Q2 2023 McDonald's Corp Earnings Call
Hello, and welcome to Mcdonalds second quarter 2023, 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 See plaque 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 Borden as a reminder, the forward looking statements in our earnings release and 8-K filing also apply to our comments on the call today.
Both of those documents are available on our website as are reconciliations of any non-GAAP financial measures mentioned on today's call along with their corresponding GAAP measures.
Following prepared remarks. This morning, 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 last quarter I talked about consistency.
<unk> in our numbers consistency and the drivers of our business and consistency in the excitement or across the system about the opportunities ahead.
This quarter the theme as.
Well, if I'm being honest the theme was grimace grim.
<unk> has been everywhere in the past few months all over the news and more than 3 billion views on tick tock.
Not bad for a 52nd birthday.
This viral phenomenon is yet another proof point of the power of marketing at Mcdonald's today.
Aside from grimace, what really stood out about this past quarter was our continued consistency.
In Q2, we delivered yet another quarter of strong performance, achieving global comparable sales of 11, 7% with double digit comparable sales across each of our segments.
We're operating from a position of strength and continuing to gain share in most of our major markets. Despite headwinds in a challenging macro environment.
The reason for this continued consistency is simple.
Our accelerating the arches playbook is working to help create a better customer experience.
Renewed focus on the fundamentals in part fueled by the reintroduction of the pace program has led to operational improvements and continued increases in customer satisfaction across most of our major markets.
To further strengthen our foundation of running great restaurants, we recently created a chief restaurant officer role in markets to keep our market teams focus on driving our strategic plan execution and performance.
Market Kroes will also help ensure that innovative ideas generated in local restaurants can be leveraged in markets across the globe.
Our success is fueling even greater ambitions, we're continuing to double down on our existing growth pillars, while evolving our strategy through accelerating the organization to stay front footed with an eye towards the future.
As we've previously shared accelerating the organization is an initiative to re imagine how we work to bring the full breadth of Mcdonald's skills and experiences together to come up with the best solutions that can be scaled.
We're bringing this to life through one Mcdonald's way horizontal ways of working and digitizing the organization.
While we're just beginning to change our ways of working we're already seeing early benefits.
I've, often said that the next great solution will come from our markets and in our restaurants.
As I recently visited markets like China, Italy, and Germany, I continue to be inspired by the entrepreneurial spirit of our system and how market teams are embracing these principles EBIT more consistently.
Visiting China truly brought to life the power of a highly digitized economy and our potential for global growth moving forward.
With about 90% of our business currently coming through digital channels in that market. It was remarkable to see how the market has forged digital relationships with customers.
China is also making tremendous progress in running the restaurants more efficiently all with the use of data and technology.
This will provide great learnings for the rest of our system.
Our Canadian team is implementing a rigorous initiative review process to relentlessly prioritize work to actively stopped projects that are less important and focus on solving the most meaningful problems for our customers.
Using a new framework the team has already cut their number of key business projects in half.
We intend to learn from and scale of this process to other markets as well.
Additionally, our UK and Ireland team recently traveled to Germany to learn best practices from the market's best Burger rollout.
This is a prime example of the agile scaling of solutions and horizontal ways of working.
And finally last November we launched our largest global unified marketing campaign ever want to go to Mcdonald's to celebrate the FIFA men's World Cup.
We're thrilled to extend this award winning brand platform with the FIFA Women's World Cup and write a new chapter in the story to meet this iconic cultural moment.
This campaign will be brought to life in 28 markets through fully integrated social digital streaming and content strategies that tap into local fan excitement.
These are just a few examples of how a one Mcdonald's way approach to common challenges will drive greater connectivity inefficiency worldwide.
Key to enabling the company has scale solutions with speed and agility is the work of our new global business services business unit or GBS.
GBS will unlock further efficiencies and capabilities of our people and resources.
We will do this by developing digital tools for the organization, making data and insights more accessible across the system and growing our future talent pipeline.
We will continue to keep you updated on how our ongoing investment in this area will benefit the enterprise in the years to come.
In addition to our accelerating the organization efforts. We're also focused on evolving our approach to capturing incremental customer visits.
Central to that is restaurant development also known as our fourth D.
Our strong performance and strength of our brand has earned us the right to begin accelerating the pace of restaurant openings in our major markets over the next several years.
While our primary focus is on opening traditional units.
We're always testing and learning new ways to meet the needs of our customers.
One example is the takeaway only restaurant in Fort worth, Texas that opened in 2022.
The restaurant site is considerably smaller than a traditional restaurant and as the way customers order and receive their food has changed dramatically over the past few years is geared toward customers based on their need state wherever they are.
Another recent example of innovation I was able to see firsthand during my visit to China is the use of food lockers at busy locations with high in store traffic.
Upon arrival delivery couriers can quickly unlock the designated locker and grabbed the customer's order without even entering the restaurant removing friction for both the kitchen and the courier.
And our new business ventures team is in the process of developing a new concept, we will call cosmetics, which we will test in a small handful of sites in a limited geography, beginning early next year.
Cosmic <unk> is a small format concept with all of the DNA of Mcdonald's, but its own unique personality.
We look forward to providing you with more information about our development plans and new format innovations at our Investor day at the end of the year.
Finally, before I hand, it to Ian.
I want to recognize our teams and business partners in France, who have handled the unrest in the market with remarkable strength and grace.
It has been extremely disruptive to the business on top of an already challenging operating environment.
Thanks to everyone connected a Mcdonald's France for your dedication and commitment to the business as well as your efforts to keep everyone safe during this volatile time.
I'll now turn it over to Ian.
Thanks, Chris and good morning, everyone as Chris mentioned, the second quarter was yet another demonstration of consistently strong performance guided by our accelerating the arches strategy and fueled by our outstanding execution.
Delivering delicious feel good moments to our customers in new and exciting ways by doubling down on our creative excellence and highlighting our core menu all with the value and convenience our customers expect.
Our performance speaks for itself and is a testament to the passion and dedication of our entire mcdonalds system.
With global comparable sales of 11, 7% and consistent performance across our segments. It's clear that the Mcdonald's brand has never been stronger and.
In fact, the brand was at the center this quarter as we engage with customers and authentic and culturally relevant ways with campaigns rooted in consumer insights.
As Chris touched on a few minutes ago, we took the install tech experience of celebrating birthdays at Mcdonalds and repackaged it for a new generation.
With none other than grimace at the center.
We became one of our most socially engaging campaigns of all time with millions of reactions on our social media posts a true demonstration of how the power of our brand emerges and organic and creative ways and our fans.
It contributed to the strong double digit comparable sales growth for the quarter in the U S.
The passion for the brand was also evident in Italy with the launch of a truly unique creative platform.
<unk> celebrated the most loved and best selling beef Burger in the market by asking customers what would you do for our crispy Mac Bacon.
The answer came in the form of customers getting tattoos of their favorite Mcdonald's sandwich, driving brand affinity and elevating share gains.
Certainly seen a lot in my 30 years at Mcdonald's, but this was a new one for me truly remarkable.
As I've mentioned before our chicken equities remain at the core of our growth strategy.
The UK celebrated the 40th anniversary of another fan favorite the chicken mcnuggets by offering limited time sources to reconnect with the Gen Z consumer.
This was coupled with compelling media that showcase the fan truth that sharing your nuggets isn't guaranteed even if your best friends.
China also highlighted the chicken mcnuggets anniversary in a creative way with an integrated marketing campaign, featuring our 'twenty piece Nuggets. It quickly went viral on social media and generated significant positive buzz among consumers.
Spicy mcnuggets one of our most popular line extensions were offered across various markets this quarter, including Australia and Germany.
It is yet another example of how we modernize our core menu adapted to meet changing customer tastes profiles and scale. These new ideas across the globe.
Both markets achieved significant lifts to the mcnuggets line as a result, and spicy mcnuggets sales reached an all time high in Australia.
Our ambition on chicken includes further scaling emerging equities across markets.
When the crispy chicken Sandwich for example has now scaled to over 10 of our largest markets, including Spain, just this past quarter.
The sandwich is already resonating with our customers, bringing attention to our chicken portfolio and driving significant chicken share gains.
A recent addition to our portfolio of $1 billion brands. The <unk> continues to be an important catalyst of chicken growth for many of our markets.
The U K for example has achieved market share leadership in chicken.
A remarkable growth over the past few years with the launch of both the crispy and the mix spicy chicken sandwiches.
We look forward to further scaling these new global favorites to customers around the world.
A challenging macro environment, including rising interest rates and elevated costs continues to create volatile consumer confidence levels and put pressure on consumer spending.
Providing customers with an affordable option has always been core to Mcdonald's.
But in these challenging times it is even more important for us to remain agile proactively meeting the needs of our customers.
Germany continued the success of its mixed smart menu initially.
Initially introduced last quarter to provide entry level affordable meals, it's contributed to our best sales quarter ever in the market and lifted value perceptions with consumers.
The UK unveiled a similar offering with its new saver meal deals in June and the early results are encouraging.
A permanent addition to the menu it aims to provide consistent everyday affordability and ensure customers can still enjoy their favorite treats like the double cheeseburger, despite the rising cost environment.
Maintaining our leadership position in value is crucial to future success and Mcdonald's holds the number one position and good value for money and affordability across most of our major markets.
This shows that even in the most challenging of environments. Our customers know that they can rely on Mcdonald's to provide an affordable destination for the food that they love.
But we know that customers perceptions on value are made up of more than just the price of our food.
It's also about the experience that we provide.
We've continued to enhance the customer experience, providing the seamless and memorable interactions our customers have come to expect.
Last quarter, we introduced an enhanced ordering process through our app in the U S with the goal of delivering a faster and more enjoyable experience for the customer.
While we are still learning from this deployment early results have been extremely positive with elevated sales initiated through the app increased customer satisfaction and improved service times.
Canada also introduced new experiences in the App with the launch of the frequent Flyer program tap.
Tapping into Canadians passion for travel the digital campaign celebrated Mcdonald's fries, and the opportunity to taste them in other countries.
This creative approach to Reengage with our loyalty members resulted in lifts to both digital acquisition and digital customer frequency during the campaign.
Now in over 50 markets across the globe, we're continuing to build stronger relationships with our loyalty customers and fueling growth of our digital sales in the process.
And our top six markets digital sales represent nearly 40% of system wide sales.
And our loyalty members remain highly engaged with over 52 million 90 day active members across our top six markets.
As our relationships with these customers continue to grow we will unlock additional customer needs and explore investments for continued digital innovation at a scale that only Mcdonald's can achieve.
Strong execution across all elements of accelerating the arches is creating additional customer demand and share gains across most of our major markets, but we recognize that we're operating in a challenging macro environment, where costs remain elevated customer discretionary spending is limited and industry.
Traffic is pressured.
In line with industry trends and as inflation begins to normalize later in the year, we expect top line growth to moderate.
Turning to the P&L, our strong topline performance across each of our segments drove adjusted earnings per share of $3 17 for the quarter.
An increase over the prior year of 25% in constant currencies, excluding other charges and gains in both periods as well as our prior year tax settlement.
Our company operated margin performance for the first half of 2023 is in line with our expectations and remains hampered by continued cost pressures as.
As we look to the remainder of the year, we expect macro headwinds will continue.
Total restaurant margin dollars grew by nearly $450 million and constant currencies or nearly 14% for the quarter.
Strong franchise sales performance continues to be offset by targeted and temporary franchisee assistance provided mainly to our European franchisees were elevated costs continue to pressure restaurant cash flows.
We're still anticipating that these efforts will have an impact of $100 million to $150 million for the year.
G&A for the quarter decreased 6% in constant currency.
Primarily driven by prior year cost incurred for our worldwide Convention last April and timing of anticipated current year spend.
We are pleased with our strong adjusted operating margin of just over 47% for the first half of the year. This.
This was driven by the continued strong top line growth that I mentioned and timing within our G&A spend.
For the full year, we now expect adjusted operating margin to be about 46%, reflecting heavier G&A spend in the back half of the year, along with an expected property gain in other operating income in quarter four.
Our adjusted effective tax rate was just over 18% for the quarter.
And with that let me turn it back over to Chris.
Thanks, Ian as I've said before Mcdonald's Corporation is in the business of selling our brand our investments through accelerating the arches to create cultural conversations and developed industry, leading innovations have increased the value of our brand and kept us relevant.
In June Mcdonald's earned an impressive 18 lines across 10 markets at the Cannes Lions International Festival of creativity.
Additionally, our team in the UK and Ireland was awarded the prestigious marketing societies Grand Prix, which recognizes the best marketer in the country.
The Mcdonald's brand also rose to the number five spot in the 2023 Cantor brands top 100, most valuable global brands report behind only the leading tech industry brands.
As we've upped our marketing game. It's also been interesting to see how our food quality scores with customers have continued to increase.
The more customers love our brand the more they love our food.
Beyond the great brand stories created by our marketing teams and agency partners are the thousands of franchisees around the world, who create real life brand stories everyday in the restaurants with our customers.
Our franchisees and crew bring the Mcdonald's brand to life with great hospitality convenience and service.
The best brand in the industry backed by the best franchisees has been our value creation formula for decades.
We're always looking ahead to what is next to asking ourselves how do we continue to create the world's greatest franchising opportunity for the world's greatest franchisees for generations to come.
This requires making decisions for the long term to earn our success rather than expecting it we're assuming it.
Our accelerating the Orchard strategy is focused on just that setting.
Setting up the company and our franchisees to continue to prosper.
Okay.
Laying the foundation for the future also involves strongly defending the franchise system and independent ownership rights a position echoed by the National franchise leadership Alliance. The elected representative voice of Mcdonald's franchise organizations across the U S.
I am confident that the system is focused on the right priorities and is well positioned to meet the customer needs of tomorrow.
Thank you to the over 2 million talented people working in our restaurants, our thousands of franchisees in our entire network of suppliers around the world, who bring the Mcdonald's experience to life each day.
I'll now turn it over to Mike for Q&A.
Thank you and 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 Eric Gonzalez with Keybanc.
Hey, Thanks for the question and good morning. My question is about your expectations for the U S. Consumer I think last quarter. There was some discussion about your base case that the U S with experienced a mild recession and I think you called out that youre starting to see some evidence of trade down I know check management.
At that time, so I'm wondering has there been any change to your current thinking and whether those consumer behaviors have intensified or moderated in the last quarter.
Alright, Thanks, Eric for the question.
I'd say overall, there hasnt been dramatic change.
In the U S consumer sentiment is actually improving a little bit.
We're certainly still.
Far off of where we were back in 2019.
As we look at our spend.
But by different sort of economic cohorts.
We are gaining share in the if you look at incomes under 100000, we're actually doing quite well, there, which suggests that we're getting some benefit from trade down.
From things like full service dining.
Casual dining et cetera.
And then even if you go to incomes up 45, K and less.
Our business is performing Theyre performing well there what were seeing with that group as we are seeing.
A little bit of a decrease in.
Order size.
But it's being offset by very strong continued strength in traffic. So I think net net when you look at all of it.
There is certainly concern with the U S consumer that shows up in their sentiment.
But our business and particularly I think our value positioning in the market.
Has put us into a good position to be able to weather that and continue to drive the share gains that youre seeing.
Hi, Eric and Deanna.
A little bit too.
Christmas comments.
I think we've talked.
If I just focus on the U S over the last couple of quarters, and then kind of these two broad areas it probably consumer.
Adjustments that we've seen I would say the first one is we are seeing some consumers that are kind of trading down from those more premium or higher priced items in the menu to more core and value and then I think as Chris.
Third we have consumers that continue to visit and probably are just buying a little less so their basket sizes are a little bit smaller.
And then what they had been previously.
I think the context is those two factors, though have been really well they have been in play for a number of quarters now have been very consistent so we're not seeing any further.
A deterioration I think that which is encouraging and as Chris touched on I think speaks to our leading value for money and affordable positioning in the U S business, which we know is industry, leading and we rate maintain a really strong gap to the competitive set I mean I think it is I think the consumer still remains under pressure.
Obviously with the macro context with all of the inflationary impacts that they're seeing on their kind of basket of goods and obviously with rising interest rates, but we know.
We had obviously positive traffic growth in the quarter in the U S business, we know that on a comp basis, we continue to outperform the broader sector and I think as Chris touched on in his opening remarks.
We're doing.
We continue to focus on the experience and we know based on the feedback that we're seeing from our customers that we're delivering an improved experience and I think thats a credit to the U S business and all of our franchisees and their really strong focus they've got on executing and make sure we deliver for the customer when they do choose us.
Our next question is from David Tarantino with Baird.
Hi, good morning.
I wanted to follow up on your comments about sales moderating as the year goes on it which is understandable given given the starting point here, but specifically I was hoping you could perhaps break down.
The guest count growth versus the check growth.
In the U S and if you have it in Iowa as.
Well for the second quarter, and then how do you expect that check growth component to moderate as kind of the inflation environment gets a little bit more moderate. So I guess, if you could just frame that up for us that would be helpful. Thanks.
Thanks, David.
Well look what I'll do is I think.
Kind of give you the broad brush.
Factors that I think we consider when we when we talk to kind of our expectation of a moderation in our topline as we kind of work through the back half of the year I think there are three things there that I'd call out is the first is just we certainly believe from a kind of COVID-19 comparability, the substantive kind of tailwind.
Are fully behind us as we move into the back half of the year. So I think thats. The first piece the second piece.
Is just as we talked.
Two in our opening remarks, I mean, we certainly are seeing inflation starting to gradually come down.
I think that's been the case in the U S business, probably starting the end of last year.
It's obviously still elevated but I think we are seeing that gradual kind of decline and I think in the majority of our international markets. We started to see I think as we head into the back half of the year.
The gradual decline begin there as well and so I think as inflation begins to come down.
I would certainly expect our pricing levels to also start to come down. So that's the second factor and I think.
Then the third factor.
I would just be as Chris touched on previously I mean, I think there are a number of our top markets, where we know the macroeconomic conditions are challenging we know there continues to be a lot of pressure on consumers, we know consumer sentiment.
Continues to be impacted.
And so we do expect the broader sector.
To kind of begin to kind of decline in those markets as we go through the back half of the year and so I think thats kind of a third.
What kind of trend that we think about when we talk about moderation if I spoke specifically to the U S.
I think.
We are obviously looking at kind of a one year comparable but also kind of comparing back to 2019, I think that moderation is probably more pronounced in the back half of the second half than the front half.
But I think if you step back and you think.
When you look at the quarter two results, we had positive track traffic across each of the three operating segments.
We are laser focused on what we certainly feel is the most important metric which is that we are continuing to gain market share in the majority of our top markets. We know we continue to out perform the competitive set and that's certainly what we're laser focused on we feel really confident about how our accelerating the arches strategy continues to resonate.
Across all of our markets, we do business with and the strength of our underlying momentum.
Our next question is from Jeff Bernstein with Barclays.
Great. Thank you very much.
Just looking at the guidance that you've provided.
I think you mentioned that operating margins, you're now expecting at 46% for this full year ex the restructuring charges.
And just from the 45% prior.
I was wondering if you could maybe offer some color as to what you believe are the primary drivers of that and just as importantly, how should we think about that operating margin looking out 123 years is that reasonable to assume that that continues to grind higher or is there a certain level, where you would expect that would top out whether just naturally or whether based on reinvestment that you might.
I want to make I'm, just wondering how you think about that operating margin, especially in the current environment. Thank you.
Hey, good morning, Jeff.
Let me start with that one and thanks for the question so.
So let me start I think with 2023 and as you touched on I think we started the year with an op margin guidance of about 45% we've updated that now.
To say about 46%.
We're really pleased with our performance in the first half of the year, where we were.
47% from an op margin standpoint, and I think that connects to what we've talked about pretty consistently which is we do believe that over time as we continue to drive top line growth that we can.
Continue to get leverage in our op margin line I think we saw that in the first half as we head into the second half I think there are.
Couple of things that kind of our.
Specific to the guidance for the full year firstly.
The inflationary pressures and margin pressures, we certainly believe we will continue I just talked about kind of a moderation of the topline as we kind of work through the rest of the year.
We also expect as I touched on in my opening remarks that our G&A spend for the year will be more back half than front half weighted so thats a factor.
And the other call out and I kind of touched on this again in my opening remarks was we do expect and this is in the guidance that we will have a onetime property gain.
In the fourth quarter I think as we look forward again I would just reiterate that we certainly believe as we're continuing to being able to drive that topline growth.
That we can continue to gain leverage in the op margin line I think it's something we will certainly talk about further in the analyst day at the end of the year.
Our next question is from David Palmer with Evercore.
I would love to hear more detail about the trends and insights from those countries.
Your.
Where are you seeing relative strength and weakness.
What do you ascribe those trends too.
I ask partly because we're still dealing with post COVID-19 dynamics in some of those markets that are perhaps greater than the U S.
With some back to travel back to work in center cities, but I'd also be interested to hear about macro headwind headwinds youre already seeing in the business you mentioned the value menu launches in Germany and UK. So wondering if you were doing those as proactive launch June or perhaps reactionary. Thanks, so much.
Hey, David It's Chris Thanks for the question well as you saw in our results overall, our IOM business put up very strong performance. So we're very pleased with that and it's a credit to the team and how they're executing against that also as you probably know.
Our our IOM, particularly our European markets.
Facing even more significant inflationary pressures U S U K in particular.
And in the U S and the team there.
They have done a really nice job of putting in the pricing that they need to to.
Ensure that we're protecting margins franchisee margins, but at the same time that we are maintaining our.
Our affordability and value for money leadership in those markets and our measures are continue to hold up quite well.
The other thing Thats going well for US is just the execution that we're seeing.
In our IOM markets.
They continue to make progress on service times customer satisfaction scores are continuing to increase so there has been really.
Strong performance from an operation standpoint.
Over in Europe .
Where you do see in every countries, obviously got a little bit of a different nuance, but.
Certainly the unrest that I mentioned in my opening comments in France has put some challenge from a macro standpoint on that business. We've also had.
A number of restaurants that have actually been impacted through some of the protests there that we've had to take offline.
And theyre going to need to go and get rebuilt.
So there is pressure that we've seen from a macro standpoint in France.
In the U K.
UK is dealing with.
Probably.
The worst it were close to the worst consumer sentiment.
In Europe , and Thats, putting some pressure.
On the business, but overall, our UK business is performing well and I think <unk>.
Each market has its own approach to value.
But we're seeing I think that probably being a little bit more of an orientation and those markets just to make sure that as we build our second half plan that we've got a strong value message as part of that so.
We're all very pleased with how our IOM and FERC.
Our European markets are performing and I Wouldnt say theres anything one in particular that.
The reason for that it's a whole playbook.
Our value, it's a focus on core menu that had great chicken growth and.
And then of course, we're seeing all the benefits from digital and.
One of the things that as it.
Maybe not fully appreciate it but with $52 million.
People in our top six markets now in our loyalty program, we do typically see about a 15% increase in frequency.
When we get members into loyalty and we're still seeing high single digit growth rates in our loyalty programs in terms of sign ups. So that continues to be a tailwind for us in the business.
Our next question is from John <unk> Jpmorgan.
Hi, Thank you I actually my question is in the context of value. It's a perfect follow up to that so you discussed some of the success of the next smart value menu, the saver menu and obviously I'm hearing a lot about global solutions as.
As we kind of think about ways to drive traffic drive sales may be to some extent.
<unk>.
At the expense of margins does it makes sense.
Consider the return of a.
Style menu in the U S Canada.
France, France, Australia, what have you I mean does.
<unk>.
<unk> menu at.
At least in some construct part of what you see the big six or seven.
Offerings to consumers to be is that something that is on the front burner. Thank you.
Yeah, I'll take that so I think the starting point is to just emphasize we're winning on value.
So the programs that we have in place.
Our working and delivering for us and it shows up.
Not just in our overall performance. The fact that we're driving both check and we're driving guest counts.
But it shows in <unk>.
A value standpoint that from my vantage point, you would need to change I think we feel really good that the value programs that we have in place are actually driving the success.
Probably the only thing that teams would be looking at is as they think about marketing communication in the back half of the year do they maybe emphasize a little bit more of a.
Driving awareness of the value programs that are already exist in the market that may be something that submarket to consider doing but we feel great about the value programs that we have in place in each of our markets today and.
And I wouldn't expect to see any changes.
The programs that we have.
Maybe just a little built.
Chris I think.
I think just.
One of the things that we.
We feel really good.
Good about and the business is just how our teams are continuing to be proactive and agile and kind of obviously a volatile set of external circumstances and I think thats. The example in both the UK and Germany of what the teams have introduced there is a great example of learning from each other because theres a lot of consistency and those pro.
Grams, but bringing bringing them to life in ways that are relevant and doing that while we're in a position of strength as we are in both markets, Germany. As an example in the second quarter had an all time sales record for their business. So I think this is us staying close to our consumers make sure making sure we're leaning into the needs of our consumers as they work.
Through the broader.
Our next question is from Brian Bittner with Oppenheimer.
Thanks, Good morning, I wanted to ask about store level margins clearly your same store sales were very impressive in the second quarter over 10% comps in the United States with store level margins in the U S. We're still down about 70 bps year over year in the quarter. So can you.
Can you talk more specifically.
About what is causing a drag on margins, despite such strong topline and and as the top line potentially slows moving forward as you talked about is there a scenario where store level margins can start to show.
Improvements or is this a situation where you anticipate store level margins to feel more pressure for longer.
Good morning, Brian It's Dan Thanks for the question.
Well look I would start with the headline I mean, our belief is that the best way to drive sustainable margin improvement is for us to focus on driving strong momentum in the business and I think the U S business is the perfect example of that while certainly as you work through these kind of rapid and accelerating.
At periods of inflation, there is pressure from a percentage basis, and we've clearly seen that in the U S business.
The example would be in the strength of our momentum in the U S. Actually means that our owner operator cash flow was up year over year, obviously in a continued challenging environment and that's what we're focused on is how do we drive sustainable margin dollar cash flow growth for ourselves and for our free.
<unk> I think from a percentage basis.
Youre right I mean, I think we continue to see pressure, obviously from food and paper inflation labor inflation.
I think our where we talked about earlier in the year remains in place.
We said this and I think we are.
Consistent with that in the sense that we thought.
Our macaco margin in the U S business would be kind of roughly in line in terms of 'twenty three with where we were at quarter four 2022.
But we have a lot of confidence that as we continue to drive that strong top line momentum as we go forward that will continue to be able to drive both margin dollars and over time margin percentage growth within the business and I would just add as I mentioned in my opening comments I've been to a number of markets I've had a chance to talk to franchisees in a number of mark.
And I've been very impressed and pleased with how theyre thinking about working through the current scenario right now which is.
They are playing the long game and they recognize the importance of us.
Continuing to make sure we have leadership in value and affordability.
As they also think about how do they.
Rebuild margins back to kind of where we were during this pre inflationary spike and so in many many cases.
The conversations we're having with franchisees are about more of exiting the year and where do we want to see margins when we exit the year.
But recognize that.
There may be some short term impacts on this as we continue to balance our need for margin, but also our need to maintain our leadership.
With customers so hats.
It's off to the franchisees, who I think are taking the exact right perspective on this and it's what shows up in our performance and the reason why we're taking share.
Almost all of our major markets.
Our next question is from Dennis Geiger with UBS.
Thank you I wanted to just ask you a little bit more on how you're thinking about maintaining some of the underlying momentum and the share gains you've seen for quite some time now in the U S. As you think about some of the key drivers in place across the three DS the operational execution newer set already on arrival stuff et cetera can you just.
Sort of unpack, how you think about the most impactful traffic and sales opportunities in the next year and maybe even over the coming years. Thank you.
It all goes back to the strategy of accelerating the arches and when we laid out accelerating the orange as we talked about our Mcd framework, it's about great marketing, it's about focusing on core menu. It's about <unk> now the <unk> and so one of the things that I and then underlying all of.
That is about great execution, and I think one of the things that for me gives me confidence about the strength and resiliency of our business not just in the U S. But around the world is that it's broad based it's not being folk driven by.
One off promotion, it's not being driven by kind of silver bullet youre seeing it because of consistent execution across the entire strategy. So you are seeing evidence of where we continue I think to up our game from a marketing standpoint.
That's driving strength around our brand scores our brand.
Has never been in a better place than it has been our focus on core menu in things like best Burger at the focus that we have on chicken.
We're gaining share.
Share in both chicken and beef, which off of core menu.
Has a lot of benefit and then we continue to do a great job of executing against our <unk> and will against our <unk>.
Digital for Us is.
Something that.
It's actually I think a virtuous loop, where youre seeing the stronger our digital business becomes.
The more that it's driving customer engagement and digital.
Our app downloads and when you compare us to anybody else in the industry.
Orders of magnitude difference in that that creates some economies of scale that become self perpetuating over time, so as I look out for the business for us it's going to be about continuing to do all the things that we're doing on that and underneath that is the execution that we're seeing in our restaurants and with the pace program.
We've put in place last year.
And most of our major markets. This year, we added the U S.
But youre seeing service times come down across the board in our major markets Youre seeing VSAT, our customer satisfaction scores.
So up in all of our restaurants, so I wouldn't attribute our success to any one thing. It's the fact that we're executing across the entire accelerating the oranges playbook that gives me confidence that this is a momentum business.
When you've got momentum it helps and it can be self perpetuating that you don't want to get complacent on that.
But the fact that we have momentum I think is driving an ambition.
To drive our operator's willingness to invest because they do see.
As we play this out we've got a long runway of we certainly believe we have a long runway here at mcdonalds.
Our next question is from Chris <unk> at RBC.
Thanks, and good morning, So Chris I know you touched on this in your prepared remarks, and you plan to share more at the Investor day, but could you maybe expand a bit more on the development outlook as we think about the second half of this year as well as beyond 2023, you've seen strong topline momentum improving margins and you've made organ.
<unk> changes to help support development. So what are the key unlocks here or next steps going forward to accelerate new restaurant openings. Thank you.
Sure well, we will share much more detail about this at the analyst day at the end of the year, So I won't get into the specifics, but I will talk about the activities that we're doing right now which is one of the starting point is just looking at our opportunity with traditional restaurants, and if you think of.
Over the last several years, our focus has been largely globally around reinvestment.
In the U S. We haven't grown units going all the way back to 2014, if you go to a number of our large IOM markets.
Growth there from a unit standpoint has been pretty anemic.
<unk> to what we think is the opportunity and so we are doing a very detailed both top down and bottoms up look.
To say what is the development opportunity that exists in each of those markets and how do we go and exploit that.
The U S is one example, I think the other thing that we looked at is think about the U S restaurant estate today.
And the U S restaurant state today reflects probably what the demographic profile of the population profile looked like 20 or 30 years ago.
And imagine the amount of shifts that have happened people moving to the south the southeast.
That isn't reflected in our footprint our footprint reflects what the population looks like probably 20 or 30 years ago. So you end up finding there is a number of places around the us where we are significantly underdeveloped relative to where the population exists today that opens up for us a whole bunch of development opportunities for us to go.
After the other thing that we're overlaying on top of this as we are as I mentioned in my opening comments thinking about small format and how do we bring new concepts that open up real estate opportunities that under a traditional model would not necessarily be available to us a bit.
Reason that that we can now look at those is because of the growth that's happened with the digital and delivery, where you don't necessarily need the big dining rooms that you needed in our traditional restaurants. So you are now able to look at real estate sites that previously would have been sort of off limits to us those become opportunities. So we're taking all of that.
These things together and rolling that up to get a perspective of what we think the new unit potential is going to be over the next four or five years as you would imagine it's a longer lead item. So this isn't going to be something that shows up in.
In 2024, and even in 2025, but you can start to with focused on it get some real benefits in 2006 and beyond and that's what we'll share at analyst day.
Our next question is from Andrew Charles with Cowen.
Great. Thank you I wanted to ask about the reiterated 100 million to $150 million of targeted and temporary rent relief in Europe , recognizing the numerous macro challenges in the market. The brand is certainly successfully navigating these with impressive topline strength front half of 2023. So when you combine this with better than expected.
The copco margins and QQ shifting that cost pressure perhaps.
Had been a severe surgeon anticipated what do you need to see to reduce the outlook for leaf.
Just a quick follow up to that can help level set how much of that $100 million to $150 million.
It's been so far in 2023.
Hi, Good morning, Andrew Thanks for the question. So let me just kind of touch on a few things look I think.
As we've talked about before.
Providing support to our franchisees is kind of normal course of business for us obviously.
The difference this year is just the kind of.
The pace the scale and the breadth of the pressures.
You highlighted obviously, probably most centered in Europe .
So I think on the backdrop of all of that we decided towards the backend of last year to kind of provide some more extensive support as we talk about always it's always targeted and temporary it's always fact base support that support goes to franchisees that need support.
Port.
And I think as you've heard me talk a little bit on some of the other questions. This morning.
That inflation is kind of coming to play the way we predicted it. So I don't think theres been a difference versus our expectations, which is why we've reiterated that we continue to expect that we will spend between $100 million to $150 million for the year. This year I think the other thing I just want to go back to that.
So important and it's certainly something I strongly believe in <unk>.
Given you. The example before of as we work through Covid and we've provided support at particular moments as we worked through that with our franchisees I think that was fundamental to the <unk>.
Exit velocity and momentum that our business had I think what you can see now if you look at our IOM segment and Chris talked about this earlier is the strength of our underlying momentum the consistency of our momentum and I believe thats fundamentally connected to decisions like this.
Cuz, they keep our system fully aligned they keep our system front footed.
And focused on the opportunities that we have to continue to drive growth in our business I believe.
That's a significant strategic advantage that we have and I think it has been a key contributor to why we continue to outperform even in markets that may be more difficult from a macro economic context, and I would just add again back to my market visits that I've done in the last couple of months in some of those conversations that.
I have had with franchisees.
We do dinners.
Every time I visit the market with a group of franchisees and many of them in our IOM markets specifically.
Thanks to us for the support that we're giving and attributed their willingness and ability to focus on the long term to not.
Necessarily just be chasing pricing in the short term because they understand we're in this together, we're both making investments to ensure that the success of our business is long term focus so I think it hit it exactly right.
When we make the decisions and do the right things for the long term.
Benefits time, and again, we're proven right on that and I feel very good about the program that we've got in place and it is temporary and targeted.
It appropriately it should be alright.
Alright next question is from Sara Senator with Bofa.
Thank you I guess couple of questions around the margin. Please first on the G&A can you just talk a bit about what the back half spending might be on.
Easter come in pretty decently below the full year guide so I'm just trying to understand what the step up might be in.
How to think about that that G&A as a percentage of system sales may be even going forward and then could you just give us some color on pricing and commodity basket inflation for the U S. And then IOM markets I'm, sorry, if I missed it but just how much price on the menu and and what the basket look like thanks.
Great. Thanks, Sarah So let me start with G&A I, just I mean, I think a bit of a headline there I mean, I think our normal let's call. It cycle of spend in the business is probably always a little bit more back half than front half weighted I think this year, that's a little bit more pronounced I think.
There are kind of.
A couple of probably more substantive factors for that I think the first one.
Is around our continued.
Investment in technology, and digital I mean, I think you've heard us talk and me in particular previously that we will we have the capacity and the capability and we will continue to invest in areas in the business, where we believe there's a significant opportunity to drive growth and generate a return and I think.
Our digital and technology investments have been unclear.
Strong example.
And continue to be one of our key growth drivers and I think as Chris touched on previously we continue to believe we've got significant opportunity as we go forward to unlock further.
Capabilities around our digital and technology platforms, and so we're continuing to.
Accelerate investment in those areas I think the second one.
Is back to our global business services organization as you know as part of our Ato changes earlier. This year, we stood up a global business service organization at an enterprise level. Because we felt there was an offer is a relatively significant opportunity to look at how we can digitize I'll call. It.
The operational part of our business and drive sustainable efficiencies as we go forward.
So we're doing a fair bit of work and investing right now and looking at that opportunity to understand how big is it what is it going to take to get after it.
How should we think about sequencing and prioritizing the investments obviously once you go into those sorts of journeys there are.
There are multi year journeys and commitments to kind of deliver that sustainable and benefit but.
If we think of the kind of the broader environment today, the ability to kind of drive sustainable efficiency the ability to get at data and analytics in a sustainable way I think is becoming more important and we think there's a significant opportunity there that we're looking at so I think our guidance remains.
Tact as we stated at the beginning of the year, which is we expect our G&A to be in that two two to two 3% of sales range I would say I think I certainly expect that we'll be closer to the to the higher end of the versus the lower end of that range, but.
But that's a bit of texture on G&A I think on pricing I mean, obviously pricing varies significantly based on the context in the individual markets. So maybe what I can do is just give you a little I mean, obviously pricing remains elevated as as inflation more broadly remains elevated in the majority of our markets maybe a little.
Texture on the U S, which is I think if you look at the second quarter, we were kind of on average at a low double digit level of pricing in the business I think as we work through the rest of the year, we will probably end of the year and that kind of low double digit range a lot of the pricing in the second quarter is.
Carryover from 2022 in the U S business as we work through that kind of a peak inflationary period, and obviously as I talked about earlier, we're kind of getting those two.
Offsets to the pricing, we're taking which is kind of a trade down in and consumers that are kind of continuing to visit but buying a little bit less again, those two offsets have been been very consistent and as Chris and I have both talked to we continue to see traffic.
Both in our U S business, we continue to see market share gains and we continue to see this kind of strong leading value for money and affordability positioning. So I think what I've talked about before which I think is really important is the work we've done on it.
And a couple of years before we've kind of got into this more challenging macroeconomic environment around our capabilities that we've put in place with our third party advisers that we work with and who make recommendations to our business, including our franchisees.
On how we price obviously, our franchisees make those decisions I think.
<unk> had a significant improvement in our capability I think as Chris has talked about we've had pretty good discipline from our system and the pricing that we've taken to really kind of get the balance of working through the short term challenge with a long term focus on continuing to make sure we're driving momentum and we feel pretty.
Good about how we've been able to navigate obviously a complex environment.
We're at the bottom of the hour that completes our call. Thank you Chris Thanks, Ian and thanks, everyone for joining and have a great day.
This concludes Mcdonald's Corporation Investor call you May now disconnect and have a great day.
Okay.