Q2 2019 Earnings Call
At the request of Mcdonalds 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. Stupak you may begin.
Good morning, everyone and thank you for joining us.
With me on the call. This morning are President and Chief Executive Officer, Steve Easterbrook, and Chief Financial Officer, Kevin I was then.
Today's conference call is being webcast live and is also being recorded for replay on our website.
Before I turn it over to Steve I want to remind everyone that the forward looking statements in our earnings release and 8-K filing also apply to our comments.
Both documents are available on our website as are reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.
And now I will turn it over to Steve.
[noise]. Good morning, we're pleased to be speaking to you today from our corporate headquarters in downtown Chicago, where we recently celebrated our one year anniversary in this contemporary urban facility.
Returning to Chicago is a deliberate move to get closer to our customers and the trends shaping business and society today.
Our new facility was designed to be a modern uninspiring environment, a catalyst for all four our evolving culture.
A move is always a metaphor for the men momentum were seeing across all business momentum that has been building since we first launched our turnaround plan.
As we recently passed the full year, Mark I thought it would be important to spend a few minutes, reflecting on our journey.
Back in May 2015, or announce our initial steps to reset and rebuild our business, including a three fold priorities of driving operational growth.
But certainly excitement to the brand and unlocking financial value.
At the time, we were keenly aware that the pace of change inside Mcdonalds has been eclipsed by the pace of change outside all business.
We knew we had to evolve with changing market and consumer dynamics.
And we knew incremental progress wasn't going to catch it.
Returning to a growth company was going to require big bold steps and greater personal accountability.
When you success will be determined by the fall between the slow.
But choosing progress over perfection and moving with a sense of urgency.
So we set out on a journey to become faster smarter and more responsive to changing consumer expectations.
We restructured to be closer to customers and foster at the point of impact.
We re franchised to drive growth and bring greater insight at the local level.
We increased accountability and financial discipline and return cash to shareholders.
Most importantly, we have returned to operating growth.
Indeed within two years, we established a strong foundation one that was fit for purpose I brought the business to a place where we could begin accelerating growth again.
That led to the launch of all velocity growth plan in March of 2017.
The plan is rooted in building on the fundamentals that have served all companies so well over 60 years.
So about running better restaurants.
Offering a compelling menu of delicious an affordable food.
Complementing that with hospitality and convenience for our guests.
We know that when we create delicious bill good moments for customers every visit every day.
Customers recognize our efforts I'm reward us with repeat visits.
We also know that we must continuously complement not work with big and powerful moves that keep us relevant uninviting for new generations of guests.
We deployed three accelerators to help us do just that.
Our experience of the future or Ian yes.
Digital and delivery.
With these efforts we are focused on actions have the biggest benefit to the most customers in the shortest possible time.
That's the path to becoming a better Mcdonald's.
Four years, then we did the hard work to put the velocity growth plan and accelerates is firmly in place and we are energized by the broad based strength in our results.
For the quarter global comparable sales increased 6.5%, which most four full years of quarterly comp sales growth.
This was complemented by positive global comp guest counts.
During the quarter, we made strong gains in running great restaurants.
We still have work to do because speed of service is so important to our customers seconds matzoh an impact decisions they make them repeat visits.
We are leveraging the power of the system franchisees supplies and employees to reduce menu complexity.
Improve operational procedures deploying new drive thru crude competitions on incentives.
Adopt best practices for staffing.
On leverage new technologies to make it easier for our teams to take responsibility for performance.
I'm very encouraged by the results we're seeing.
We set market level targets earlier, this year and the chop service times across many markets globally.
They are providing a better experience for our customers.
And with that seeing record high customer satisfaction scores this summer.
Here in the U.S. The plan, we built with our franchisees is ambitious collectively we recognized the need for change and you would be hard work.
We spend 2018 deploying major niche initiatives, including a new value platform fresh beef delivery.
He OTN modernization and the restructuring of the U.S. field operations.
At the beginning of this year, we said 2019 would be a year to execute are running better restaurants and optimize the initiatives we deployed last year.
In a restaurant visits with franchisees around the country I am seeing the result was a focused execution against the plan.
Importantly, average franchisee restaurant cash flow has grown eight consecutive months through June .
Fully overcoming the decline we saw in 2018.
Across all international operated markets or.
And we're seeing continued success consistent execution against the velocity growth plan is a winning formula.
I had the pleasure to visit Italy during the quarter and witnessed first hand, the rigorous focus on operational innovations and improvements.
Italy now has posted 10 consecutive quarters of comp sales and guest count growth.
The double digit comp sales and guest count growth for the quarter.
In fact, Italy has outperformed the local informal eating out or E. Oh category for nearly two years now.
I saw similar energy and focus and opened from Italy to Poland, which also posted strong comp sales and guest count growth for the quarter.
This high performing market was an early adopter of AOCF and digital.
In Walsall I saw the positive impacts our guest experience leaders have on hospitality as like greedy customers with a special won't but my guess feel welcome.
Italy, and Poland are great examples of markets, where we started a best practice and replicated at scale across other markets.
Whether around Iot rollout hospitality operations all digital.
Ideas originate in one market and rapidly move to another creating an environment, where all boats rise.
Now, let me turn it over to Kevin for a deeper dive into our comp sales trends by market and performance drivers.
Our topline momentum remains strong.
As Steve mentioned global comp sales increased 6.5% for the quarter with each operating segment contributing meaningfully to our growth.
In the U.S. comp sales were up 5.7%, our highest comp sales increase since the launch of all day breakfast back in the fourth quarter of 2015.
And once again, we also grew comp sales across all day parts.
Performance drivers for the quarter included proven value in deals such as our national two for $5 mix and match promotion featuring our core menu items as well as other locally relevant offers.
Our renewed focus on our iconic core menu resonates well with our customers.
Since switching to fresh be for our quarter pound burgers, just over a year ago, our sales results and positive customer response confirm it was the right strategic move.
In the first half of 2019, we sold over 55 million more quarter pound burgers compared to last year.
A combination of both deal offers and line extensions featuring Bacon and deluxe builds on our classic quarter pounder, which he helped to boost sales.
Similar to last quarter, the sales benefit from our modernized CEO TF restaurants contributed to our overall U.S. comp performance, which we expect to continue for the remainder of 2019.
By taking learnings from completed projects, we have successfully reduced construction downtime and were also recovering sales quicker after reopening.
During the quarter, we converted an additional 600 restaurants to EOG tee off for a total of 1000 projects completed in the first half of this year.
We still expect to complete a total of about 2000 projects for the full year.
Strong average check growth from both product mix and pricing continues to fuel our topline in the U.S.
We're seeing success with offerings that increase average check traffic and cash flow such as our current worldwide favorites LTL.
However, returning the guest count growth in the U.S. remains a top priority in the street fight for market share.
Turning outside the U.S. strong balanced results continued across the international operated segment with comp sales up 6.6% for the quarter.
Each of the markets within the segment grew comp sales and nearly all of the markets also grew comp guest counts.
Strong results in the UK, France, and Germany were key contributors to the segment's growth.
The UK marked its 50 threerd consecutive quarter of comp sales growth and increased market share versus our competition across all day parts.
Maximizing delivery was a key success factor for the market along with menu innovations such as the Bacon roll breakfast sandwich and the taste of America Burgers Alto.
France has been successful with both its premium and core Burger offerings balanced with a compelling value platform, helping the market to again achieve record high market share.
France now has nine consecutive quarters of both comp sales and guest count growth.
In Germany is maximizing contributions from Iot TF, our core menu and strong value messages, all of which resonate with their customers.
Germany also gained market share versus competitors and customer satisfaction scores are up.
In the international developmental license segment comp sales increased 7.9% with sales and guest count growth across each geographic region within the segment.
Results across our three largest markets drove the strong sales performance with double digit growth in Brazil strong comps in Japan and positive performance in China.
Accelerated new restaurant growth by our strategic partners, primarily in China.
Let the segment to grow system wide sales by 10% for the quarter in constant currencies.
Now I'll turn it back to Steve to further discuss the growth accelerators driving our global business.
Over the past four years, we've seen unprecedented changes in the global consumer landscape.
With this proliferation of change consumers today expect more from us.
Quality service and convenience are more important than ever.
And of course delicious food served by welcome people is absolutely essential.
I think senator races velocity growth plan, all about giving our global customers more control over how they order.
How they pay and how they serve their food.
In the U.S., we've made significant progress in modernizing all restaurants through our experience of the future initiative.
We have now modernize over 8500 U.S. restaurants.
Today customers are much more likely to visit an iOS CF restaurant than they were just a year ago.
At the end of May I was honored to join our team in New York for the opening of our New times square restaurants.
Three storey restaurant as a major brand statement on how we're providing a better customer experience through dekle enhanced customer service and seamless order and pay technologies.
Our major end markets have had experience of the future for some time and we continue continuing to unlock is potential.
For example, in Australia, and all major European markets.
Over 40% of installed customers now use kiosks when dining with us.
Taking control of how by older customized food and select how to be served.
From New York to Sydney, and most places in between our restaurants are not just ready for the future and meeting customers on their terms today.
Delivery is another area, where we're taking bold action to meet customers' expectations for high quality food.
On their terms with increasing demands for convenience and speed.
We've made significant progress on delivery the past two years and have room to grow in a largely untapped market with great upside.
Driving customer awareness and trial about delivery remains a top priority.
Globally, we expect delivery to be a 4 billion dollar business and 2019 for Mcdonald's and franchise restaurants.
Across all major markets, we've maintained double digit delivery sales growth in restaurants offering the service for more than 12 months.
In the UK and Spain delivery now accounts for greater than 10% of sales in restaurants that offer delivery.
In the U.S. move delivery with Greece is now available in more than 9000 restaurants, which is more than half of all mcdonalds U.S. restaurants.
We're also continuing to add new partners that allow us to scale and deploy delivery to meet untapped customer demand.
We recently announced a partnership in the USA wood door dash to expand the availability and accessibility for customers to receive our delicious food wherever they are.
We will quickly Scot woodall dash across the U.S. to provide customers with a choice of delivery partners.
In Canada, we've seen incremental strength in delivery with our second national partner Skip the dishes.
We also delivered an 850 restaurants in Canada, many of which have delivery from both partners.
Multiple delivery partners now are also the norm in Italy, Spain and Russia.
Wed be learning from our partners Waltz driving increased delivery orders.
We're also taking bold action on digital.
Since closing the dynamic yield acquisition in April we launched the decision logic technology on digital menu boards in drive throughs across multiple regions in the U.S.
Customers have responded to the points of sale suggestive selling by adding French fries drinks chicken nuggets and other favorites to their orders.
We're already seeing an increase in average check by improving our ability to offer customers what they are likely to ones.
With suggestions based on time of day weather.
Items already in customers orders.
We introduced dynamic yield technology in Australia. This month and will increase the number of drive throughs in the U.S. using this technology from about 700 today to over 8000 in the next two weeks.
By year end, we plan to integrate the technology in nearly 100% of all drive throughs in both markets.
This is another example of using technology to create more engaging experiences for our guests.
The technology infrastructure, we have built over the past three years to support our velocity growth plan and accelerators is fundamental to our transformation.
It's a reflection of what our customer demand from us and is not static.
Digital capabilities change by the day.
An impact what customers Ultra me ultimately expect from us.
The technological ecosystem, we are building will enable us to meet these rising expectations.
Positioning us for new opportunities to elevate and transform the customer experience.
Now I will turn it back over to Kevin for a look into the financial results for the quarter.
Adjusted earnings per share of $2.05 grew 7% in constant currencies for the quarter, when excluding impairment and other strategic charges from both the current and prior years.
Our results benefited from strong operating performance for the quarter revenue grew 3% in constant currencies as our comp sales growth more than offset the impact of refranchising activity.
Adjusted operating margin for the first half of the year was 43.2% an increase of 30 basis points versus last year.
As a result of our Refranchising efforts over the past few years the largest component of operating income is our franchise margin dollars.
With growth of 9% in constant currencies for the quarter franchise margin dollars now represent nearly 85% of total restaurant margin dollars.
Our consolidated franchise margin percent declined 100 basis points as our strong sales performance was impacted by higher ERP ETF related depreciation in the us.
As well as 70 basis points from the lease accounting presentation change that I discussed last quarter.
As a reminder, this presentation change has no effect on our franchise margin dollars, but the impact to our franchise margin percent will be ongoing.
Turning to our company operated restaurants consolidated margins grew 20 basis points to 18.1% for the quarter.
I Oh EMS segment company operated margins were flat versus prior year as our strong sales performance was offset primarily by higher labor and other costs such as delivery commissions.
US company operated margins grew 40 basis points to 16.3%, reflecting strong sales performance and Refranchising.
Partially offset by continued commodity and labor pressures, along with higher IOL TF related depreciation.
Second quarter pricing for both the us and the big five markets in the Io M. segment was up about 2.5% while commodity costs were up a similar amount across these markets.
In the U.S., we expect commodity pressures to ease somewhat in the back half of the year and still expect our grocery basket to be up 2% to 3% for the full year.
For the big five markets in the Io M. segment, we expect the full year commodity cost increase to be up roughly 2.5%.
Gionee was 2.1% of system wide sales for the quarter and flat to prior year in constant currencies.
We still expect DNA for the full year to remain relatively flat in constant currencies versus last year as we continue to invest in digital and technology capabilities.
Our effective tax rate was 24.5% for the quarter.
And we continue to expect a full year tax rate between 24% and 26%.
Foreign currency translation negatively impacted our second quarter results by seven cents per share given the strength of the U.S. dollar.
At current exchange rates, we expect the foreign currency impact to lessen to two to four cents for Q3 with further easing into Q4.
Our estimated full year headwind remains at 18 to 20 cents.
As usual this as directional guidance only because rates will change as we move through the year.
Now I'll turn it back to Steve.
I'll begin my remarks, this morning by talking about momentum.
The momentum we are building is apparent to all customers, who seek the convenience and value of Mcdonald's great tasting food.
Is apparent to all people is apparent to industry observers who are watching our transformation.
Getting to these results wasn't easy and we need to continue to work hard to sustain performance as we face macroeconomic and industry uncertainties around the world.
But we remain confident in our strategy is.
Customers are rewarding us for the investments, we're making to offer them great tasting food.
Modern and hospitable environment, an unparalleled convenience.
We all want to be associated with companys organizations and brands that engage and inspire us.
Friends that are inclusive fun relevant unsuccessful.
Brands strive to improve communities and societies at large.
That's where we are headed as we continue to unlock the potential of the velocity growth plan and these accelerators.
And this is why you will see us continue to focus on our innovation and technology pipelines.
This is all version of success.
We are building a better moved almost through a culture of innovation focus on a better customer experience.
A culture that strives to make the jobs of restaurant employees easier.
On a culture that is focused on sustaining long term growth.
This is our mindset as we push ourselves to execute open lusty growth and accelerators with a strong sense of urgency passion and commitment.
With that we'll open up for Q and a.
As a reminder, if you are an investor and we'd like to ask a question. Please press star followed by the number.
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 Andrew Charles with Cowen.
Great. Thanks, Steve can you give a little more context, the mix growth in the us that seems to be accelerating certainly outperformed south of the lower ticket breakfast occasion, if that's continued.
As well as lapping dollar 123 from last year helps but I think investors are wondering about in terms of the customer's ability to continue to pay up absent any growth in traffic.
Related leave the most tangible driver maybe dynamic you want as we look forward in the 700 stores that have added the initiatives. So far have you experienced a consistent lift to sales, particularly on mix once a drive through ads the initiative.
Have the list sales been more varied thanks.
Thanks, Andrew.
As you say clearly this is a cheque Caribbean.
Sales growth in the us.
Well I think is encouraging for us and gives us confidence that.
We go more sustaining platforms.
The balance of how that check it builds so we're about two thirds through.
Product mix.
One third true so I think thats, a fairly healthy balance what do you kind of drill into it.
I mean, there is a number of elements that play is helping so if we just look at some of the menu activity and promotional activity through the quarter for instance.
That was a good low can cope initiative, which.
Many of the cops initiated particularly through the east.
Printed on the day of fish promotion, which.
Gave us an incremental lift.
We've been pleased with the way the worldwide favorite promotion has worked and Thats.
Meeting or maybe even slightly exceeding our targets is giving us incremental business.
As we continue to innovate around the kind of the whole of the grill platform the quarter pounder cheese with.
It different options around led us to monitor that.
Well always.
We actually realized that.
No business, particularly now Weve reestablished relationship.
So I think there's a number of elements through just the the menu and marketing piece that have given us.
Platforms that it's taken us a while to invest in operation they embraced but has now begun to them a little consistent results.
Well, we shall we say as we convert.
Restaurants here, we're getting an incremental sales lift from that.
Some of which will come through.
Grouping increasing use of the self order kiosks that we generate higher average checks as we've mentioned before.
Alongside delivery, then don't forget delivery room, but bear in mind as that becomes a large part of our business. We're still seeing about twice the average check on the typical delivery will grow as well.
So there's a number of contributes is no one single contribution if you look through right across the business I think is the culmination.
A lot of the initiatives that we've been investing in the last two or three is a beginning to come together, which is giving us encouragement.
No not in yield.
We've been really pleased I'm going to say sort of three months in couldn't be more pleased with the integration of dynamic yield both as a company and as a culture, but also frankly getting the capabilities into our restaurants that we've been running 700 restaurants now for the best part of two and a half months, we're seeing consistent trends.
Across different dayparts growth to the weak across those 700.
And that's certainly encouraged us with the support of all around oil prices of course.
So quite significantly accelerate the rollout we note the technology works, we look at into our existing.
Outdoor digital menu. So we're going to go from about 898000.
But this time in two weeks time, which is which is fantastic and we would expect to see we have no reason to believe that this kind of they should we begin to see and I'm going to go into those details, but the commodity space at the moment, we would expect to continue.
The accelerated rollout.
Well somebody really encouraging to us while we're on the subject of dynamic yield.
We've taken into our first international market.
Going very very quickly go over that 20 restaurants to 150, Australia.
The reason that simple because I don't want to get too much into it but the the content management system, the kind of the brain, which holds all the data which phenomena.
Product books off to then produce what we can show on the digital menu boards internationally. They have one typical content management system on the U.S. has another.
And we've been able to prove very very quickly.
He works on both platforms, which really indicates.
She is ready for a global expansion. So we'll be careful that we don't get over our skis on it but.
The pull for them, obviously strong excitement for the iron ore price is right.
And.
The most probably will only one of the most reporting add on this is what does the business results is Amanda it just makes the managers and crew life threshold as well and.
You want to take that process, a little quicker because we don't anticipate a newly suggestive sell the technology does it fully so.
I was anomalously, but plenty of wide variety of initiatives.
Okay support lessened and not leased by the way just the fact that we're actually running the restaurants better known to focus we put on the drive throughs.
Which I spoke about last quarter, we're seeing John few times talking to almost all of our major international markets, notably here in the U.S. as well something maybe more about.
Our next question is from David Tarantino with Baird.
Hi, Good morning, and Steve I guess, while we're on the subject of speed of service I just wanted to ask.
I guess at the opening remarks, you talked about.
Having a philosophy of.
Have not focusing on incremental change, but focusing on more step changes.
And your and your overall strategy. So I'm just wondering if there is.
Something on drive through speed.
That can accelerate the progress you're seeing it seems like it's been fairly shallow so far, but perhaps perhaps I'm mistaken on that and then maybe one clarification at the end I just I just wanted to understand the traffic growth or traffic decline in the U.S. and Q2 did that did that change from what you saw in Q1 or to remain around the same level. Thanks.
That's great well, let me take the drive through one.
Once a year, we get all leaders from around the world together, So probably 60 70 strong, including the managing directors, while top 20 markets and we come together the selling of March and.
While most.
Katy is paying.
A really strong performance across the last three to four years. There are some areas, where we know we need to do better and we kind of had a watson conversation.
At the start of motion, we collectively agreed that we were going to.
We knew some emphasis on the drive through so as Tom said being going the wrong way most of our markets for three full years for reasons, we can understand as weve added to our business, but we knew that was sustaining trends so.
When you talk about progress in the drive through.
I mean, frankly April improved we want to get incremental improvement week to week to week. So each time a customer comes back said we go to later they can notice a few seconds difference.
There's been a ton of things we've done.
We've had some centrally led initiatives, but also it's a market that all the stuff from some of the menu simplification moves that you would have read about.
Here in the U.S., we streamlined the late night menu removing of the signature Crossfit, which was signed out of service times.
Im giving some of the local co ops at Chaucer Rollbacks breakfast rollout come the second phase.
So those things just helps the operation the kitchens.
We were also introducing increasingly using technology.
And the diagnosis diagnostic tools, all managers and crew can see in real time in the dry food items. They can basically decompose the various elements of a drive through.
Visit for customer into its constituent second so I'll only taken to take the orders have when we take to take the payment.
How long it takes as it got to the food presented how many calls we all tend to pull forward and bring the food later and just with the attention we've begun to see notable changes so any kicks off ready by starting this quarter.
Just to give you a slight sense of.
What we're seeing already in June for example, in the US we saw a 15 second reduction year on year. So they saw him to drive through which I would say is more of an incremental.
Notable clearly.
Yes regarding the customer sees us move the journey. It also helps us with throughput as well so.
Hi, This is certainly a lot more to do.
But I'm really encouraged certain other international markets of assessing double that reduction with the folks at putting on so.
More to come.
Kevin you might want to talk a little bit to traffic.
Hi, David regarding guest counts in the us in the second quarter.
I'd say there wasn't a meaningful change in the underlying guest count trend in the us.
The actual number for the second quarter was.
Ill say less negative than the first quarter, but there were some specific things in the second quarter, some of which Steve mentioned earlier things like there is that calendar shift with Easter timing this year versus last year that a little bit benefited the second quarter.
As Steve talked about the delay of fish, we had about 70% of our co ops that offered a fully efficiency on the in Q2 that helped drive sales and guest count and then worldwide favorites, obviously wasn't LTL that.
The second quarter too so while the while the actual number was less negative in the second quarter, Hey, there really hasn't been a meaningful change in the underlying trend.
Our next question is from Jeff Bernstein with Barclays.
Great. Thank you very much just following on that.
One clarification, if you could just provide some color on the breakfast side of the business in the U.S. I got the impression last quarter that you were keen to see the breakfast at turned more favorable Im wondering if you can.
Talk about when there was an accelerating momentum in the quarter, where it stands as a percentage of sales and maybe how breakfast compares to the to the rest of the day and then I just wanted to.
One of the things should we expect.
Kevin to an update on.
Return of cash targets as we now finish out.
19 are we going to get another kind of three year bucket as we look out for the next few years or how should we think about the outlook for that going forward. Thank you.
Hi, Jeff ill take the first one.
We did see a better.
Trading performance from the breakfast Daypart in quarter two.
The combination of local activity with a local cops old plus we did get seasoned strong results out of the cafe initiatives and the diagnostics that we launched in the first quarter as well. So on the date part we grew sales. It was still slow was the slowest growing dayparts amongst the date, but with respect to a solid sales growth.
They were still guest count decline as.
I think we've mentioned before is that couldn't give all the entrance who are competing in the breakfast market and we don't have it.
All around way the way, perhaps we used to back in the day. So it remains competitive we got sales growth, we're encouraged by that but we know the whole book today.
And regarding the return of cash target so.
As you know this year will complete our three year 25 billion dollar target. We're on track to do that so we'll finish that this year later in the year that.
We'll provide an update as far as what that means going forward past beginning in 2020.
Our next question is from John Glass with Morgan Stanley .
Hi, Thanks, good morning.
Can you update us maybe on the US franchisee relationships in particular, I think you slow down the EU TF rollout in concession to them, but now you are talking about profits.
For eight months rising is there a greater enthusiasm to embrace this maybe in pull forward some of the things you're talking about in 21, and 22 and get it done faster can you also talk about maybe where they stand or where you stand on delivery I think there was some friction around commissions and sort of the economics of that have you resolve some of those issues and I think there was some adjustments you may plan to make in the back half just what those adjustments to royalty rate rent relief associated with that thanks.
Yes, Thanks John .
As I've said before 2018 was a really hard look yeah, I mean, both the owner operators as the company invested a lot of time north of that but a lot of money in and really kick starting the biggest motivation.
Plan they've built.
And that does create tensions at a point in time and that's that's natural.
We booked all the way through them I would say that by easing off Big Center. The speed of the Ido Ts gave those on oil prices and wanted a bit of breathing room.
Able to select that push one or two projects out which gave them a lot more confidence and comfort.
That said the results, we're getting from the TANF rolled out already strong and they similar very similar to what we've seen elsewhere in the world. So.
You will find the majority of overall prices are sticking with the original plan.
Accelerated plan ready to complete that businesses by the end of 2020 .
It will be optional for and what price to pull that projects forward. If they want to 2021 2022 that welcome to we'll be ready for it.
I think it has also given us is.
I mean, we're a wonderful learning organization as a system you know, we're always striving curious to get better and.
If we look at the performance of Ian just as an example, you mentioned that.
The downtime the projects were about two to four days backed up this year I mean.
On T., Eighteight, which clearly helps.
Hope to get the business back on track the time to recover the sales as in when you reopen and getting ourselves back up to the levels that recovery time is quick up I don't we show the dip during the closure is a little less this year than it was last year. So I think our execution around these 2000 projects this year, Sean, but probably those three elements, which again builds confidence.
In the iron ore prices that is going to be a stronger business outcome for them.
With delivery, yes, we.
Hey at 18 to roll this out the other operators and obviously a great business opportunity, we have around the world with our owner operators in each of our markets to find.
I'd arrangement with them as to how we can best.
Take some of the heat out of the commission costs that they face in order to make it encouraging we will then to make money out of it we have the company will make money as a result, so I think we're in a follow up in a place I think probably the two indicates is just here in the west.
Well demonstrate the confidence the unraveling operators have is that once we settled on this new rent arrangement with them I think it was within about a week. They voted on a national marketing campaign with a reach to put marketing dollars behind delivery.
And the economics with which they have embraced the second third party operator being door dash.
I mentioned in my opening comments, we got around 200 restaurants in Houston.
Dollar dash at the moment.
And that's just really making sure we can integrate the technology and get the operation right by the end of August we're going to probably two waves of around 4000, plus restaurants. So we'll be up at about 9000 on door dash by the end of August again to show me into Spain regarding hence the unrequited commitment behind it.
I think on an already about 9000 with all kind of all key strategic partner, we should do briefs.
There is no prolific cross over this would be about an additional 1200 restaurants that have either one or rather depending on coverage.
That means that given some of the 8000, which will have to third party operators and yet we've seen around the world that does give us good incremental delivery business coming customers.
Typically not solely but typically loyal to one third party operator.
So we know what we've seen from Canada, when we added scale the dishes to the breweries platform.
We've also seen elsewhere around the world such as.
In Italy, where we got three when you go below deliberate and do vary so we got good experience.
Multiple delivery partners.
We are confident the incrementality will come with it and then as a result, the cash flow to the operators.
Ultimately the mood of the operators I think a feeling much more confident.
By May of this year that cash flow growth eclipsed the decline that they saw in 2018. So as you can imagine that gives people a great sense of satisfaction June continue that way now about eight months in a row and cash flow growth and.
Hey, confident and committed to maintaining that trend for them because they committed a lot to this plan they committed not to our business and we want them to do business with success.
Our next question is from Greg Francfort with Bank of America Merrill Lynch.
Hi, yes. Thanks for the question, just maybe going back to the drive thru times could can you quantify how much those were up and then.
I guess the question is how much you recaptured with the 15th second what percentage of what you have seen an increase in the last few years and then how much opportunity do you think there is going forward and.
What's the key strategy to address that as their changes you have to make on the product front under menu front to kind of capture more.
Timesaving. Thank you very much.
Yes, I'm going to get into all the details of that drive you service something to differ by country as well obviously.
Depending on how busy the drive throughs on I mean, you've got we go certain markets in Europe were trying to do is only about 40% of the business of a drive through restaurant was here in the us.
Can be upwards 70, 75% so that creates a totally different service type dynamic.
I would say across the major markets.
As we sat down in March we want to we want to set ourselves abundantly you had to be about 30 seconds betta, which we knew would be.
Notable not to be noticeable to the customer and also then business enhancing as it is up three but fruit, but I, particularly those peaks of his times, obviously thats. The most critical time to do it.
There's a number of different initiatives to I mean, some is just getting the focus.
Understandably with the aggressive rollout of experience the future that was a heightened focus in store front counter dining area. We just rebalancing that so some of it is just the focus on the dry food people positioning making sure we're stopping right training and the basics.
But there are certain things for example, a menu and I think we've got a thoughtful.
So renzi capability through OXXO global operations team and our innovation centers now to analyze.
The complexity of our menus by market and identify those slow moving items that really are contributing much that incremental margin certainly not setting in many volumes.
But create barriers to service.
I know diagnostic tools the forensic tools, we have now is providing the information into each of the markets that can make spot many decisions, but it's not just about the menus around technology as well and actually just making it fun I mean weve.
And a number of service competitions around all the markets.
Particularly now we'd given these tools to the restaurants to the manages when I first of all this.
The trailing through time the tools in Canada will be 12 to 18 months ago, and then sold them.
Wrote out in Europe , probably about 12 months ago, and the majority of the U.S. structures now property book captured my attention or something else Theres. The infusion ASM the managers and the crew had that kind of local come competition, how you doing versus the dry foods Neal area to drive throughs in your own operated very well the drive throughs of cement volumes. So if we can use these tools in many ways to identify where the barriers of Ashley just making fun incentivize and.
Getting Hughes as a management crew so.
Most of Com I'm encouraged with whoever out because some of these restructuring 30 40 seconds quick.
Now just three or four months in so they've got a bigger opportunity than some but they make good headway and the use of a proud of where the US is no there.
Focusing on getting better than the 50.
Our next question is from Dennis Geiger with urea.
Great. Thanks for the question I wanted to ask a bit more about the U.S. guest counts.
Maybe if you could just comment a bit more where you're seeing progress and where the biggest opportunities are.
To continue to show that improvement and I guess within that context, Steve I think you've talked in the past about a growth strategy to retain customers regain customers and convert casual customers any update there you could give specifically on the converting the casual customer.
And if that's still how you're thinking about getting that guest count and the U.S. Thank you.
And Dennis it's Kevin I'll, I'll take a stab at that and Steve can chime in.
As far as progress or opportunity I think as we've talked about certainly one of our biggest opportunities continues to be a breakfast as Steve talked about there's been a lot of new entrants into that space. So theres not many players that are growing Comcast accounts at breakfast or really in most of the day parts by new entrants have kind of caused a.
Scattering I'll say on the existing guest counts along just more units.
As far as retain regain converting the convert strategy for us was always around.
Kind of opportunities in either other day parts or other areas that we didn't have our fair share. If you will so areas like coffee it snacking and areas that are potential further growth opportunities.
But we are not as strong in some of those areas that wasn't necessarily taking some of our existing customers and just having them come more frequently.
So there still are opportunities in some of those areas again like coffee and.
Like snacking.
I think the way we think about it is there is an opportunity and this is what kind of one of the purposes of both Eo TF and our digital is to take.
Take our existing relationship with customers and expand that relationship through digital means whether that's through apps loyal further loyalty program at some point, but the whole customer relationship where we can get to know and personalized offers.
Easier and better for our existing customers, that's one of our big opportunities.
You ask guest counts will continue to be a.
We call it a street fight just because it's a very competitive environment here in the us.
But I think there is more of a focus on what do we need to do in the various day parts again breakfast, probably being the biggest opportunity for us to regain some of those guest counts that we lost and it really is about.
We call like losing guest count is not losing customers is losing customer visits so customers that may not be visiting us as often as they work historically and if we can if we can regain some of those additional visits especially at breakfast time, which as you know a very habitual ritual and so if we can get those customers coming again at breakfast time huge benefit.
And just as a full kevins comments, particularly around the.
If you like the technology ecosystem with building here for us to have a personalized relationship with our customers, which I think will be valuable to us and also make it valuable to them, we've got to find ways for them to identify themselves when they enter the drive through without slipping the joint through process down identify themselves self order kiosks.
Again with it even though there's less pressure on time that you don't want it to slow down.
Well for example, having home delivery and when we get to route delivery through the Mcdonald's App and we're working with.
As a partner of.
So we are going to be getting.
The ability to route those orders through the Mcdonald's that once we can start to link.
A drive through transaction is to install transactions to home delivery, we start to build a really good picture about customers individually first.
I think that will be incredibly valuable.
Asked to make ourselves more relevant.
And and more interesting to those customers and from a customer perspective, just might experience smoother and more enjoyable. So expect to hear more there are certainly some initiatives. We're working on the market is right now on those.
Nothing to say at scale, yet but.
Surely the culture of innovation that we going here is is playing out we've got a number of initiatives in.
Number of all markets were learning very very quickly how best to identify customers or customers to choose to identify themselves in a better way of saying it at the drive thru at the in store. We believe we've got the home delivery piece already.
Initiated.
I'm very excited about what that could.
Our next question is from John Tower with Wells Fargo.
Great. Thanks.
I just wanted to talk quickly on.
The unit growth I think today, you bumped up your expectations for 2019 to 800 stores net.
Over the past two years, you've seen a nice jump in an absolute net numbers. So can you discuss.
Whether or not you expect this type of net openings to persist in the future. What's fueling this growth are franchisees and new markets seeing better returns than in the past. Thank you.
Yes, Thanks, John for the question.
Couple of things first related to the I'll call. It change slight change in guidance in the outlook section of the release.
Really what's driving that net additions number of about 50 higher than it was last quarter is less closings. So our gross openings number for this year will be similar to what we thought it was going to be but the closings than we originally anticipated beginning we are a little bit lower and about half of those are in our developmental license market and about half of them are in the.
International operated markets half of that change in closing that it.
As far as how we think about unit growth.
There's still a lot of potential even in our mature markets submarkets like.
Canada, France.
Italy, Spain have a lot of opportunity to continue growing new units.
And the U.S., even long term, we believe now.
What's helpful. In the way we've changed our business model is what you actually see as right now substantially the large portion of openings are in our developmental license markets, China and the other GL markets, which use their capital. So it's a it's a pretty efficient way for us to grow. So you should expect to see continued growth in new units.
Again, both in the inner in the DLT markets by our partners as well as in our more mature markets that we own like the ones I spoke about.
Just to add on to that.
I just want to give a shout out to some of the.
Mid size operated markets recently have been in Italy, Poland, Netherlands, I mean, these markets are doing double digit sales comps until the double double digit sales comps and hence that's creating fairly significant increase in volumes and throughput in the restaurants is putting some capacity pressure on them. So well continue the desire in the markets is to start to pick up the openings a little bit I'm heading out to Russia in about two months time to spend some time with the team and.
Again with the strong growth in both guest counts and sales they say no. They have an ambition for growth and if you remember we previously called segment. The high growth segment and that was because we expected them to grow units at a greater pace than perhaps the more mature markets. So we're keeping a real close eye on it.
The strong will be growing the business and strong growth conference level is too.
To grow the units as well so more to come on in again.
Our next question from Brian Bittner with Oppenheimer.
Hi, Thanks for the question can you guys talk a little bit more about your store level margins in the United States. It's the first time they have expanded in five quarters and certainly we're a much healthier level than all of US analysts were forecasting I know you said Refranchising was a positive impact Kevin, but I think probably a similar impact as you've seen in recent quarters. So are the franchisees seeing a similar margin trend change this quarter and if so what drove that and then just following up on the IEO TF can you tell us what the net impact you believe.
It was on comps this quarter and how you expect that to change.
Into the second half. Thanks, yes, Thanks, Brian Let me start with the store level margins in.
And I guess I'll talk about company operated margins because obviously we have.
Those are our restaurants right.
I can see a lot of detail related to those.
I see one of the big differences is.
Certainly comps in the second quarter were higher than they were let's say in the first quarter and obviously higher incomes definitely helped that but the other thing I'd say is there is a little bit more stability in the restaurants in 2019 and 2018, Steve talked earlier about kind of the hard work and all the things that we threw at the restaurant in 2018, including Iot TF a lot of project fresh beef. The restructure we did in the field all those changes that kind of impacted the restaurants.
And so kind of as we've now kind of I'll say stabilize the business a little bit and just have less overall initiative deployment as well as slowing of the pace or getting near the end of kind of our refranchising. The restaurants are now able to just focus on running the restaurants as efficiently as possible and so so we saw kind of more efficiency labor productivity in the second quarter than we've seen in the <unk> than we saw in the first quarter in last year on the franchisees side, we've talked about their cash flow is up so their unit level economics have been doing well. Similarly, so I think thats, probably the biggest change as far as what we're seeing in margin versus last year certainly.
Related to Caf I'd say the benefit in the second quarter was a little higher than it was in the first quarter and we would expect that to be relatively similar for the remaining quarters of this year.
As we said we completed about 1000 projects this year, but as you know so far this year of our 2000 and that will complete and total, but that's coming off of finishing about 4500 last year. So we have a big base of projects that are now complete that we're seeing the benefit of in addition to kind of improvement in how we're doing those projects as Steve talked about less downtime quicker recovery et cetera. So we expect that those the MTF benefits to continue.
And obviously as we have completed more projects that certainly helps future results.
As we near the top of the hour, we'll take one final question from Sara Senatore with Bernstein.
Okay. Thank you very much and I just had two quick follow ups. If I may be the first regarding the CF and traffic in that you asked I had been under the impression that last year part of the issue with general store closures, you lost and traffic and I would have thought maybe you'd have gotten that back this year, but it sounds like you haven't.
We haven't gotten the traffic back so much as the customers that are so going coming down or they are just spending more capex supporting that I just wanted to understand the dynamic therapy cheering and lapping the closures and then just on China and are you seeing any cannibalization mandates across the across the.
Good point, a lot of restaurants, taking unit growth in China and from their current salaried. Accordingly is that something that you have to contemplate or are you still satellite underpenetrated you can see there.
John I can start with the MTF.
Related to Aeo TF. So last year as you mentioned, we had restaurants closed that the one that needed to be.
Primarily the ones that had the big projects, what we call non modernize the ones, where we needed to do a remodel plus the TF components. This year, while theres less number of projects being done there are more a higher percentage of those non mods being done so.
While weve gotten better at.
Reducing the amount of time that Theyre closed we still have some of those closures now that.
That isn't the only issue obviously related to traffic, though again to be fair, we were losing traffic before we started the TNF and that won't fix all the issues related traffic. So the traffic piece is beyond just geo TNF alpha as we've gotten better and gotten more of these projects were getting better at completing those but that in of itself won't resolve all of the traffic issues.
Just to pick up on the China question, Sarah we had which really strong system wide sales growth in China for the quarter.
Clearly weve got a rapid pace of expansion of new restaurant openings, but we grew sales and grew guest count in the culture as well so the coal business is robust.
And I would say probably exceeding the opening plans. We had initially expected I think if you look at a five year period.
Heading 2020 two.
Our partners are looking to exceed more than 2000 openings I certainly on track for that at the moment.
And having caught up with the recently that Rob Im very confident moving about the state of the business I mean is incredibly competitive you've seen the pace at which other paper expanding.
But it is a huge market.
The the emerging middle class that the greater affordability of the mass population there is heading towards western QSR type of average checks in the portability. So.
It's certainly a market. We're excited about we're very comfortable long term future that I'm pretty pleased with the way the pause looking out as well.
Terrific job site.
It will be more 400 openings this year off for about 400, plus last year as well so.
And if I can keep the sales comps going at the same time then.
That.
Indicates a healthy position the business.
Okay. Thanks, everyone for joining us have a good day.
This concludes Mcdonald's Corporation Investor Conference call.
Oh.
[noise].