Q4 2024 McDonalds Corp Earnings Call
Speaker Change: Hello and welcome to McDonald's fourth quarter 2024 investor conference call. At the request of McDonald's Corporation, this conference is being recorded.
Speaker Change: 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 1 on their touchtone phone.
Speaker Change: I would now like to turn the conference over to Mr. Scott Meter, Interim Treasurer for McDonald's Corporation. Mr. Meter, you may begin.
Speaker Change: Good morning everyone and thank you for joining us. With me on the call today are Chairman and Chief Executive Officer Chris Kempczinski and Chief Financial Officer Ian Borden. As a reminder, the forward-looking statements in our earnings release and 8k filing also apply to our comments on the call today.
Speaker Change: 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.
Speaker Change: Please limit yourself to one question and then re-enter the queue for any additional questions.
Chris Kempczinski: Today's conference call is being webcast and is also being recorded for replay via our website. And now, I'll turn it over to Chris.
Chris Kempczinski: Thanks Scott and good morning everyone. Thank you for joining us today to review our fourth quarter and fiscal year results.
Chris Kempczinski: Obviously, our performance in 2024 did not meet our expectations, but I'm still immensely proud of our McDonald's system.
Chris Kempczinski: It was a busy year, and at times it felt like McDonald's was a part of almost every major news story reflecting the reach and visibility of our brand. Throughout it all, McDonald's people were resilient and responsive.
Chris Kempczinski: We stayed focused on our customers, acted swiftly when needed, and continued to run our restaurants at a high level.
Chris Kempczinski: To our employees, franchisees, and suppliers, I want to say thank you.
Chris Kempczinski: In 2024, global comp sales decreased 0.1% for the full year, with comps up 0.4% in the fourth quarter, including positive comps across our IDL and IOM segments.
Chris Kempczinski: and we'll provide you with more texture on these results in just a minute. As we transition into 2025, several factors give me confidence that our performance will return to proper form over the next several quarters.
Chris Kempczinski: First, we have the right strategy, accelerating the arches. Our MCD growth pillars still offer significant growth opportunities, and I'm pleased with the 2025 market plans, particularly their balance of value and full-margin food innovation.
Chris Kempczinski: Second, the U.S. food safety issue is now largely behind us and we expect to have fully recovered by the beginning of Q2.
Chris Kempczinski: At McDonald's, we always say that food safety is our number one priority, and this unfortunate incident is an important reminder of that fact.
Chris Kempczinski: The strength of our brand depends upon the absolute trust of our customers, and I'm pleased by the positive feedback we've received from so many regarding our rapid and transparent handling of this issue.
Chris Kempczinski: And third, we'll continue to realize incremental benefits as more markets deploy new solutions from each of our three strategic technology platforms, consumer, restaurant, and company.
Speaker Change: Later, I'll come back and provide more visibility into our 2025 plans, but for now, let's move on to Ian, who will discuss Q4 and full year results.
Ian Borden: Thanks, Chris. And good morning, everyone. As Chris noted, the QSR industry remained challenged and our performance in 2024 fell short of our expectations.
Ian Borden: Pressure on spending persists, in particular with two significant cohorts of our consumer base, low-income and families, particularly in Europe.
Ian Borden: Still, we're confident that our Accelerating the Arches strategy, which is rooted in customer insights and built on our inherent competitive advantages, is right for our business to win in 2025 and beyond.
With respect to our quarter four performance
Global comp sales growth was slightly positive.
Ian Borden: In the U.S., Q4 comp sales were negative, reflecting the impact of the food safety incident.
Ian Borden: When we met last quarter, we committed to bringing the full resources of McDonald's to bear to re-engage the customer, and we did just that.
Chris Kempczinski: As Chris mentioned, by the beginning of Q2, we expect to have fully recovered.
Ian Borden: The immediate actions we took to identify the cause allowed us to quickly shift the focus to regaining our customers' trust.
and reigniting their brand affinity.
Ian Borden: Throughout November and December, we saw sequential improvement in baseline traffic performance, including slightly positive comp guest count growth for the month of December, and had a positive comp guest count gap to most near-in competitors for the fourth quarter.
Ian Borden: These results were driven by our marketing efforts to amplify traffic drivers. This includes additional investment in our national value campaign and always-on digital and media plans to drive momentum.
Ian Borden: In our International Operated Market segment, comp sales performance this quarter was slightly positive due to mixed results across the individual markets.
Ian Borden: including negative comps in the UK. While QSR industry traffic was positive in only two of our big five markets, we had a positive comp guest count gap to most near-end competitors across the majority of our largest markets.
Ian Borden: During a difficult time for the industry, we have acted with urgency and remained steadfast in continuing to focus on what's within our control.
Ian Borden: including refining and providing compelling value propositions, introducing exciting menu innovation, and leaning into our One McDonald's Way approach to marketing by driving brand strength, building cultural relevance, and connecting with our customers and crew in exciting ways.
Ian Borden: has paired everyday affordable price, or EDAP, menus with strong meal bundles through the Canadian McValue menu.
Ian Borden: which features the $5.79 meal bundle and a $1.00 coffee EDAP offering which drove coffee share gains in the quarter.
Ian Borden: Canada not only provided great value offers, but paired them with full-margin promotions that connected with our fans through culturally relevant campaigns.
Ian Borden: These all help to drive positive sales and guest count performance in the market, including positive guest count gap to near-end competitors for the entirety of the fourth quarter. And in Germany, we've continued to meet customers where they are, even with a difficult industry backdrop.
Ian Borden: While QSR industry traffic in Germany has continued to contract further since the third quarter, we have continued to drive market share gains by expanding upon the already successful McSmart menu, now offering a range of meal bundle options introduced at the end of September.
Ian Borden: We are seeing incrementality to the business, driven by the extended value offerings and by layering on exciting menu news with full margin items such as Der M or The Big Arch, as well as The Big Rosti, which it made its annual return.
Ian Borden: In other markets such as Spain, we have continued to outperform the competition by driving strong execution of our Accelerating the Arches strategy.
including continuing to focus.
Ian Borden: on value through Menu4U, which is a branded equity that we have been able to capitalize on for over three years and delivering on digital execution with a month-long Christmas calendar, boosting engagement on the app and driving an increase in identified users.
Ian Borden: We also saw success from our One McDonald's Way approach to marketing, combining cultural relevance with global reach.
Ian Borden: Through a Friends TV show themed adult happy meal featuring our core menu items including six Friends characters
and a themed dipping sauce.
Chris Kempczinski: The campaign provided a significant lift to our top line, with a social media reach expanding well beyond just Spain. All of this contributed to the market's strong comp sales and guest count performance in the quarter, as well as share gains for both the quarter and the year.
Chris Kempczinski: France, a market that we've talked about all year, started to see signs of improvement, with positive comp sales and guest count gaps to near-in competitors for the fourth quarter. These results were driven by our partnership with Hot Ones, providing three fiery sauces to fans, each one spicier than the next.
Chris Kempczinski: being one of the most talked about campaigns over the last few years in the market.
Chris Kempczinski: We've also seen the success of the €4 Happy Meal, which has resonated with families, driving an improvement in their brand perceptions around value and affordability.
Chris Kempczinski: and a lift in the Happy Meal category. We are encouraged by these signs of progress internationally and will continue to build upon the actions taken in 2024 so that we have a strong foundation for growth in 2025.
Chris Kempczinski: Finally, in our International Developmental License segment, comp sales for the quarter were over 4%, largely driven by positive results in the Middle East and Japan.
Chris Kempczinski: In the Middle East, the positive sales comp largely reflected lapping the impact of the war that began in October of 2023. And in China, we're seeing encouraging signs of stabilization.
Chris Kempczinski: Our ability to continually evolve to stay ahead of the customer positions us for success in any economic environment. Turning to the P&L, adjusted earnings per share were $2.83 for the quarter, a 4% decrease compared to the prior year in constant currencies.
Lastly, before I hand it back over to Chris...
Chris Kempczinski: I want to touch briefly on our capital expenditures and free cash flow profile. Our CapEx spend for the year was just under $2.8 billion.
Chris Kempczinski: More than half was invested in new restaurant unit expansion across our U.S. and IOM segments, which enabled us to deliver on our openings target for the year.
Chris Kempczinski: Our CapEx spend was slightly above the high end of the range we provided for the year, as we invested more toward our future year development pipeline, setting us up for success as we continue to increase our pace of openings.
Chris Kempczinski: Our free cash flow conversion for the year was 81%, below our expected 90% range due to pressures on top line performance and higher capital spend to accelerate new restaurant growth.
Chris Kempczinski: We have continued to follow our capital allocation priorities for the year. After investing to support long-term growth of the business, we returned $7.7 billion of cash to shareholders through a combination of dividends and share buybacks.
Chris Kempczinski: We remain committed to returning all excess free cash flow to shareholders over time. I'll talk about our 2025 outlook shortly, but first, let me hand it back over to Chris.
Chris Kempczinski: Thanks, Ian. Our ability to stay ahead of customers' changing needs and reimagine the McDonald's experience for tomorrow is the key to achieving our 2025 ambitions.
Chris Kempczinski: We're moving forward with agility and urgency, getting back to guest count-led growth and winning share from our competitors.
Chris Kempczinski: Our unwavering focus on the MCD growth pillars will continue to unlock executional excellence and drive growth across our business.
Chris Kempczinski: Our marketing efforts are reclaiming leadership and value and affordability through initiatives like everyday affordable price menus and meal bundles.
Chris Kempczinski: In the U.S., the January launch of the McValue platform provides consistent, compelling value with the choice and flexibility our customers want.
Chris Kempczinski: In many of our international markets, we are making further enhancements to our value programs in the first quarter to ensure that we are offering industry-leading value.
Chris Kempczinski: And with good value at the foundation, we will overlay a strong pipeline of creative marketing ideas that will delight our fans and will provide full margin check growth.
Our core menu remains at the heart of our business.
Chris Kempczinski: We're excited about the significant opportunity we see within our chicken portfolio and see the potential to add another point of chicken market share by the end of 2026.
Chris Kempczinski: We continue to roll out McCrispy, which is now in over 70 markets, and will be available in nearly all markets by the end of 2025.
Chris Kempczinski: This year, there is incredible energy for the return of snack wraps in the U.S., along with a few other markets.
Chris Kempczinski: and the U.S. will also launch a new chicken strip offering.
Chris Kempczinski: We'll continue to pulse in the Chicken Big Mac as a limited-time only offering over time. In 2024, the Chicken Big Mac helped generate chicken market share growth in the France and the U.S. with positive incrementality.
Chris Kempczinski: Deployment of Best Burger continues. It's currently available in over 80 countries and we're on track to implement it in nearly all markets by the end of 2026 and we're excited to capture incremental growth with the Big Arch as we roll it out to more international markets this year.
Chris Kempczinski: Our 4Ds continue to drive growth, and we're actively doubling down on digital and development.
Chris Kempczinski: For digital, we know loyalty customers spend more than their non-digital counterparts. We've made strong progress and we're on track toward our long-term targets of 250 million 90-day active users and $45 billion in annual system-wide sales by the end of 2027.
Chris Kempczinski: To date, our 90-day active users totals has reached over 170 million across 60 markets, with system-wide sales to loyalty members totaling approximately $30 billion in 2024.
Chris Kempczinski: For development, we delivered on our 2024 restaurant openings targets across the globe and we're on track to reach 50,000 restaurants by the end of 2027.
Ian Borden: Finally, our close partnership with our world-class franchisees, including the recent renewal of our Master Franchise Agreement with Arcos Terrados, will be critical to driving our continued growth. Let me now turn it back over to Ian for details on our 2025 Outlook.
Ian Borden: Thanks, Chris. We're confident that our Accelerating the Arches strategy will continue to drive growth in 2025 and over the longer term. But as we've discussed, there are varying levels of near-term headwinds across markets.
Ian Borden: Our approach to our 2025 outlook reflects the current environment of softer declining restaurant industry traffic in the U.S. and many of our larger markets.
That said, as Chris noted...
regardless of the operating environment.
Ian Borden: We remain steadfast on the execution of our Accelerating the Arches strategy and the continued rollout of the actions we began to take in 2024 across the system to drive guest count-led growth and grow market share by outperforming our competitors.
Ian Borden: Our financial targets for 2025 reflect the benefit of these initiatives, as well as our expectation of gradual stabilization of the macroeconomic and consumer environment, but does not include any impact from potential new tariffs.
Ian Borden: Should the underlying environment improve beyond our initial expectations, especially with respect to lower-income consumers, we would expect to benefit disproportionately relative to our competitors.
specifically for 2025.
Ian Borden: driven by the durability of our business model, we're targeting our full year operating margin percent to be in the mid to high 40% range.
Ian Borden: and above the 46.3% adjusted operating margin from 2024, primarily due to franchise margin performance.
Ian Borden: With respect to GNA, our system's financial strength enables us to invest in areas that we expect will drive long-term efficiencies for our people and for our stakeholders.
Ian Borden: Even with the muted top-line growth in 2024, we maintained the right long-term investment mindset as we were able to prioritize our run-the-business spend.
Ian Borden: We expect 2025 GNA as a percentage of system-wide sales for the full year to be about 2.2%. Our 2025 target reflects continued investments in technology, digital, and global business services, or GBS.
Ian Borden: You heard Chris mention the three strategic technology platforms earlier. Through the investments in these platforms, we plan to continue to get more efficient in running the business over time and ultimately free up more resources to continue to drive long-term growth.
Ian Borden: We still have significant investment years ahead of us before these efficiencies are realized.
Ian Borden: Below the operating line, we're projecting interest expense this year to increase between 4% and 6% compared to 2024, due to higher average debt balances and interest rates, and expect our full year effective tax rate to be between 20% and 22%.
Ian Borden: Turning to restaurant development and capital expenditures, we expect net restaurant expansion in 2025, along with restaurants we opened in 2024, will contribute slightly over 2% to system-wide sales growth as we continue to accelerate our new unit development.
Ian Borden: We plan to spend between $3 billion and $3.2 billion this year, with the majority invested in new unit openings across our U.S. and IOM segments.
Ian Borden: This increase in CapEx versus the prior year is in line with our expectation of about 300 to 500 million increases each year through 2027, as we outlined at our December 2023 Investor Day.
Ian Borden: Globally, we plan to open approximately 2,200 restaurants this year, with about a quarter of these openings in our U.S. and IOM segments.
Ian Borden: We expect to open more than 1,600 restaurants in our IDL segment, including about 1,000 in China. Overall, we anticipate slightly over 4% unit growth from the nearly 1,800 net restaurant additions in 2025.
Ian Borden: Our capital allocation priorities remain unchanged. First, to invest in the business to drive growth, including capital expenditures, as well as investments in technology, digital, and GBS.
Ian Borden: Second, to prioritize our dividend. And third, to repurchase shares with remaining free cash flow over time.
Ian Borden: Lastly, with a strong U.S. dollar that may continue to strengthen into 2025, we expect foreign currency to be a full-year headwind to 2025 EPS.
Ian Borden: totaling in the range of $0.20 to $0.30 based on current exchange rates.
Ian Borden: As always, this is directional guidance only, as rates will likely change as we move through the remainder of the year.
The resilience of our business and our overall financial strength.
Chris Kempczinski: have put us in a position to succeed in any environment. And I'm confident that the continued execution of our Accelerated in the Arches strategy sets us up to deliver long-term growth for our system and create value for our shareholders. Now, let me turn it back over to Chris.
Chris Kempczinski: Thank you, Ian. This year, McDonald's will celebrate its 70th anniversary.
Chris Kempczinski: Through generations of ever-changing global economies, technological booms, extraordinary social and political evolution, and resounding connections to the center of culture, we've grown stronger year after year by staying true to what we do best.
Chris Kempczinski: serving delicious food with unmatched value to our customers while feeding and fostering communities around the world.
McDonald's remains uniquely positioned to do just that.
Chris Kempczinski: By staying true to our golden rule of treating everyone with dignity, fairness, and respect, we continue to build connections that strengthen our brand and make positive impacts through our 40,000 plus local businesses around the world.
Chris Kempczinski: Our unwavering commitment to inclusion requires ongoing focus. While we recently evolved our approach, McDonald's commitment to inclusion is steadfast.
Chris Kempczinski: So I think about the road ahead for 2025, I'm reminded of a quote from our founder Ray Kroc. He said that the two most important requirements for major success are first being the right place at the right time and second doing something about it.
Chris Kempczinski: We believe no one is better positioned than McDonald's to seize on the opportunities ahead.
Chris Kempczinski: face complexities head-on and in the words of Ray, do something about it. We have all the tools we need to focus on what matters most to our communities and customers.
Chris Kempczinski: As we look to 2025, we won't let up. We're playing to win. We have the right playbook in accelerating the arches. We have the right advantages, our size, our scale, our brand relevance. We have the right mindset and a strong legacy of acting on our biggest and boldest ideas.
We have the power of our three-legged stool.
Speaker Change: Thank you to our remarkable franchisees, suppliers, and employees. Your dedication to our McFamily and the communities you serve is unparalleled.
Speaker Change: We are grateful for your passion and so very proud of our partnership together I look forward to making the arches shine even brighter in 2025 and beyond with that we'll take questions
Speaker Change: 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. We ask that you limit yourself to one question and recue for any additional questions.
Our first question is from Dennis Geiger with UBS.
Speaker Change: Great morning, guys. Thank you. Wondering if you could talk a little bit more about the early customer response to McValue, sort of if any updates to
Speaker Change: to the latest on customer value perceptions in the U.S., and if any thoughts to share sort of on the guest count check and margin impacts from the new platform. Thank you.
Speaker Change: Sure, good morning Dennis. So we are, it's obviously early days still with McValue, but we're pleased with how it's getting out of the gate.
how that's getting out of the gate.
Speaker Change: From a perception standpoint, as we have increased our focus on value in the U.S. starting last year when we did.
Speaker Change: Most recent, particularly on the most recent visit with value and affordability. So I think we're seeing the customers giving us credit for the value programs that we have put in place there. So feel good about that.
Speaker Change: And maybe just, Dennis, I'll just build on Chris, because you were asking about check and margins. And so I think just talking specifically about the...
Speaker Change: The buy one add one for a dollar Where I think we're seeing You know strong kind of check in those Transactions of the fact accretive to our overall check in transactions that have a buy one add one in
Speaker Change: Unknown Speaker ...an outcome to what they want to get to from a product choice standpoint.
Speaker Change: The other thing I would just highlight is breakfast in particular, we've seen
Speaker Change: taking share. And I think if you think ahead a little bit, this will be the 50th anniversary of breakfast in the U.S.
Speaker Change: this year, and I think there'll be some some really, you know, kind of interesting and exciting things that the U.S. does business does over the next little while around breakfast. Some more to come on that later. Yeah, just to maybe add one other thing to what Ian was talking about. If you look at the $5 meal deal,
Speaker Change: Even though that's compelling value, it's driving other purchases. So the average check on $5 meal deal for us in the U.S. is north of $10. So it's doing what we were hoping for when we launched that.
Our next question is from David Palmer with Evercore.
David Palmer: Thanks. A quick follow up on on that in the fourth quarter, U.S. comp.
Reflected a negative check, slightly positive traffic.
You know, could you…
Speaker Change: Give us a sense of price versus mix in the quarter and why we saw what we saw there. And my main question is really on IOM. Any color that you can offer there? A lot of...
David Palmer: of brands, U.S. brands slowed in the back half of fourth quarter 23.
Speaker Change: Did you see an acceleration through fourth quarter of 24 better exit rate in key IOM markets? And I know you've been doing some tinkering with value relaunches in key IOM markets. Any color on that would be helpful. Thank you.
Speaker Change: We were seeing, as you know, in early October, we were seeing strong performance.
and the U.S. with both.
Good check.
started to play out.
Speaker Change: You know, we kind of hit our nadir in, I'd say, early November, and then we saw sequential improvement through the balance of the quarter, which is now continued into Q1. But what you're seeing is you're seeing that
Speaker Change: We are driving GCs and stealing share from a GC standpoint.
Speaker Change: But not surprisingly, particularly now as we're into Q1 and we're launching
launching a broader McValue platform.
Speaker Change: GCs are running ahead of check, and that's very much consistent with our experience.
as you're putting in new value programs.
Speaker Change: You will see Czech run ahead of GC's, I think Joe, or run ahead of Czech, I think Joe's talked about that in the past.
Speaker Change: And then as you get that sort of bedded down and you introduce food news and other things on top of that, you get the one-two punch of check plus.
Unknown Executive, Christopher Kempczinski
Speaker Change: Basically about a year, some of the opportunities that we had in France.
Speaker Change: has continued to improve their performance and that's continuing into Q1.
Speaker Change: So we feel good about France, we feel good about Canada.
Speaker Change: We continue to outperform in Germany. We continue to outperform in Italy.
Our opportunities in IOM...
Speaker Change: The two markets that we are spending the most time thinking about right now are the UK and Australia where One, it's both a challenge market and two, frankly, we're not performing to our full potential. So I'd say net-net on balance We're seeing IOM
Speaker Change: I think you saw that in the results, but there's still work to do in a few of our specific markets.
Speaker Change: single digit comp sale and comp traffic just below that. So I think that just is the reason I highlight that is because when we get kind of value driving momentum, and then we start layering in kind of as we've talked about before the full margin food news like the chicken Big Mac in that instance.
Speaker Change: or the, you know, the great marketing execution. You start driving volume and really profitable transactions. And that's where we were at.
Speaker Change: momentum regain trust obviously we invested a fair bit in value and affordability and obviously in digital offers to get consumers back and so that's certainly I would call it we're
Speaker Change: through the actions we've taken, in particular in areas like value and affordability, we're still dealing in a number of markets in our top markets where the industry is contracting. And so I think our momentum is certainly moving in the right direction, as you heard from Chris, but it's still certainly there's an element of headwind that we're continuing to navigate.
Our next question is from David Tarantino with Baird.
David Tarantino: Recovery from the E. coli incident by the beginning of Q2. I guess, you know, one question is, you know, what's, you know, I guess, what does that sort of mean in terms of kind of what, what type of cop momentum?
Yeah, thank you, David. So, you know, on the U.S.
Speaker Change: recovery from E. coli. I think right now what we're seeing is
Speaker Change: The biggest impact so think about that as sort of the Rocky Mountain region
That was really the epicenter of the issue.
Speaker Change: down versus where we were heading into that impact. But very much seeing it at this point is just contained to
Speaker Change: and that's what led to our comment around thinking that we'll have it behind us as we begin in Q2.
Speaker Change: around what that actually means, it's going to be a function of us executing.
It's not just that
Speaker Change: We get E. coli behind us, but it goes to we've got to make sure that we've got McValue off to a good start, and we've got to make sure
Speaker Change: that we have strong marketing programs along with food innovation that goes with that.
Speaker Change: I think what you see is that when we do that, and we do that well,
Speaker Change: This business has the potential to be putting up both positive GCs as well as positive check and ultimately that drives comp.
Speaker Change: So that's our expectation, that's the plan that we've put in place, which is if we execute that we get this business as I described in my comments back to proper form.
Speaker Change: where they were pre-incident level, we still got the isolated impacts that Chris talked about and I think obviously what we're trying to do is get this business back to the momentum that we were seeing to start
Speaker Change: Q4. I mean, we're very encouraged by the fact that, as we talked about, we ended the year in December with positive, slightly positive guest counts in the U.S.
We know on a Q4 total basis,
Speaker Change: that we were taking comparable traffic share versus the industry still in the U.S. But we still got, as Chris talked about, just I think a little more work to do to get that momentum kind of fully back to where we think it can be as we work through Q1.
Our next question is from Sarah Senator with Thanks America.
Unknown Speaker ...
Speaker Change: You know, kind of a trajectory change and then just quickly on the UK, you know, that's a market that is historically, I think, been very strong for McDonald's. So, you know, is there anything to note there? Just, you know, it's.
Speaker Change: Negative or sort of talking as a weak point surprised me a little bit.
Speaker Change: Yeah, why don't I'll take the UK and then let Ian address the the other question that you had Sarah
Ian Borden: So, I think in the UK, if you think about this business, you're right, it's one that historically has performed quite well for us, been one of our strongest performers.
Ian Borden: I think what we've seen in the UK is certainly the consumer there is under pressure, there's a cost of living issue.
Ian Borden: that exists in the UK. That is putting pressure on the low-income consumers.
Ian Borden: Consistent with what we've seen in the U.S., that's also putting pressure on families.
Ian Borden: And you have a very strong local competitor there who's been very aggressive from a value standpoint, particularly on breakfast. And so you put all those things together.
Ian Borden: and we're not seeing the UK business perform certainly at a level that we're used to historically. I think that said, we understand what needs to go in place and there's been a lot of work with our local franchisees.
there to do that.
Ian Borden: It goes to making sure that we have a strong savers platform. That's been something that's been in the market for quite a while. We've introduced a five pound meal deal similar to what we have in the U.S. And there's also been a focus on the Happy Meal program to re-engage that family business.
Speaker Change: I think paired with that, though, is we need to have better marketing in the UK. I think we frankly didn't have the level of marketing execution in the back half of last year that we're used to, and so that's, I think, one of the big priorities for us.
Speaker Change: As we head into 2025 is we've got to get that marketing to be kicking in so that we do have this one-two punch of being competitive on value, which I feel very confident we now have in the UK.
Speaker Change: But you've got to be able to pair that with strong marketing programs, strong food innovation that can give you that sort of full margin balance.
Speaker Change: We've run this playbook many of the things that I'm describing were the same issues that we faced in France The progress and the momentum that we're seeing on the French business now Is what gives us confidence that we'll be able to get to the same place on the UK but certainly work to do in the UK
Speaker Change: So just Sarah to circle back on your on your check question and I'm going to exclude kind of the U.S. obviously the food safety kind of specific disruptions which again are kind of temporary and time bound I think
Speaker Change: to ensure that we're kind of meeting the needs of the consumer that's having kind of a reset on check.
Speaker Change: But obviously, I think when you get kind of past those adjustments, I mean, I think there's we've got a lot of ability to kind of continue to drive strong check. And obviously, we've got to start doing that by getting the right levels of momentum in the business. I mean, the U.S.
Speaker Change: and kind of where we were pre-food safety incident is, I think.
Speaker Change: Strong guest count build obviously kind of building on each other as we've had momentum and then kind of layer in these exciting food or marketing events
Speaker Change: France is another example. Obviously, as you know from all the conversations we had on France.
Speaker Change: throughout 24. Again, as we've started to see that kind of positive momentum come into effect, and you look at Q4 where we had the chicken feet Mac activation, we had this
Speaker Change: Digital, certainly, and loyalty in particular, are going to be really important ways for us to continue to drive, track, as you know.
Unknown Speaker ...drives.
Yeah
Speaker Change: We know we're going to be able to get those customers to spend more as they visit us. So I think digital will be a really important component of how we drive check and frequency as we look forward.
Our next question is from Brian Harbour with Morgan Stanley.
Thank you.
Yeah, thanks. Good morning, guys.
Speaker Change: A quick one just could you kind of spell out roughly where you'd expect
Speaker Change: to be in the US versus IOM. I know you kind of gave it together. But and then maybe just a broader question, you know, how has new unit performance been? Obviously, you seem to have leaned into that even more so than you spoke about.
Speaker Change: A little over a year ago, and you talked about kind of, you know, pulling forward some of that growth, but could you just comment on how you've how you've seen that fair over the last year?
Speaker Change: Yeah, morning, Brian. I think on unit growth, we said, you know, we expect as a system about 2200 gross openings and about a quarter of that to be in our wholly owned market, I would say up the quarter, about 70% of those openings would be in IOM.
and the rest roughly in the U.S.
is a big step up over 24, and we feel...
Speaker Change: free-standing drive-throughs. We know those sites kind of build to their sweet spot over the first couple of years as they kind of establish their trading area. So, I think, you know, we're on pace.
Speaker Change: We're confident in getting to our 50,000 target by end of 27, and obviously the wholly owned openings are a really important part of that.
Our next question is from Lauren Silverman, Deutsche Bank.
Hey, thank you very much.
Speaker Change: So it sounds like you're optimistic in the U.S. about getting back to prior momentum. Good to hear about the return to positive comps internationally. Can you help level set how you're thinking about comps and a full year basis in the U.S. and IOM, and then any color and progression through the year, what we should expect for 1Q, sequential improvement?
Thank you very much.
Speaker Change: Yeah, morning, Lauren. Let me maybe give a bit of context there.
Speaker Change: Look, I think if you think about at least maybe pacing and progression through 25, I can comment a bit on on that. I won't get into kind of specific.
Unknown Executive, Christopher Kempczinski
Speaker Change: Lapping, which is obviously a negative headwind in Q1. I think we've certainly seen a sluggish start.
Speaker Change: to the broader U.S. industry in January in the U.S. And I think if you think about everything that Chris and I have been talking about today, you've got our momentum kind of building on the back of the actions that we've put in place.
Speaker Change: through 24, particularly obviously in regards to value and affordability and some of those actions I would say still going into place.
in a couple of markets through Q1.
Speaker Change: As we talked about in our opening remarks, I mean, I do think we think the kind of operating conditions get kind of gradually and progressively better as we work through the year. So I think that's a bit of the color I would give you on.
Speaker Change: We need to do to ensure that we're taking share consistently across all of our top markets, despite, I think, the some of these more challenging conditions that we continue to to navigate.
Our next question is from John Ivanko with J.P. Morgan.
John Ivanko: Hi, thank you. We've been talking about accelerating the organization leading into global business services for some time.
Speaker Change: You know, I understand the last couple of years, there's a lot of work done beneath the surface on GBS specifically and, you know, the thought that we would start to see some benefits in 25 and 26.
Speaker Change: It doesn't sound like we're gonna see leverage in 25 and 26 based on you know your earlier comments So I did just want you know you to address
Speaker Change: that would happen is kind of the first point. And then secondly, you know, if you can talk about some of the qualitative improvements in the business that have come specifically through GBS that we could see potentially benefit the business into 25 and 26. Thank you.
Speaker Change: Hi, John. Well, you're right to acknowledge there's been a lot of work going on in getting this GBS organization set up.
I'd say, you know, we certainly didn't expect to see
Speaker Change: as it comes more fully online in 26 and then I think probably steady state in 27.
Speaker Change: And it's the new capabilities paired with, I think, a much more efficient operating platform where you're going to start to see the benefits of that. So we're very much on track. We're pleased with all the work there as you
Speaker Change: I'm sure know from other organizations that you cover, setting these things up is a Herculean effort and there's a lot of people involved in getting this done, but I'm pleased with where we're at. We're very much on track, but I don't expect to see in 25 that you're going to be getting any material benefits out of this.
Speaker Change: Part of 27, as you've heard me talk about before, we've kind of got four key work streams. We've got finance,
Unknown Executive, Joseph Erlinger, Unknown Executive, Christopher Kempczinski
Speaker Change: We'll see substantive kind of efficiencies being driven. And I think maybe just to give you a bit of a kind of a textural example, you know, we put kind of the first.
deployment of our people system in place in
Speaker Change: Unknown Speaker ...vertical to kind of horizontal ways of working across the organization and
Speaker Change: All of these investments and we're certainly looking to continue to stay very disciplined on our overall absolute G&A spend with the potential over time as we bring these on to get further reductions on that as percent of sales. So stay tuned, more to come on this.
Our next question is from Eric Gonzalez with KeyBank.
Speaker Change: The second half of 24 was difficult. Some of the capital margins expected in the fourth quarter were particularly challenging.
Unknown Speaker. Thank you. Thank you.
Speaker Change: I think you said you expect the capital margins to improve year-over-year in 0.5 driven by top-line growth. Beyond that recovery for E. coli, can you discuss how much of that margin degradation that you saw in the second half of the year you expect to get back, given the heavier emphasis on value and the value issues that rolled out at the start of the year and what the drivers of that improvement will be as the year progresses? Thanks.
Speaker Change: Fundamentally has changed I think in that in that regard. I mean obviously as you as you highlighted 24 was clearly a year where we didn't get
Speaker Change: the strong top line growth that we need to kind of drive margin improvement. And I think that combined with kind of some of the inflationary pressure areas like food and paper and labor, as well as
Speaker Change: What you highlighted, which is kind of are the mixed shifts as we kind of get stronger value and affordability in place Certainly put pressure on margins through the course of the year and then as you note
Speaker Change: In the U.S., we had those specific impacts through Q4, which was obviously, as I talked about earlier, the kind of impact specifically to quarter-pounder sales, which is a very strong, profitable margin item, and then the investments that we made in kind of customer recovery, which had impacts. So, I think...
Speaker Change: You know, I think the actions that we've taken across the business to get that really strong guest count momentum back in place.
Speaker Change: to growing improvement. That's obviously what we're expecting in 25, which is why we've said.
Speaker Change: We expect margins to be slightly up from where they were in 24 on a percentage basis, and I think that's despite, obviously, the fact that there is kind of continued inflation pressure and more limited pricing ability in the current context. So, I think we feel confident about getting momentum back and it's obviously.
Unknown Executive, Christopher Kempczinski
Our next question is from Andrew Charles with TD Commons
Speaker Change: Great, thanks. Ian, just a good segue from the last question, you know, based on the MCOPGO disclosure, we're estimating about a 14% decline in...
Speaker Change: U.S. MECOPCO 2024 Store-Level Cash Flows. So I'm curious to first, that's a fair proxy for the owner-operators in the past year, and then looking ahead, you know, curious about your confidence in U.S. store-level cash flow growth in 2025, just as the industry does not appear to be backing down on value in 2025. Thanks.
Speaker Change: Yeah, well, I won't, Andrew, try and reconcile the numbers. I think the team can do that with you in follow up just in where you're kind of getting your numbers from. But because there are a few things, I think, that are kind of moving within margin, including some kind of structural changes, but I think you can give more texture to, but I think.
Speaker Change: If we look at our plans in total, across the majority of our markets, we certainly feel good that we can drive improvement.
Speaker Change: to cash flow and that'll be based on obviously driving that strong top-line volume and then obviously taking Macapco margin from a percentage basis up slightly versus where it was in in 2024. Yeah, the only thing I would add is
Speaker Change: Certainly, we had a number of things in the U.S. business that we were navigating last year. Inflation, investment in value, we had an E. coli. All that said, our U.S. franchisees
So those... Those...
Speaker Change: Businesses that business continues to perform well franchisee cash flow continues to be strong and as we get some of those headwinds behind us and hopefully back to stronger momentum that obviously would work its way through to the bottom line.
Our next question is from John Tower with Citi.
John Tower: Great, thanks for taking the question. I'm just curious, Chris, you outlined a number of the initiatives that you're going after in 25 with respect to new product news and noticeably absent was any commentary regarding
John Tower: kind of your beverage platform, specifically in the US. And I know at your Investor Day in late 23, there was a lot of discussion around McCafe and how large of a platform that is globally and the opportunity there to improve.
John Tower: Consistency across the globe. So I'm just hoping you could provide some current some, you know, color around where you see that platform going over time. And do you see that as a strategic opportunity over the next several years?
Sure. Thanks, John. Well, certainly we are.
John Tower: Very bullish on the opportunity in beverages, and we think there's there's a lot of growth potential in beverages
both in coffee, the coffee side, whether it's hot.
John Tower: The rest of the business with very strong margins, so excited about that. As you noted at Investor Day, we talked about kind of going after it in a couple of different ways, looking at how do we do that within the restaurant. That work continues.
John Tower: and then we also talked about a test that we're doing around this COSMICS brand.
John Tower: looking at a number of stores there. I'd say that the learning with Cosmics continues.
John Tower: Announced a few months ago. We're closing some stores. We're adding some stores. I think what we're learning there is
The smaller units
Speaker Change: Unknown Speaker 10 to perform better. You want to drive through with that. Some of the things that we're closing, we're sort of end caps with no drive throughs.
Speaker Change: So I think we're continuing to learn there, and as we kind of further refine our plans, I think you'll hear more from us about...
Speaker Change: How much of that opportunity needs to come through new units with something stand-alone like COSMICS, or how much of the potential do we think we can capture
Speaker Change: going to thinking about what we might be able to do to capture that opportunity in the current restaurant. So our focus is still very much on it, but I don't have a whole lot more new news to share on that at this point.
Speaker Change: We have time for one more question with Jeff Bernstein of Barclays.
Thank you. Bye.
Speaker Change: Great. Thank you very much. There's a question on the U.S. commentary that's been made on the call.
Speaker Change: I think you mentioned at one point seeing sequential improvement in the U.S. comp since the trough with E. coli in November, yet I know in response to a different question you said that you'd noticed maybe a sluggish start to 2025.
Speaker Change: for the QSR segment. So I was wondering, first and foremost, whether you can comment on whether or not that sluggish start is really weather-led or whether you think there's some maybe change in consumer behavior in recent weeks or the past month or two?
Speaker Change: and I know separately you mentioned new product news, so I'm just wondering if there's any color you can share on that.
Speaker Change: The Snack Wrap relaunch timing, and I think you mentioned something about chicken strips. So any color on those two new products that seem like exciting new news would be great. Thank you.
Thanks, Jeff, for the question. So I think.
Speaker Change: Yes, we were seeing improvements, certainly from the trough of where we were with E. coli. I think the important thing to just recognize in the U.S. is
Speaker Change: Broadly, both in Q4, but frankly, it continues into Q1. The overall market is pretty muted.
A big part of it that
That low-income consumer is.
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Speaker Change: a strong value program, which is the focus in Q1 and getting McValue launched.
and then as you alluded to
Speaker Change: We do have, I think, some very exciting food news, food innovation coming in the U.S., but my U.S. team would kill me if I gave any more details about the when and the exact specifics of how we're going to plan on doing that.
but certainly expect that to come.
Ian Borden: online later in the year. Ian, I don't know if you have anything else to add.
Chris Kempczinski: Well, just I think just double clicking on on what Chris already talked about, Jeff, which is
Chris Kempczinski: Industry is still seeing a fair bit of headwind, and that's certainly what we were giving.
Chris Kempczinski: an indication of in terms of January so even though we may continue we expect to continue to grow share I think the industry itself has certainly had a sluggish
Chris Kempczinski: start, and that's certainly, as Chris said, partly due to that lower income consumer, although
Chris Kempczinski: We continue to do well with lower income consumers, in fact, quarter four was our high point for
Chris Kempczinski: in terms of share with that particular consumer group, even though they are under a fair bit of pressure, as you heard from Chris. So that's just a bit of texture maybe to kind of put the context of our comments together.
Speaker Change: Okay, that concludes our call. Thank you, Chris. Thank you, Ian. Thanks everyone for joining. Have a great day.
Speaker Change: This concludes McDonald's Corporation Investor Call. You may now disconnect and have a great day.