So thanks, Jeff Let me start.
Knowing in the last role that I had.
Overseeing China as part of that <unk>.
Look I think as you heard in my opening comments.
I think China continues to be impacted.
By the zero Covid policy.
<unk> to be in place and obviously that continues to be disruptive not just to us, but I think to consumer confidence in the kind of broader macro environment in China.
So I think that certainly what we feel is the driver of the shorter term.
<unk> and challenge in China as you heard me talk to we continue to gain share and it's a pretty competitive marketplace. As you would know so I think we feel that the team in China has done a pretty nice job to work through.
This more challenging period 800 openings I think you can expect that will be kind of consistent as we go forward.
I certainly think I think speaks to the confidence we have in the longer term opportunity in China, which remains.
In place.
But that volatility I think is going to exist until there is a change in kind of focus about how they're handling COVID-19.
Yes, the only thing that I would add just keep in mind that in China. There were still 33 cities and about 65 million people in this last quarter that we're in.
Either full or partial lockdown as a result of the zero Covid Polish though I think sometimes here in the U S.
In our western markets.
Where we are in a different position relative to the pandemic, we sometimes lose sight of in China. There is still a.
Still significant restrictions, which is impacting mobility and ultimately that impacts our business.
But long term our outlook on China remains very bullish we're going to continue to build restaurants at an aggressive pace like Ian was talking about and.
And we do hope and expect that in 2023.
Situation in China is going to improve for us alright.
Alright next question is from John <unk> with Jpmorgan.
You there Jon.
Sorry about that.
Hi, Dad said different conference calls and I suppose.
Thank you.
In a level that you talked about two three to two 4%.
You're obviously spending a lot of money, but you clearly you are getting results. So I just wanted to kind of have a sense.
Both in G&A and if we can also comment on Capex.
Weaker spending levels for the business.
<unk>.
The time and the environment, where the system might be looking for efficiencies or.
Is it the opposite that you actually have an opportunity to spend more and get more.
Tribes feature sales and overall market share again, both on G&A and in Capex.
Yes.
Yes, Thanks John .
Let me take that.
Two questions I think on G&A as you kind of heard me.
<unk> talked to in my commentary there are really a couple of drivers for this year.
Resulted in that adjusted outlook.
The first one is.
The stronger U a impact of the stronger U S. Dollar. So if you think of our <unk>.
G&A, let's call it formula to get to the percentage <unk>.
60% of our sales come from outside of the U S. So obviously, we're translating those sales back into less U S dollars and 70% of our G&A spend.
As U S dollar based so that's the first impact the second impact is obviously just the general inflationary pressures that we're seeing on cost, which obviously is also.
Coming to play in our G&A expense.
Expenses, I think what I would say coming into the role is.
Certainly, it's an area that I'm going to be focused on I think we.
Continue to believe that in terms of the running the business part of our G&A spend we should be able to drive efficiency and gain leverage as we continue to grow our top line as we go forward.
That's important for two reasons, one the efficiency part but also.
Want to make sure we've got the G&A capacity.
To ensure that we can spend on areas like technology and digital are innovation, where we wanted to drive things that are going to drive growth, but I think the net of that formula is that we continue to believe we should gain leverage in G&A as we go forward I think the second part.
On capital.
I think capital there.
There were two reasons why we adjusted guidance down from the two to $2 2 billion to now.
<unk> $2 billion again, one of them is just the stronger U S. Dollar of about 60% of our capital spend is outside of the U S. So we're just translating that spend back into fewer U S dollars I think the second bit.
Is.
Slightly less openings due to kind of the permit timelines in some markets slightly fewer projects getting done.
<unk> lead times.
What I would say on capital is I think and again coming out of my previous role.
We continue to believe we've got an opening opportunity across many of our owned markets. We continue to get really good returns on new restaurant openings I think thats something that we will continue to look at as we as we go forward and I think Chris wanted to just jump in just a couple of closing thoughts here I appreciate it and the question that for.
And the way I think about it is it's the effectiveness of our spend and as you noted in the question we've been able to see that for the investment in G&A. It's certainly driving the type of performance, but I would tell you that I think we have an opportunity to get even more effective on the impact of our G&A investments and for me it should.
Bose up where we're still too slow I.
I think we have to get faster I don't think that we're fully leveraging our scale we have to find ways to do that we're still solving the same problems multiple times in different markets as opposed to having one solution that we can very quickly share across the globe. So.
As I look at the effectiveness of G&A. There is still a lot of work for us in that area.
Our next question is from Brian Bittner with Oppenheimer.
Good morning, Thank you.
Just what's your base case being a U S recession, and I think a deeper within Europe . It's obviously hard to go back and recall how strong the U S business performed best in class during the OE.
Recession period, and so do you see the business as defensively positioned today as it was then announced so just wanted you to comment some more on the low end consumer.
U S trends are so strong in the third quarter in October .
In light of the weakening we're hearing about this slowing consumer I know.
You said youre seeing trade from.
From the low end consumer within your own business, but as this cohort of consumers just generally sees more value is this actually.
Youre breaking up a little bit Brian we will try to maybe yes, maybe all questions we could here.
I'll answer what I can here and then afterwards, if we missed anything you can follow up with Mike on this but certainly there are lessons from 2008 2009, but there are also differences from 2008 2009.
It is true that our business performed well in that last downturn period.
And there were a number of factors for that keep in mind back at that time, we had dollar menu as an embedded part.
Our value offering we also were launching mid cafe and starting to scale that so so those were things that were helpful to us.
In the last.
In the last downturn, we are in a different dynamic right now you have.
Not just pressure on inflation with food and paper, but you've also got labor inflation in a very tight labor market. So thats different than 2008 2009.
Our expectation is that we are going to perform well in this environment certainly on a relative basis to our to our competitors here, but there are different factors at play.
And I think theyre going to be different drivers its focus on digital and delivery and we do think that those are going to.
Be more pronounced now and the fact that we have scale and we also have the ability to do it we think at lower cost than our competitors thats going to be one thing that we believe works in our favor. The fact as I mentioned earlier that our brand and our asset base. We think is in a better position.
Gives us a little bit more pricing power than maybe in the past, where we're leaning into dollar menu. We actually I think we've got pricing power right now.
The only other thing I would just add as evidence of that is one of the things that we look at as we look at our share by income group and in the U S. We can actually look at what is our share amongst low income consumers, we're gaining share right now among low income consumers.
That goes back to the fact that we are positioned as the.
The leading brand in terms of value for money and affordability. So so long as we continue to stay on the right side of that.
We are seeing the benefit like I said with the low end.
Low income consumer and to the degree that we end up in a more challenging economic environment in 2023, that's going to be helpful to our business trends.
Our next question is from David Palmer with Evercore.
Thank you a question on Europe , and the IOM during its quarter.
Coca Cola mentioned that there was a strong summer in Europe , partially helped by weather, but then weather was a negative two towards the end of the quarter. So.
I would imagine there might be some noise because of weather and there might be noise that to tease out in terms of COVID-19 comparisons but.
Are you seeing any real trends in Europe in recent months in terms of sales and traffic and has there been any slowing in particular markets that you would attribute to consumer confidence and discretionary income and then also given what you know about what's going to happen in terms of rising utilities in the coming months what impact do you think these will.
<unk> on your IOM company restaurant margins in consumer traffic.
The last part is difficult, but any thoughts would be helpful. Thanks.
Yes, Thanks, David Good morning.
Well look I think what I would say in Europe on trends as I think we've seen pretty good consistency of strength.
Across our European markets. So.
Don't think we've been impacted by the weather factor that you talked about.
Perhaps as others have I think our momentum there is really strong and as you and I have talked about before.
Just.
As Chris talked about the strength of our brand in Europe again modernized asset base I think.
Strong teams strong alignment with our franchisees in our system in Europe all of those things are coming to play and as you heard.
Chris talk about.
A little bit in the U S context, I, just think all of those things coming together put us in a position of strength and then if you look at things like value for money and affordability across the majority of our European markets. We are the leader.
On those measures, which I think are really important as we head into this.
More dynamic environment I think on margins as you heard me talk too.
In my opening remarks.
Certainly in Europe , if you look at food and paper.
We think inflation in Europe is going to be a little higher and last a little longer than what we are seeing in the U S energy prices as I talked to earlier.
And some of our European markets are up two to three times, what they were 12 months ago. So those are certainly pressures that are facing some of our markets and certainly our franchisees and our European business I think we've done a lot of work over the last couple of years.
<unk> pricing capability and what I mean by that is the advisories advisors that we use the tools the data and the analytics.
So I feel like we're in a good position where were using the right facts and data the right consumer insights to make really I think consumer facing decisions and we're taking.
The right levels of pricing and getting that balance right between recovering inflation, but also not getting ahead of the consumer and I think the momentum to Europe kind of speaks to.
You know how we're doing on that.
One of the things that that is a factor in all of this is when we give pricing recommendations, but ultimately it's up to the franchisees as to whether they adopt those pricing recommendations and we're still seeing very strong adherence with our franchisees to our pricing recommendations, which we take as a signal that there's can't.
Evidence in how we're going about the decision making on that.
As we near the hour, we got time for one more question from Greg Frankfurt with Guggenheim.
Okay.
Hey, I have a two part question I know, Mike you might kill me for that but the first one is this is this really the MC rib farewell tour. That's the first one and then the second one is a follow up to John's question from earlier.
Just maybe can you talk about how youre thinking about accelerating unit growth, you've talked a little bit about delays in permitting but.
But the confidence in the timing and magnitude of maybe getting back up close to three 5% to 4% unit growth when we might expect that to happen.
Well the <unk> is the goal of sandwiches on our menu and so like the goat, Michael Jordan, Tom Brady and others Youre never sure. If they are fully retired or not.
And over to you.
Yes, I think.
I think.
What I would just reiterate is what I talked to earlier I mean, I think if you look across our IOM markets and the U S. I think you've heard us talk about the strength of the brand and the business.
I think certainly we continue to see as I talked about earlier really good returns around the unit openings that we are doing in those markets I think certainly there's more opportunity there.
And I think Thats, something we will talk to you more about it as we kind of get into 2023, and our fourth quarter earnings.
Okay. Thank you Chris Thank you and thanks, everybody for joining and have a great day.
This concludes Mcdonald's Corporation Investor call you may now disconnect.
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