Mike Cieplak:

Good morning, everyone, and thank you for joining us. With me on the call today are Chairman and Chief Executive Officer, Chris Kempczinski; Chief Financial Officer, Ian Borden, and President of McDonald's USA, Joe Erlinger. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website, as are reconciliations of any non-GAAP financial measures mentioned on today's call along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. Please limit yourself to one question and then re-enter the queue for any additional questions. Today's conference call is being webcast and is also being recorded for replay via our website. And now I'll turn it over to Chris.

Joe Erlinger:

Thanks, Chris, and good morning. It's been a few years since I've participated in the McDonald's earnings call. And I want to start by reflecting a bit about the progress McDonald's USA has achieved since that call back in 2021. Over the past three years, we've significantly moved the needle in several areas, like loyalty, which has grown to over 20% of our US system-wide sales and over 37 million 90-day active users. We've also improved our chicken market share with the launch of McCrispy. As I said then, it was the accumulation of our decisions grounded in our values that continue to keep the McDonald's brand relevant for our customers, and meaningful for our people, providing a strong foundation for future growth. That continues to be our approach as we're now focused on raising the bar on our customer experience, considering our customers' current reality. Since the very beginning, and Chris touched on this earlier, we've earned our success through excellent QSC&V, quality, service, cleanliness and value. And as we've evolved our approach time and again over the years to match the changing expectations of our customers, we continue to deliver an exceptional customer experience today. In this last quarter, McDonald's USA delivered its highest-ever year-to-date customer satisfaction score. While I'll share more about the $5 meal deal in a moment, both the Bacon Cajun Ranch McCrispy and Grandma McFlurry promotions drove sales, along with cultural buzz and brand relevance. All said, our business performance reflects industry-wide challenges and current context, one where customers are making thoughtful choices about when and where they eat. And while we always work hard to provide value to our customers, they're telling us that they want to see and experience even more value from McDonald's. And we're listening as we remain laser-focused on providing great value to our fans this summer and beyond. So we tapped into ideas that already exist within our system. Our restaurants in Upstate New York have been running a local $5 meal deal that was highly successful, performing well with lower income customers and driving overall incremental sales. By leveraging learnings from within our own system, we brought this to life for customers across the US. We've seen a lot of enthusiasm and the number of $5 meal deals sold are above expectations. Trial rates of the deal are highest amongst lower-income consumers and sentiment towards the brand around value and affordability has begun to shift positively. To date, 93% of our restaurants in the US have committed to extending the offer even further into the summer. And there are other ways customers can experience great value at McDonald's. We continue to provide a steady stream of offers on the mobile app, including nationwide free Free Fries Fridays, where you can get a free medium fry every Friday with any $1 purchase on the app. And as we work through the important details of the future US value platform, we will continue to make decisions grounded in insights with the customer at the center. At the end of the day, we expect customers will continue to feel the pinch of the economy and a higher cost of living for at least the next several quarters in this very competitive landscape. So we believe it's critical for us to consider these factors in order to grow market share and return to sustainable guest count-led growth for the brand. McDonald's is uniquely positioned to succeed in this environment, given our size, scale and competitive advantages. We have a fully modernized restaurant estate. We have a simplified menu that focuses on our core while never shying away from bringing back fan favorites at the right times or pursuing the right new product innovations. We have built one of the largest loyalty programs in the industry and we're continuing to lead with a long-term mindset, making decisions that meet our customers where they are and where they need us right down, while also plotting a path for sustained success. And now I'll turn it over to Ian.

Chris Kempczinski:

Thanks, Ian. Earlier this month, we brought leaders together to discuss our goals and objectives as we further establish McDonald's as a leading global consumer brand. As a team, we are committed to act with urgency, cementing our value leadership growing share in areas like chicken and bolstering loyalty through digital customer acquisition, adoption and retention on a global scale, and we are continuing to lean into our three pillars, M, C and D as our blueprint and engine for growth while leveraging technology to transform how we operate across all platforms. Even as the world around us continues to change, we know the power of the McDonald's brand will prevail. We're digital forward, values-driven and culture-led and will continue to reinvent ourselves to meet our customers and restaurant teams where they are today and where they're going tomorrow. With more than 40,000 locations across the globe, we uphold a presence that we believe few in our industry could ever hope to match. We offer the best franchising opportunity in the world, offering a familiar beacon of support for the over 40,000 communities where we live, work and serve. And we're just getting started. We're making progress towards our ambition of 50,000 restaurants by the end of 2027. And when we combine our strategy with great value and high-level execution, we are confident we will further our leadership position. As I close, I want to extend a sincere thank you to our franchisees, suppliers and employees around the world for their continued resilience and unwavering commitment to serving our customers and local communities. And with that we'll begin Q&A.

Mike Cieplak:

Our first question is from John Ivankoe with JPMorgan.

Chris Kempczinski:

Hi, John. Thanks for the question. You're right in that last year, you may remember we were talking about there being pressure on the consumer and particularly that low-income consumer that was notable in a few of our major markets. And what has happened in the intervening period of time is that we've seen more markets have the same sort of slowdown. And it is certainly most pronounced with that low-income consumer, but we're also seeing an impact with larger groups, particularly around families in Europe that we're seeing this as people are just looking to economize. You're also right that we're looking at a continued gap between food at home and food away from home inflation. The gap is about 3% right now or a 300 basis point gap between the two. So you are seeing consumers being much more discretionary as they treat restaurants. You're seeing that the consumer is eating at home more often, you're seeing more deal seeking from the consumer, and you're just seeing, I think, a trade down even within either units per transaction or within mix, all of those things for us are indicators that the consumer across a number of these markets is being very discriminating. And I would point out consumer sentiment in most of our major markets remains low. And so your point around how do we make sure that we're anticipating where these customers are going and what the value is required. I think it's a fair question. And what we've done is, in a number of places, you've seen us and heard us talk about what we're doing with McSmart, what we're doing with McSaver some of the things that we've put in place in the US. But I think it's also clear to us that in several markets in a number of markets that you need to have a broader value platform and that trying to move the consumer with narrow offerings that are one item or a few items is just not sufficient for the context that we're in. And so what's going on in markets around the world is looking at how do we further broaden what some of the value platform offerings could be as we also perhaps look for other places that we can dial down. And that conversation, as you know, with our franchisees, takes a moment, it's not something that happens immediately, but I would say that there's good recognition across our franchisee base that we need to be providing value. We need to be providing a broader level of value and at the same time, we've got a lot of other levers. So this is not all about value. We've got levers around what we can do from a menu standpoint. We've got some great equities that we need to be driving there. And there's more we need to be doing from a marketing standpoint and stepping up by marketing. So I'd say the changes that we're working on and talking about with our markets, yes, it's around value. It's making sure that as we're facing certainly a more difficult environment than even what we anticipated last year that we've got that value offering, but we're also using the other things that are at our disposal to get this business back to where we know it should be performing.

David Palmer:

Thanks. Congratulations, Mike. Thank you for your help all through the years. As far as the question, I guess, I'd like to focus on the IOM countries. How do the challenges in your key markets differ from the US in terms of market share versus the informal eating out sales trends? In the US, it feels like McDonald's is still in a state of searching and perhaps negotiating to find the right value message ahead of menu news that might happen later. Are you at a similar stage of searching and perhaps negotiating with franchisees about value overseas? Where are you in terms of how satisfied you are where you are in terms of the value message? Thanks so much.

Ian Borden:

Sure. Good morning, David. Thanks for the question. Look, I mean, I'll just start, I think, with a bit of context, which is, as you heard Chris in his opening remarks, talk about, I mean, I think the pressures on the industry and consumers that we're seeing are broad-based in nature. And I think if you look across our IOM markets, which you will know historically, I think we've had -- have been a real strength to our system. I think that external pressure has heightened and I think certainly gotten more significant in several of those markets through the second quarter. And so I think it's still what I'll call an evolving situation. We've talked a lot about value and affordability over the last couple of quarters. As you know, we've kind of highlighted McSmart, which is an entry-level meal, affordable meal option that we put in place in Germany at the beginning of 2023 and Germany has been consistently one of our most strongly performing markets even in a much more difficult context over the last couple of quarters in the marketplace. So I think it's -- part of it is just the evolution of what's happening with the consumer, what's happening with the industry. I think we have strong alignment engagement with our franchisees across our international markets. I think we're working very collaboratively and constructively to get the right programs and platforms in place from a value and affordability standpoint. I think part of it's just been the landscape in the consumer is evolving and those platforms and offers have needed to be sharpened and I think better positioned to be delivering in the current context. And so I think we're -- we're moving with speed and pace, as you've heard us talk about before, but the environment, I think, has been changing and context has been evolving. And I think we're just trying to get ahead of that as we've talked about in kind of our opening remarks.

Mike Cieplak:

Our next question is from Brian Harbour with Morgan Stanley. .

Chris Kempczinski:

Yes, it's a great question. We feel really good about our digital business, and we're seeing strong performance on the digital business, as I alluded to in the opening. I think the challenge on digital right now is basically only about 25% of our customers are on digital in terms of identified customers. And so as you think about what you need to do to drive the overall business, we just don't have digital yet at the size and with the penetration that's needed to move the entire business. And I think some of what has happened as you started to look at things is we probably were a little over rotated on digital versus broad everyday value that we're offering available to all consumers, those who maybe aren't yet on our digital platform. So that's the work that's underway. I think in time, certainly, as you know, digital is going to continue to grow for us. We're going to get more and more customers on our digital platform. And I think in a couple of years' time, particularly as you get to 250 million users, that's a different conversation about how digital can drive value. But today, we just don't have the penetration where we need it to be to move to 75% of the business that's not on digital. And so that's the value work that we just have been talking about.

David Tarantino:

Hi. Good morning. A couple of questions on the US value initiatives. First, I was hoping you could elaborate on the effectiveness of the $5 meal deal that you're running and whether you're seeing the sales or traffic inflection you had anticipated from that program. And then secondly, I think, Chris, you mentioned it's necessary to have more of a platform idea in all of your key markets. And I'm just wondering, in the US, how those conversations are going with franchisees and whether franchisees are supportive of a broader national value platform and when that might happen? Thanks.

Mike Cieplak:

Our next question is from Sara Senatore with Bank of America.

Ian Borden:

Good morning, Sara. It's Ian. I'll start and then I think maybe Chris or Joe might jump in at the end. Look, I mean, I think as you said from a margin pressure standpoint, I mean, obviously, the top line performance has been more muted. So that obviously creates a level of pressure. But I think if you use kind of our McOpCo margins as a bit of a proxy you would have seen that they've held up pretty well through the quarter simply because, as you noted, we're certainly seeing much lower levels of inflation in areas like food and paper, which are down at the kind of low single-digit level. I mean, obviously, labor inflation, particularly in the US, is a little higher still, especially with some of the minimum wage changes in places like California. I think in terms of just kind of maybe kind of trying to answer your -- the broader part of your question, I mean, value and affordability is kind of a fundamental part of our business model. And I think our owner operators understand that and obviously understand that, that's something strategically that we always need to have in place as you would have heard us talk previously about, I mean we don't subsidize pricing. So we want to get to the right outcomes and do that on a way in a way that it's going to be sustainable and profitable for both our operators and for McDonald's. And I think over time, we know that strong affordability and value is what drives volume-led growth, as you heard Joe touch on and volume, obviously, is ultimately what drives sustainable profit and cash flow for the business and for the system. I think as we get some of these ideas in place, obviously, we want to bring them to life in creative and effective ways, and we're going to put all of the resources of our system against making sure that we execute this and put ourselves in a position to win in a difficult environment. But I may just kind of let Joe or Chris weigh in.

Chris Kempczinski:

Yes. My only add is I just would underline the word that in use, which is sustainable. We're only interested in doing things that are sustainable strategies that we can continue. And so that's going to be our guide as we think about where we need to go on these things. And there is a lot of, I think, strength within our system, financial strength within our system to implement the necessary changes, but they have to be sustainable for us.

Dennis Geiger:

Thank you, and thanks, Mike, for all your help, best of luck. I wanted to focus again on the meal deal. I appreciate all the insights there. Specifically, as it relates to customer awareness in the US of the meal deal and sort of thinking about the marketing message or the marketing intensity, is that something you could help us frame up for us where it is right now? Is it something that ramps and kind of related, just thinking about the time line generally from a new market -- a new value platform or a new bigger value offer to guest count contribution. Is there a way historically in environments like this to kind of think about how that time line looks. Thank you.

Chris Kempczinski:

My only add on the PACE question is that ultimately is on us. There's nothing externally that drives the PACE. It's all an internal thing. And so we've seen in some markets like France, for example, where there's strong alignment, we can move very quickly in other places, it requires more conversations because of the breadth of the changes. But at the end of the day, we've shown the capacity to move quickly and my hope would be certainly that in a market like the US. I think Joe and the team are having great discussions with franchisees about the importance of getting to that value platform that we've talked about.

Jeffrey Bernstein:

Great. Thank you very much. Just looking outside the US, perhaps, I was hoping to touch on France and China. France, I'm just wondering if you think it's more of a McDonald's specific issue, which I think is what maybe you referred to in the past versus a macro issue and how you view the competition there. And then in China, I know you mentioned that consumer is less confident. I'm just wondering if you're seeing anything to give you pause on an otherwise aggressive unit growth outlook or maybe a change in strategy, whether you're seeing any US brand pushback or anything along those lines would be helpful. Thank you.

Joe Erlinger:

Jeff, I might just hook on to Chris because I just want to -- I know you were asking about France, but I think it is important just to kind of reinforce a little bit of what we touched on earlier, which is, I mean, I think the external trends and pressures that we're seeing on the industry on the consumer, I think, are broad-based across IOM. I think consumers are being, as you've heard us say earlier, more discerning about where, when and what they eat. And I would say we don't expect significant changes in that environment for the next few quarters. So obviously, as you've heard us talk a lot about, we're kind of laser-focused on this forensic review of kind of our value and affordability positioning in each of our key markets. We're going to position ourselves to win, and we're moving, I think, with a sense of urgency, but obviously, at the pace to get that right. And as you've heard us talk a lot about, we've got the system strength and know-how to push us in that winning position. I would just say, I think the third quarter has certainly started similarly to how the second quarter ended, and we're seeing, I think, negative comp trends across IOM and frankly, across each of our three operating segments.

Eric Gonzalez:

Hey, good morning, and thanks for the question. I'm just curious about trade down. In the past McDonald's was thought of as a defensive option because in economic downturn, it would pull share from more expensive categories. So I'm just curious why you think you might not be getting the trade down that you depended on in the past? And whether that's a function of value perception or something that could be addressed in the new value construct. Thanks.

Mike Cieplak:

Our next question is from Lauren Silberman with Deutsche Bank.

Ian Borden:

Hi, Lauren, it's Ian. So just maybe just to reiterate a few things. I mean, I think, as I said, the pressures are broad-based. We're seeing those pressures, I think, on the industry and on the consumer across almost every one of our large owned markets globally. And as I said, I don't think we -- I don't -- we certainly don't profess to have a, I think, a crystal ball on how the future will look like, but we don't expect that we're going to see a change in that environment over the next few quarters. I mean, I think that's why we're laser focused on getting value and affordability right. As you heard Chris just say, I think it's not even so much about consumers moving from us to others. It's about consumers in that low-income category. And I think families, which are obviously two big cohorts of our consumer base across most of our markets, just eating out less frequently than they have been previously. I think we're confident that if we get our value and affordability propositions, right, if we get them into that winning position in each marketplace, that will encourage consumers to come back when they can. And I think if you take examples of what some of our markets done, I'll use the UK as a bit of an example that ran a campaign in the end of May, beginning of June, a 3 for GBP3 mix and match campaign. They also have done a GBP1.99 Happy Meal offer in the app. When we run compelling affordable options like that, we know we're able to draw consumers back and we know we are best positioned to be able to do that. So that's certainly what we're focused on. As I said, certainly don't claim that we can predict. I think when the environment will turn or when the consumer will turn. I think what we're focused on is making sure that we're winning in the current context in each and every one of our markets. And that we're positioned to accelerate our momentum as this challenging environment begins to turn in each and one of our markets as we look forward.

Mike Cieplak:

Our next question is from Brian Bittner with Oppenheimer.

Chris Kempczinski:

Sure. Thanks for the question. So there's two ways that we measure value. They're both consumer-based surveys. But one is we get to just the overall brand impression and we survey consumers around the world for their brand impression of how McDonald's does on both value and affordability. Affordability being a more specific thing around typically price points, value being a broader metric that speaks to a number of different things. So it's all survey-based. Like I said, there's part of it, which is looking at brand image. And then we also have a second survey that we do around most recent experience and that gives us a little bit more of a current snapshot of where we are seeing the consumer. And it's been particularly on the most recent visit that we're seeing our leadership gap is shrinking. Our brand image scores around value and affordability. We still are very strong there and we're seeing those gaps hold up. But on the more recent visit that we are seeing some of the pressure, some of the decrease, still leading, but that margin may be shrinking a couple of points in a market, for example. In terms of what gives us confidence about our ability to continue to lead on value, it starts with the fact that for 70 years, we've led on value. And for 70 years, we've led on value because it's what the brand stands for. And frankly, we can buy food and paper at a better price than anybody else. So we have an underlying competitive advantage that we can buy at a lower price than anybody else in our industry. The other thing is the way that the consumer defines value, yes, there's a price point component to it. But the other thing that we see in all of our value work is that there are intangibles that consumers think about around how they define good value or not. Things like, for example, how convenient is the restaurant, things like, for example, how clean the restaurant is, things like how tasty is the food. Those typically are representing maybe 25% to 30% of consumers' value perceptions. So it's not just about hitting low price points. It's also the overall experience you can deliver. And as you've heard us talk about in the past, our restaurant estate is in great shape. Our restaurants are running strong execution, service times are improving around the world. CSAT scores are high. So I think we've got a lot of things from the intangibles that are working in our favor. And as you've heard us talk about on this call, there's other things that we're doing to make sure from a value standpoint and particularly around value platforms and products and price points that where the consumer expects us to be.

Mike Cieplak:

Our next question is from Jake Bartlett with Truist.

Chris Kempczinski:

That's right, Jake. So we obviously exited the second quarter as we lapped the Grimace Birthday Meal and Shake with negative comps. And then we have experienced negative comps here in July. The success, obviously, we've seen is the shift in traffic that we're experiencing. And in my 22 years of experience at McDonald's, traffic and guest counts usually comes before sales and so we've got some exciting promotions up coming here in the second half of the year. And we think that if we can get the traffic moving, we'll see customers obviously willing to spend more. Remember that the customer that's coming in for the $5 meal deal, they are buying more than just the $5 meal deal because we see that average check-up around a little over $10. So that's why we feel strongly about how the $5 meal deal is connecting in the marketplace and specifically with that low end consumer, which has been our opportunity.

Jon Tower:

Great. Thanks for taking the question. Maybe just a similar line of thinking in terms of your expectations for store margins for the balance of the year. Obviously, you've got some good guys with respect to inflation coming off, but I think pricing is also rolling off a little bit, and now it seems like promotional activity is going to be ramping. So how should we anticipate the impact on store margins both in the US business and the IOM segment for the balance of '24 and perhaps into early '25?

Mike Cieplak:

Okay. That concludes our call. Thank you, Chris. Thank you, Ian. Thank you, Joe. Thanks, everyone for joining. Have a great day.

In challenging times, there is significant power in focusing on what's within our control to maximize the impact of our strategic plan:

offering our customers delicious food at unparalleled value and convenience. And it's exactly this approach that will continue to drive growth. McDonald's is best positioned to win in the industry because when we combine our strong system alignment with our fully modernized estate, a globally recognized brand, delicious food on our core menu and the highest level of execution across our 4Ds, no competitor could match us.

Mike Cieplak:

Our first question is from David Tarantino with Baird.

Mike Cieplak:

Our next question is from Brian Harbour with Morgan Stanley.

Christopher Kempczinski:

Sure. Well, I think what we've seen, if I turn to France, as an example, France, I was talking about last quarter as having a number of areas of opportunity and in my prepared remarks, I noted that, that system in France came together very quickly around a national value program that they then put significant marketing support against and they got to north of 80% awareness in a very short period of time that's starting to drive encouraging trends in their business results.

Ian Borden:

And maybe just the only build I'd add to what Chris said, Brian, is, I mean, I think I know, as Chris said, our U.S. leadership team is really -- is working really closely with our owner/operators. I think we have a good understanding of what we need to do, kind of how to do that well. And we're going to move, obviously, as quickly as we can together with owner/operators to kind of address that opportunity. And we've seen that work really well in other markets globally, as Chris was talking about.

Dennis Geiger:

Wondering if you could speak a little bit more to kind of what you're seeing with that U.S. consumer, whether it's by income cohort or spending pattern.

Christopher Kempczinski:

Sure. Well, I think one of the things that we noted when in our opening is that the consumer is certainly being very discriminating in how they spend their dollar. And the inflation that has occurred over the last couple of years in the U.S., I think, has certainly created that environment.

Mike Cieplak:

Our next question is from John Ivankoe with JPMorgan.

Mike Cieplak:

Our next question is from David Palmer with Evercore.

Ian Borden:

David, just maybe to build because I think experience, as you noted, is encompassing of a number of different factors. I mean, I think we're driving better speed of execution consistently across our top markets. We know when we put capabilities in place, as you've heard us talk about previously like Ready on Arrival, which is in place in the U.S. that we're delivering hotter, fresher food as customers arrive to our restaurants and delivering an overall better experience. I think the sharp point and Chris mentioned this is just we've got that opportunity on affordability and we're really laser-focused on making sure we can meet the need that consumers are expressing in the current context. But we feel really good about all the other aspects of the experience and how we're delivering against what customers are expecting.

Eric Gonzalez:

On the pricing discussion, and I appreciate the point that your store-level margins are back to 2019 levels, but perhaps you could speak to the current level of year-over-year pricing and your current inflation expectations for food and labor this year?

Christopher Kempczinski:

Sure. Well, my guess is your question is focused on the U.S. because obviously I could give a different answer depending on where you are in the world. But if I focus just on the U.S., most of the pricing that you see now in the U.S. is carryover pricing. It's not new pricing per se. Most of it again is carryover pricing.

Sara Senatore:

I guess one clarification and then a question. You mentioned that the QSR industry traffic is flat to declining. I guess, I always think of this as an industry where traffic is kind of, at best, flat. So I'm just trying to understand, given you usually have better data than I do, whether that's an inflection point? Or this -- the sort of traffic trends have been more consistent, which it sort of sounds like?

Ian Borden:

It's Ian. Let me take the clarification and then I'll let Chris address your question. So what I said earlier was that industry traffic, and I was talking about across many of our top markets, is flat or we're seeing declining trends.

Christopher Kempczinski:

Yes. And then turning to franchisee and your question about how we support franchisees, you're right that our U.S. franchisees, and I could go through other markets as well, but they're in a strong position. When you look at franchisee cash flow, we are at, I think, our second highest level ever, 2021 being the peak, but we're at very strong franchising cash flows. We're going to see franchisee cash flows increase in Q1.

Mike Cieplak:

Our next question is from Lauren Silberman with Deutsche Bank.

Brian Bittner:

As it relates to the operating margin guidance, mid- to high 40s range is still a very wide range, Ian, and I fully understand there's a lot of moving pieces in the financial model. But I'm curious, with a quarter in the books, if there's an opportunity to perhaps tighten the expectations around that range? As we look towards last year's 47%, is that kind of a good base case target for operating margins this year? Or should we anticipate declines similar to like what we saw in the first quarter?

Andrew Charles:

Chris, looking to learn more about how this national value platform will be different from years past. So if I think, historically, back in 2018, for instance, the $1 $2 $3 was launched. It looked like it was a negative traffic year for the U.S. business just in that regional approach to value had been more successful the brand despite what you said about competitors that are pursuing more national value. So I'm curious what you think is going to make this time different that will lead national value to be more successful, if you can put about the constructs of what that will look like going forward.

Mike Cieplak:

Our next question is from Greg Francfort with Guggenheim.

Christopher Kempczinski:

Sure. I think if you look at the impact of some of the boycotts in a few of our markets, I wouldn't say things are getting any worse there. And then, I think, in some cases you might be able to look and say perhaps it's getting slightly better in some places.

Brian Mullan:

Just a question on CosMc's. I wonder if you could just talk about what some of the early learnings are in your tests in both Illinois and Texas.

Christopher Kempczinski:

Sure, Well I'm going to disappoint you, Brian, in telling that there's not a lot to report. I think what we're still seeing is there's a lot of interest in CosMc's that's sort of curiosity driven. And as a result of that, it's tough to get a sense of sort of what are the true kind of underlying performance expectations.

Jeffrey Bernstein:

Great. Just following up on the U.S. comps. I know you guys have mentioned the lower-income households and the weakness seen there and maybe some trading into food at home. Just wondering if you can maybe compare that to past slowdowns. I feel like the message has always been the benefit of the quick-service segment. Maybe you lose some on the low end, but importantly, you inherit some who trade down from above, like you said, if everyone is looking for value.

Christopher Kempczinski:

Sure. Well, so I think it's tough to go back and compare the data today versus our last time that there was an economic slowdown. I think the dynamic that you described is what we do typically see in the business. I think, as you also know, Jeff, that our business over-indexes with lower income consumer. So there's that consideration.

Ian Borden:

Jeff, maybe just 2 quick hooks to what Chris said. I think across markets, I think what our leadership teams are spending time on talking to the business, talking to our franchisees about is what I'll call making sure we've got a street-fighting mentality in the current context. I mean, clearly, the macro is more difficult. Clearly, everybody is fighting for fewer consumers or consumers that are certainly visiting less frequently. And we've got to make sure we've got that street-fighting mentality to win irregardless of the context around us.

Operator:

This concludes McDonald's Corporation Investor Conference Call. You may now disconnect.

Mike Cieplak:

Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Ian Borden. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website, as are reconciliations of any non-GAAP financial measures mentioned on today's call along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. Please limit yourself to one question and then re-enter the queue for any additional question. Today's conference all is being webcast and is also being recorded for replay via our website. And now, I turn it over to Chris.

Ian Borden:

Thanks, and good morning, everyone. As Chris mentioned just a few minutes ago, core to Accelerating the Arches strategy is putting the customer at the center of every decision we make, acting with agility in any environment to deliver delicious, feel-good moments at an affordable price each and every day. Our quarter four comp sales performance of over 4% in both the U.S. and IOM segments and over 3% globally remains a direct result of exceptional execution against this strategy, making it clear once again that our business is resilient despite ongoing macro pressures and challenges. As a system, we've navigated countless challenging environments since we first opened our doors in 1955. This past quarter was no exception, and our thoughts remain with the families and communities impacted by the war in the Middle East. As Chris and I have both mentioned before, the war has meaningfully impacted our IDL segment performance, resulting in fourth quarter comp sales of less than 1%. Despite this, our business model provides stability in our P&L from the negative sales impact in the region. Among the many strategic advantages of McDonald's are our size, scale, and geographic diversity, translating to incredible resilience as a system. We will continue to stay focused on supporting our people and the local communities in which we operate as we work closely with our [DL] (ph) partners in the region. We are extremely proud of the way our system continues to conistantly show up for customers in every corner of the world, highlighting time and time again the strength of the McDonald's brand when our system comes together. Providing our customers with affordable options has always been core to our brand, and it's even more important as consumers feel pressure on their spending, particularly the lower-income consumer. We continue to listen to our customers by evolving our value offerings, maintaining strong perceptions in value for money and affordability. Canada, for example, maintained their McMuffin and hot coffee pairing this quarter, providing an affordable bundle during a critical day part and helping to drive market share gains in breakfast. The UK followed a similar playbook by expanding their Saver Meal deals to offer smaller bundles during the morning day part for just a few pounds. Only available through our mobile app, this further cemented McDonald's UK as a destination for great food at great value, while contributing to increased loyalty sales. The UK also combined the strength of the McDonald's brand with its proven history of connecting with customers through successful holiday marketing to create Festive Wins, an elevated in-app experience that leaned into the holiday spirit with a fun and interactive calendar promotion. Through our combination of daily deals, compelling prizes, and exclusive merchandise, Festive Wins boosted digital engagement to an all-time high for the market and generated 4 million active monthly customers. And in Australia, the market brought back its 30-days, 30-deals promotion, where customers enjoyed a daily deal available exclusive in the MyMacca's app. From discounts on our most iconic menu items like the Big Mac cheeseburger or our world famous French Fries to unique meal deals, the promotion drove remarkable engagement and contributed to a record number of active loyalty members in the market. Beyond maintaining an affordable price point we're constantly elevating the McDonald's experience enhancing the overall value of proposition of the brand. This was evident as many markets offered monopoly this quarter, leveraging learnings from across the globe to create highly interactive campaigns and once again igniting our fan's love for McDonald's. The Canadian market tapped into global best practices by offering MONOPOLY with a double peel option for the first time this year. By giving customers a second chance to win in the app. The market continued to amplify the digital experience, while maintaining those core qualities of the game that our customers love. The customer excitement was on full display and the market achieved record-setting results generating nearly 700,000 new app customers in just five weeks and driving significant lifts in mobile app sales. In fact, more than 43 million MONOPOLY codes were digitally redeemed during the promotion. That's more than the entire population of Canada. Germany also experienced record-breaking registrations with their MONOPOLY program by combining iconic peel-off game pieces with the ability to scan to win prizes in the mobile app. And for the first time, Germany offered loyalty points as prizes, rewarding our customers and driving additional digital customer frequency. And in France, MONOPOLY drove additional loyalty sales with an interactive redemption experience for our customers. We continue to navigate a difficult operating environment in the market, where results were softened and comp sales were negative for the quarter. Moving forward, we're confident that we have the right leadership team in place with the right experience to reset with our franchisees who I know are committed to restoring our strong foundation. We're acting with a sense of urgency to address our opportunities and maintaining a growth mindset in critical areas like value, core menu and delivery. Our One McDonald's Way approach to marketing extends beyond MONOPOLY as we continue to drive brand strength, building cultural relevance, and connecting with our customers and crew in new and exciting ways. This quarter, we once again tapped into the nostalgic McDonald's experience of enjoying a happy meal as a kid and recreated it for our adult fans, featuring our core menu favorites at the center. Originally launched in the U.S. in 2022, we brought back the campaign to the market in December partnering with artist and creator, Kerwin Frost, and scaling it to 15 additional markets including Canada. The excitement for the return of this event was evident, driving a significant social media engagement across many of our channels. And by encouraging our customers to trade up with a full margin promotion, we feel top line growth with a strong average checklist. In an environment where our customers are looking to familiar favorites those core menu items have never been more relevant or beloved. At the center of our core menu are an iconic portfolio of brands. $17 billion brands in their right, including four different chicken equities that are each $1 billion brands. We continue to stay aggressive on chicken this quarter making further progress towards our ambition of developing a reputation for great chicken. Germany re-hit the McCrispy chicken sandwich with strong results driving a lift in chicken sandwich sales and building additional customer affinity for the product. And the UK built on its market leadership in chicken by extending the McCrispy brand with a limited time offering, the McCrispy Smokehouse, combining new and exciting flavors and ingredients with our core chicken offerings. In China, with slowing macro-economic conditions and consumer confidence near record lows, the market continued to build brand equity by combining our delicious food with culture and community through a collaboration with local streetwear designer Verdict. The campaign not only featured access to exclusive merchandise, but put our delicious chicken at the center and drove incremental traffic into our restaurants by offering customers a discount on a second order. Turning to our P&L, our top line growth drove adjusted earnings per share of $2.95 for the quarter. This is an increase over the prior year of 11% in constant currencies, excluding current year charges of almost $140 million for write-offs of impaired software no longer in use and charges related to our Accelerating the Arches growth strategy. Foreign currency translation positively impacted fourth quarter results by $0.07 per share. For the full year, adjusted operating margin was just over 47%, reflecting higher restaurant margin dollars across all segments. Despite the significant P&L pressures that we've discussed throughout the year, top line results generated $14 billion of restaurant margin for the year, an increase of about 10% in constant currency. Lastly, before I hand it back over to Chris, I want to touch briefly on our capital expenditures and free cash flow profile. Our CapEx spend for the year was approximately $2.4 billion, with more than half invested in new unit development across our US and IOM segments. After reinvesting in the business our free cash flow conversion was in the 90% range for the year. Now with that, let me turn it back over to Chris.

Ian Borden:

Thanks, Chris. As we've discussed, we continue to operate in a challenging environment with varying levels of headwinds across our markets. Looking ahead to this year, we anticipate these headwinds will continue as the current macro dynamics continue to weigh on both our consumers and our business results along with the war in the Middle East. As we navigate these ongoing challenges, continuing to execute at the highest level with a laser focus towards growing market share will be critical. It's clear that we've had exceptional success over the last four years with strong broad-based momentum and global comp sales of over 30% when compared to 2019. It's truly remarkable. But as we’ve mentioned before, we anticipate 2024 comp sales growth will continue to moderate as we return to a more normalized level of growth with expectations closer to historical averages of between 3% and 4% in our U.S. and IOM segments. And in IDL, we do not expect to see meaningful improvement until there is a resolution in the Middle East. We expect our net restaurant expansion in 2024 along with restaurants we opened in 2023 will contribute nearly 2% to system wide sales growth as we begin to accelerate our new unit development and make progress against our target of 50,000 restaurants by 2027. With expectations of moderating sales growth and ongoing inflationary headwinds, we expect our company operated margin percent will remain pressured in the near term and we expect the full year 2024 company operated margin percent will be relatively in line with 2023. Turning to G&A, the financial strength of our system enables us to invest in areas that will drive long term efficiencies for our people and for our stakeholders. We expect 2024 G&A as a percentage of system wide sales to be about 2.2%, which reflects elevated investments in technology, digital and global business services or GBS. Through these investments we'll look to run the business more efficiently over time, and ultimately free up more resource to continue to drive long-term growth. Despite headwinds throughout the P&L, we anticipate an operating margin of mid to high 40% in 2024, driven primarily by top-line growth and franchise margin performance. We're projecting interest expense this year to increase between 9% and 11% compared to 2023 due to higher average debt balances and interest rates and we expect our effective tax rate for the year to be between 20% and 22%. Transitioning to capital expenditures we plan to spend between $2.5 billion and $2.7 billion this year, more than half of which will be dedicated to new unit openings across our U.S. and IOM segments. Globally, we plan to open more than 2,100 restaurants this year, with about 500 of these openings in our U.S. and IOM segments, where we continue to see strong returns. We also expect to open more than 1,600 restaurants in our IDL segment this year, including about 1,000 in China, where we recently completed the acquisition of Carlyle's 28% stake in McDonald's China. We're excited to have increased our minority ownership to 48% in our second largest and fastest growing market and believe it will enable us to further benefit from the market's long-term potential. Overall, we anticipate about 4% unit growth, driven by more than 1,600 net restaurant additions in 2024. And finally, we expect to generate strong cash flow in 2024 with free cash flow conversion in the 90% range. Going forward, our capital allocation priorities remain unchanged. First, investing in the business to drive growth. This includes both capital expenditures, as well as increased cash investments in technology, digital, and GBS. Second, returning all remaining free cashflow through dividends and share buybacks over time. While the macro environment remains challenging, we believe that our Accelerating the Arches strategy is the right playbook and we continue to maximize our [MC&D] (ph) growth pillars to drive strong results. We have confidence that our competitive strengths and our ability to continue to evolve to stay ahead of the customer positions us to succeed in any economic environment, delivering long-term growth for our system and our shareholders. Now let me turn it back over to Chris to close.

Operator:

Thank you. [Operator Instructions]

David Palmer:

Thanks. Probably just a two-parter. Quickly, do you think that there's any impact from boycotts to IOM results anywhere, even if they're slight? And then separately, the multi-year trends this year have been stable for a lot of the year, basically since the second quarter. I'm really thinking the U.S. very strong compared -- very strong multi-year trend. So there's no shame in these remaining stable. I'm just wondering if you think that there is a reason for those trends to reaccelerate or there's a lesson in that, maybe your best play because, obviously, we're dealing through some very noisy months here with weather and whatnot over the fourth quarter and here in January. So I'm wondering how you're viewing that with the goal perhaps being that multi-year trend can reaccelerate in 2024 and your best play to make that happen. Thank you.

Mike Cieplak:

Our next question is from John Ivankoe with JPMorgan.

Chris Kempczinski:

Sure, thanks for the question. You're right in pointing out France for us has been historically one of our best markets. We have some of our highest customer satisfaction in that market. We have some of our highest franchising cash flows in that market. We're not happy with our performance in France right now. And if I were to isolate two areas that we are focused on to improve in France, the first is, we did get offsides on value there. The team has done a very nice job in pivoting and just put in place a new value program there that we're seeing great early success with that. But certainly, that was a reaction and we don't want to see that. And then second, we continue to have operations opportunities in France and that's something that we've been having a lot of engagement on with our franchisees. So as I think about IOM, certainly lessons there. But on the positive side, France is certainly our most pressured market right now in France -- or in IOM, but I also feel very good that we're going to get that business back on track and continue to have the performance that we've become accustomed to in that market over many, many years.

Mike Cieplak:

Our next question is from Jeff Bernstein with Barclays.

Ian Borden:

Good morning, Jeff. It's Ian. So let me take that. I think as we talked about on the comps in our opening remarks, I think -- and we've been talking about it, as you know, pretty consistently over the last couple of quarters, as inflation levels have come down and, obviously, our pricing broadly is coming down in line with kind of inflation getting back to what I'll call more normal levels, I think that's why we talk about comps kind of getting back to more of that historical norm range of 3% to 4% in both the U.S. and IOM this year. I mean, I think the only texture I'd give you there is, we had a slower start to the year. I think there are a couple of important reasons for that. Firstly, we had a really strong start to 2023. So obviously, we're lapping against that. And then, I think you'll remember a year ago we talked about just the abnormally mild weather that we were dealing with as a tailwind benefit in beginning of 2023 in both North America and Europe, and so we're obviously working against that as well. I think if I was to think about the year, I think about the back half of the year probably being slightly stronger -- slightly stronger than probably the front half. Just again, we had an incredibly strong first two quarters of 2023 that we're working against. And I think some of the macro factors that were -- are going to impact us in 2024 could, I think, be slightly easing towards the back half of this year versus the front half. On op margin, look, I mean if you go back to 2019, I think we've had a pretty strong demonstration of what we will continue to talk about, which is, over time, certainly believe we continue to be able to drive leverage and op margin as we get the strong top line growth. If you go back to 2019, we were kind of in that 44-ish percent range. We ended last year at just over 47%. I think that's a pretty strong proof point of our ability to continue to grow margins as we look forward on a percentage basis. I think obviously, as Chris talked about 2024, we've got some headwinds to work through, but feel really confident about our ability to continue to grow margins over time.

David Tarantino:

Hi. Good morning. My question is on the impacts you're seeing in the Middle East. I guess two questions. One, could you help to quantify your estimate on how much that impacted your sales in the fourth quarter? And then secondly, could you comment on the health of your franchisees in the areas that have been most impacted and whether you think some temporary assistance will be needed as you move through 2024?

Ian Borden:

Yes. Thanks, Chris. So maybe just a couple of builds to that. I mean, David, you know that, as I've talked about before, I think we've got an incredibly resilient business model. Obviously, if you look back over the last several years, we've had to work through a number of different external challenges, and I think the geographic breadth, the size and scale of our business and our financial strength means we're in a position of strength to kind of work through any of these challenges, including the one that we're currently facing in the Middle East with the war that's going on. In regards to kind of support for franchisees or DL partners, as I've talked about before, I mean, providing support is part of our business model. It's obviously how we work together with our franchisees when conditions outside of their control warrant support. But when we do that, it's always, as you know, targeted and temporary and designed, obviously, to go to owner-operators or partners who are most in need. I think as Chris said, we've got some incredibly strong partners in the Middle East, the majority of those partners have been with us for 20 years or more. We've worked through a variety of challenges over the years. And I think we'll continue to be focused on supporting our team members in the region, working with the communities that we do business in and working closely with the DL partners to get through this together. And I'm very, very confident that we'll do that.

Eric Gonzalez:

Hi. Thanks for the question. I'm wondering maybe if you could comment on China specifically. I know it's not a huge part of your profit today, but you do have some big growth aspirations in that country. So if you could comment on some of the macro challenges that you're seeing and how they're impacting results in that country? And maybe talk about how the brand is positioned to gain share in that market. Thanks.

Ian Borden:

I might just add on a couple of things to Chris. I mean first, I would just acknowledge the team and our team in China, we opened just over 1,000 restaurants in 2023, which was an all-time high for us. And as Chris mentioned, as we talked about in our remarks, we completed the acquisition of the additional 28% to take our stake to 48% at the end of January. And I think we continue to remain really optimistic about the long-term opportunity there and our ability to have an increased stake in that long-term opportunity with that additional stake acquisition. And we're looking forward to getting that market to 10,000 restaurants by end of 2028, which is, I think, a really important milestone as we look forward.

Brian Harbour:

Yes. Thank you. Good morning. Maybe I'll just ask about the U.S. Are you willing to say kind of where pricing was in the fourth quarter and also into the first quarter? And also any color you can provide by daypart, I think we've heard some other companies talking more about late night or if you perhaps have any comments on breakfast recently?

Ian Borden:

Yes. You, I think, covered all the bases, Chris, but maybe just a couple of builds. I mean, I think we did see overall pricing for the year just around 10%. But as Chris noted, in the fourth quarter that level of pricing came down, obviously, in line with inflation and was in that high single-digit range. I mean, I think we're continuing to see pretty consistent flow through with pricing, which I think is really important because it goes back to what I've spoken about before with just the tools and capabilities that we've put in place to make sure that when we are taking pricing, we're doing that in the most effective way possible. Obviously, as we head into 2024, knowing inflation has come down a fair bit from its peak. I think, as I said earlier, I think our pricing we certainly expect will come down roughly in line with that as we work through the year. We certainly know consumers are more weary or weary of pricing, and we're going to continue to be consumer led in our pricing decisions as we kind of look forward to 2024 and knowing that the environment will continue to be competitive. We'll be thoughtful together with our franchisees, obviously, who make those decisions in their own restaurants as we look forward.

Dennis Geiger:

Great. Thanks you. Chris, wanted to just follow up on some of the color you just gave on the U.S. consumer and then some of that lower-income consumer, I think, managing the check a little bit. Just curious if you could elaborate anything more there on the consumer in the U.S. And is that check management largely been consistent with what you've seen in recent quarters? Or are you seeing any of the incidents or intensity there, pick up some? And ultimately, what does that mean as you kind of think about promotions and the evolving value options that you talk about in the U.S. this year. Thank you.

Mike Cieplak:

Our next question is from Sara Senatore with Bank of America.

Ian Borden:

Sara, it's Ian. Let me take that one. Well, look, I think you've heard me talk about this before. But the way we think about G&A is kind of in two broad buckets. I mean, firstly, we want to continue to work to run our business as efficiently as we can. We know we've got some opportunities in that area. It's why I talked about in our upfront remarks that we're going to continue to invest in the areas where we think we have strategic opportunities to drive greater efficiency. A lot of that work is going to be led by the Global Business Services organization that we stood up and is driving these transformation efforts in area like HR, finance, tech and getting after spend opportunities in areas like indirect sourcing. So part of what we're focused on is continuing to make those strategic investments so that we can continue to drive greater efficiency in how we operate, which, if you go back to the principles of kind of accelerating the organization, which was really what that whole initiative was designed around was how do we get faster, how do we get more innovative and how do we get more efficient in how we're running the business. The second kind of broad area of G&A spend is obviously investing in the areas that we feel like we've got opportunity to drive growth and strong returns for the business. And part of running the business more efficiently is to make sure we have the resources available to invest behind the opportunities that we believe exist, and we continue to believe we've got significant opportunities. I think we've talked previously to the examples of kind of our tech platforms and digital capabilities where we continue to make significant investment. Those, I think, are really strong examples of the type of growth when you look at the growth mix that are coming from those investments and obviously continuing to drive strong returns for us, and we're going to continue, obviously, to invest behind those growth opportunity areas that we have. And so I think that's -- over time, as you kind of look forward, I do believe we'll continue to be able to gain leverage in G&A as a percentage of sales. But I think certainly in the short term, our focus is going to be in those areas that I highlighted.

Christopher Carril:

Thanks. Good morning. So, just on McOpCo margins, I believe you mentioned you expect them to be relatively in line this year versus 2023. So can you expand maybe on some of the puts and takes around this outlook? Maybe any detail on U.S. versus IOM, your cost inflation outlook? And maybe finally, if and where you see opportunity for company margin upside? Thanks.

Mike Cieplak:

We have time for one more question from Lauren Silberman with Deutsche Bank.

Chris Kempczinski:

Sure. Well, as you know, we don't give traffic guidance. So we won't get into kind of a specific what do we expect to see in traffic. But I think it's fair to say that the success in this industry is always about having balance and you need to have both traffic growth and you need to have price growth. That's the long-term formula for success. So that's kind of what we use as our North Star. I think we're set up really well to have that kind of balance. As I look at our business around the world, our brand is in great shape. We are seeing some of our highest customer satisfaction scores around the world. We're seeing our operations in almost every single country around the world get better as we execute our Performance and Customer Excellence program or PACE, as you know it. I think globally, in Q4, we saw service times improve by 10 seconds. And we've got very good alignment with our franchisees. In most of our big markets, we're seeing healthy franchising cash flows. In the U.S., franchising cash flows were up roughly $35,000 last year despite all the price headwinds. So I think we're set up well as a business to have that balance right as part of our long-term focus.

Operator:

This concludes McDonald's Corporation Investor Call. You may now disconnect, and have a great day.

Mike Cieplak:

Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Ian Borden. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website, as are reconciliations of any non-GAAP financial measures mentioned on today's call along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. [Operator Instructions] Just one other piece of housekeeping today before I turn it over to Chris. As many of you are aware, we'll host an investor update on our McDonald's headquarters on Wednesday, December 6, where Chris and Ian will be joined by members of our senior leadership team to provide an update on our strategic priorities followed by a Q&A session. I ask that you please be mindful of this with your questions on the call today and focus questions on our quarterly results in the current year. We'll spend more time on 2024 and our strategic priorities in December with plenty of time for Q&A on that day. Details for the event and how to tune in can be found on the Investor Events section of our website. 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.

Ian Borden:

Thanks, Chris, and good morning. Our third quarter results yet again demonstrate strong restaurant-level execution across our Accelerating the Arches growth pillars with significant increases in customer satisfaction across most of our major markets. Our restaurants are offering customers an affordable destination every day for delicious food and great service, driving nearly 9% global comp sales for the quarter. Thanks to the tireless efforts of our entire McDonald's system, the McDonald's brand remains stronger than ever. The resilience of our business is rooted in our ability to adapt to any environment. As expected, challenging macro dynamics continued this quarter and consumer spending remains pressured. And while top line growth has continued to moderate in line with our expectations, we're outperforming the industry, and we remain the leader in value and affordability perception across most of our largest markets. Providing affordable options for our customers has always been core to McDonald's success, and continuing to evolve these options as customer needs change remains critical. As Chris mentioned a few minutes ago, it's clear that our customers continue to seek reasonably priced meals as rising costs persist and our markets around the world continue to respond. Germany delivered its highest-ever monthly sales performance by focusing on the evolving needs of our customers amid increasing macro pressures. The market launched a [Your Remix, Your Deal] promotion exclusively in the app allowing customers to build their own small bundles. Beyond affordability, this promotion offered the personalization our customers are looking for and significantly increased customer engagement, which was evident in an additional 1 million 90-day active loyalty members in the third quarter. This approach of smaller, more affordable bundles featuring our core menu favorites was first highlighted earlier this year in Germany and the U.K. with the launch of new permanent value offerings and has since been adapted locally in other markets. In Canada, a highly competitive breakfast market, the team offered customers a more affordable option with the McMuffin and hot coffee pairing. By simply featuring our core products, at a compelling price point during a critical day part, we drove market share gains in both breakfast and coffee, demonstrating how providing customers, what they want at great value always resonates. The D123 Everyday Value Menu in the U.S. takes a similar approach to affordable bundles with nationally promoted products at locally relevant price points. The platform features products such as the McDouble or four-piece McNuggets. With a bundle offered at each day part, customers can visit McDonald's for an affordable meal no matter the time of day. And while prices have evolved over time, the featured products have remained the same, providing customers with their familiar favorites from our core menu. This consistency in our value offerings means customers know exactly what to expect every time they visit us, driving our strong position as the affordability leader in the market. And in China, with slowing macroeconomic conditions and historically low consumer sentiment, the market relaunched a campaign with small price-pointed bundles featuring our hot delicious burgers. Designed to engage our Gen Z consumers, this promotion drove meaningful customer demand and increased beef share in the market. Beyond the price of our food, we're continuing to provide customers with new experiences, further elevating their value perceptions. Many markets are using our digital app to drive engagement and increase loyalty participation with our fans, through exclusive activations. This was on display through recent MONOPOLY campaigns in several markets. Starting with Australia where MONOPOLY contributed to record digital sales in the market for the quarter, fueled by higher app registrations and increased game piece redemptions. And in the UK, MONOPOLY returned for the 17th consecutive year, featuring a double-peel option encouraging customers to scan their game pieces into the app. MONOPOLY once again ignited our fans' love of the brand and delivered higher levels of app engagement than ever before. Spain had similar success with their MONOPOLY promotion over the summer. Now leveraging the same app features as the U.K., the promotion delivered significant increases in both app downloads and registrations. This is another great example of sharing best bets across our system to fuel our digital growth ambitions. In fact, in our top six markets, digital sales represented more than 40% of system-wide sales, or nearly $9 billion for the third quarter. We now have over 57 million 90-day active members across these top markets, and our relationship with them continues to grow. We're learning when they visit, how they visit, and what they buy, with more and more of our sales coming through identified channels than ever before. By continuing to elevate the McDonald's digital experience, our customers feel more connected to the brand, driving those incremental visits that we believe would otherwise go uncaptured. And it gives us more ways to reunite with customers who haven't visited us in a while. Beyond MONOPOLY, the brand was at the center of our marketing, yet again this quarter, as we leveraged a One McDonald's Way approach to celebrating the FIFA Women's World Cup in July. With record-breaking viewership and fan engagement, our brand was part of a cultural moment, and we continued to elevate our creative excellence through a scalable, culturally relevant campaign. This came to life through global activations across 28 markets, tapping into local fan excitement, and was supported by a fully integrated social, digital streaming and content strategy. Even more exciting, we celebrated our restaurant teams, by sending crew members who go above and beyond to attend the live matches. Across the as featured in campaign, MONOPOLY activation and the FIFA Women's World Cup, I can't think of another time, when we better utilized our scale to leverage great marketing ideas across our system, which is a tangible demonstration of our accelerating the organization principles in practice. Our food is at the heart of our customer's relationship with the brand. This is why we're also taking a One McDonald's Way approach to our menu, further fueling our chicken ambition by scaling core chicken equities. Our McCrispy Chicken Sandwich continues to be an important driver of chicken share growth, having first launched in 2022 and now a $1 billion brand across multiple markets. McCrispy was the most recently launched in Australia this quarter, where early results indicate a lift to chicken category sales while bringing a renewed focus to our chicken portfolio. The U.K. continued to drive excitement in chicken by creating fresh takes on our new global favorites. This past quarter, the market featured a new line extension, McCrispy Deluxe, offered alongside the McCrispy and the McSpicy in the market. By combining strong execution of our core menu offerings, with new flavor news and limited additional complexity, we continue to strengthen our chicken credibility with customers and maintain our market share leadership in the chicken category. Across each of our Accelerating the Arches growth pillars, it is clear that our playbook is working. Thanks to the resilience of our system and the strong execution across the M, Cs and Ds, we're staying relevant to our customers as their needs continue to change. Turning to the P&L. Our strong top line performance drove adjusted earnings per share of $3.19 for the quarter. This is an increase over the prior year of 16% in constant currencies, excluding current year charges primarily related to accelerating the organization restructuring costs. Our company-operated margin performance remains pressured by continued cost inflation, in line with our expectations. We expect these macro headwinds will continue in the fourth quarter. Strong franchise sales performance continues to be partially offset by targeted and temporary franchisee assistance, provided mainly to our European franchisees where elevated costs continue to pressure restaurant cash flows. We're still anticipating that these efforts will have an impact of $100 million to $150 million on our full year results. Total restaurant margin dollars grew by about $335 million in constant currencies or about 10% for the quarter. G&A for the quarter increased 1% in constant currency, and our adjusted effective tax rate for the quarter was nearly 21%. Adjusted year-to-date operating margin is 47.5%, driven by our strong top line growth. For the full year, we now expect adjusted operating margin to be about 47%, including an expected property gain in other operating income in the fourth quarter, and G&A of about 2.2% of system-wide sales. Foreign currency translation positively impacted third quarter results by about $0.08 per share with a slight tailwind expected - for the full year. As I wrap up, I want to touch on the recent dividend increase approved by our Board of Directors in early October. This marks our second consecutive annual increase of 10%, and we're extremely proud of our track record of delivering meaningful cash return to shareholders, marked by our 47th consecutive dividend increase. This demonstrates our confidence in the Accelerating the Arches strategy and our commitment to a long-term growth for the system and our shareholders. I look forward to sharing more with you at our investor update in December. And with that, I'm going to turn it back over to Chris.

Operator:

[Operator Instructions]

John Ivankoe:

Hi. Thank you very much. Obviously, value, a big focus on this call. And I wanted to ask, I guess, the focus on value in the context of recent average ticket increases for you and really across the sector, much of which driven by premiumization, customization, larger sizes, what have you, in other words, pricing increases in average ticket beyond just that of price. So as we talk about value, what does that mean to future price increases? And is there an intention to do value a particular bundled value to where the average ticket can be protected? Or would you sacrifice some average ticket in order to get future market share gains and presumably transaction gains? Thank you.

Mike Cieplak:

Next question is from David Palmer with Evercore.

Chris Kempczinski:

Yes. Thanks, David. I'll start at a high level and then hand it over to Ian to give you any more texture on that. But at a high level, we continue to be very pleased with how our IOM business is performing. We're seeing, whether you look on the quarter, the year or a four year stack, this business is continuing to perform very well overall. We're also seeing that there's great execution. We're seeing customer satisfaction scores increasing in almost all of our major IOM markets. So overall, we feel good. In Europe and, in particular, we've certainly seen more inflation in Europe. And so the team there has had to be probably even more laser-focused on making sure that we deliver great value. But the business overall, not seeing any big change quarter-to-quarter in terms of how it's performing, but I'll give it over to Ian to give you some more texture.

Mike Cieplak:

Our next question is from David Tarantino with Baird.

Ian Borden:

Good morning, David. Ian, obviously. So let me try and give you some color there. I mean I think as we said in our guidance at the beginning of the year, we expected G&A as a percentage of sales to be in the range of 2.2 to 2.3. And obviously, we've updated that to say more about 2.2. So it's come down marginally. I think obviously, we've had some really strong top line results this year. So obviously, that's a partial element of the benefits. And I think the other part is just timing of spend. I mean we are kind of a back half weighted spend cycle within the business. I think fourth quarter, more pronounced from a quarterly standpoint. So we do expect to hire level of spending as we get into the fourth quarter. But I think just there's a timing element of just kind of how the investments that we're making, I talked about kind of two areas on our last quarterly call where we continue to invest. One is behind technology and digital, which we believe are - continue to provide strong opportunities for growth, and we're going to continue to invest when we have those opportunities. I think we've got a pretty strong track record in how those investments are delivering for the business. The other area is around our global business service organization, which we stood up earlier this year as part of Accelerating the Organization. We spent a lot of time over the last six months or so looking at what we believe the opportunities are for the business there. And I think we've got good line of sight into some things that we think can drive kind of sustainable efficiencies from an operational perspective as we go forward. And we're certainly investing now behind some of those areas of opportunities. So what I would call it a little bit more of kind of the timing of spend around those initiatives and more of a focus in the first half of the year on kind of bringing our ATO organizational changes to life.

Jeffrey Bernstein:

Great. Thank you very much. Just focused on the U.S. consumer, I'm just wondering if you talk about any change in behavior, whether there was a change in trend through the quarter or more recently into the fourth quarter. I was wondering if there's pressure in some areas, maybe benefit from trade down and others. Otherwise, you mentioned in the release, I think that the U.S. comp was driven by strategic menu pricing, no mention of the traffic. So, I'm just wondering if you can maybe give a breakdown of that U.S. comp components, whether the lack of traffic growth is a concern looking at '24. How you think about those components within that U.S. comp? Thank you.

Ian Borden:

Maybe just - I'll just add a bit of a build to Chris' commentary, which certainly hit the headlines, but just maybe, because I think the texture is really important in the quarter. I mean I think the headline would be on an overall basis that we maintained our QSR traffic market share in the quarter. I think we continue to see really strong share gains in both beef and chicken being the kind of two key elements of the category. We continue to gain share with both the middle- and higher-income consumers, and that speaks a little bit, Jeff, to what you called out, which is that we're certainly partly benefiting from the trade down from more expensive alternatives within those kind of income or segment levels. We held share with the lower-income consumer in a pretty competitive marketplace. But I think the headline, is that the comparable, as Chris talked about, industry traffic was down in the quarter as it has been for the last couple of quarters. And so, our comparable traffic was marginally down as a result of that. And I think just - I think I just would want to highlight, I think, the strength of our top line performance overall through our comp sales, which remain industry-leading. As you've seen and what we've announced for this quarter. And I think that's a combination of our strategic strengths coming together, which we've been working on over the last couple of years. We've got a fully modernized estate. We've got a digital platform that's coming to life at scale that's allowing us to really interact with our consumers on a much more individual basis. Our marketing execution, which I think has really been elevated and is resonating in a more culturally relevant way with our consumers. And then, we just call out, I think, and this is really specific to the U.S. business, the outstanding execution our whole system is delivering. We know, we're delivering a better experience for customers. We know we're better staffed. And as Chris talked about earlier, we know we've got a leading position on value for money and affordability. And so, I think as a result of all of that, we certainly believe we continue to be in an advantaged position as we continue to kind of lean into these macro headwinds that we're obviously having to navigate.

Eric Gonzalez:

Hi. And thanks for the comment on traffic. And I'm wondering if you could expand on the pricing discussion. I think last quarter, you said you expected pricing to be in the double-digits for the year. So maybe you can comment on what that might imply for the fourth quarter. And perhaps you can give us an early look on what we should expect for 2024, whether that - would be that you expect price to be a little bit more normalized than what we've seen in the last few years? Thanks.

Mike Cieplak:

Our next question is from Dennis Geiger with UBS.

Chris Kempczinski:

Great. Well, thanks for the question. I guess I'd start with I look forward to seeing you at December 6, this we'll get into a lot more in that about how we see the outlook for next year and some of the specific things that, we've got planned to continue to drive the business. But I would say, broadly, we think our strategy - our Accelerating the Arches strategy still has a lot of runway in it. Each of the growth pillars, the marketing core menu and 4Ds, we think that there's still a lot more that we can do underneath each of those. Again, we'll be more specific about what that is on December 6. And then if you think about more broadly, what's happening right now is this business is starting to amass on the digital side some pretty significant scale. And the scale that we're building on the digital side opens up a lot of opportunities that we think, quite honestly, are going to be difficult for our competitors to match. And so, when you take our physical presence, having more restaurants in the U.S. than anyone else, our digital presence, which is bigger than anybody else in the U.S., along with great execution, which we're seeing with strong consumer satisfaction scores, our service times are down roughly nine seconds in the quarter. They're down slightly less than that, but still down, I think, about seven seconds on the full year, we're in a really strong position in the U.S. to continue the growth that we've got.

Chris Kempczinski:

Yes, just one thing, Ian said that triggered as well, I thought, which is being able to drive the business, we need our franchisees to be in a strong position. And franchisee cash flow in the U.S. is up this year. We're up in the quarter. So, I think that just goes to sentiment. It's much more challenging, as you would imagine, to continue to drive the business if the franchisees are not seeing it flow through. And fortunately for us, we're seeing good flow-through for our franchisees despite having to absorb quite a bit of inflation both on the food and paper side as well as on the labor side. So that's another thing that gives us confidence as we head into the New Year.

Lauren Silberman:

Thank you. Appreciate it. So, I just want to follow-up on the commentary regarding the competitive environment. Can you talk about what you're seeing in the promotional environment? Any uptick in discounting across the industry - and how might your approach to value change if the consumer gets weaker? And then I guess related, any color on same-store sales across different dayparts or any competitive - greater competitive activity in certain dayparts? Thank you.

Ian Borden:

Good morning, Lauren, I just - maybe on the build on the dayparts, and again, I'm using the U.S. as the specific context is we've had pretty strong and consistent performance across all the dayparts in the business. So I don't think there's a 1 day part that I would call out where we aren't seeing strong performance. I do think, as we've seen kind of, I'll call it, a bit of a more return to work and return to office routine, there's probably a little bit more pressure in the breakfast daypart, just as some of those competitors who've been further behind in recovery, are kind of coming to life in that category. But again, we're continuing to see good performance there. And maybe the only other build, and this was an international lens on value, is you've heard us speak to some of the, I would call it, adjustments that some of our international markets have made to value. Maybe one I would just call out is in Canada, where the team there put a morning offer in place, which was a McMuffin and coffee pairing breakfast in Canada, is a pretty important daypart. Coffee is a pretty important part of that daypart. And so, I think our markets are going to continue to front footed and proactively make sure that we're adjusting value. So it's relevant to what our consumers are looking for as the context continues to evolve. And value, as Chris talked about, is a strategic part of our fundamental business model, but we are obviously going to continue to listen to our customers and make sure we're delivering what they need and what they expect from us.

Brian Bittner:

Thanks. Good morning. As it relates to the U.S. company-owned restaurant margins, they expanded this quarter for the first time in two years, albeit modestly, but a good indication of maybe your franchise store level margins as well. What was the biggest driver of this? Was it simply easing food cost inflation against still strong pricing? Or was there anything else to point to? And could this be a potential turning point for restaurant margin stabilization in the U.S. or maybe even perhaps some expansion moving forward?

Chris Kempczinski:

The other thing that I would just add on the [Macacos] side, but it's also something that we've seen with franchisees is they're experiencing these gains even though roster sizes are growing. And I think part of the benefit that we're seeing is turnover is down. So, we're - even as we're expanding roster sizes in our Macacos restaurants, the team has done a really nice job, and we're seeing turnover levels down pretty significantly from prior year. And all of that has benefits of what - associated with it, of course, you have less training, but you also have improved execution. So, I think that's one thing that we're seeing that also is to extend, out to franchisees, franchisees, roster sizes are up versus last year. Applications are up significantly. So, I do think to this question about is something turning, on the labor side in the U.S. We're definitely seeing a turn there to the positive in terms, of having our restaurants fully staffed and having lower turnover as a result of that.

Brian Harbour:

Yes. Thank you. Good morning. You commented sort of on the U.S. side, but just within IOM and IDL same-store sales, wondering if you had any comments on kind of the check versus traffic component. And then also just within the U.S., I was curious if you had a sense for roughly how much your California franchisees will be seeing wages go up and how much pricing that might presumably take to offset that?

Ian Borden:

Yes. Good morning, Brian. So let me try and give you a bit of texture on kind of IOM and IDL, I mean I think you've obviously seen the headline comp numbers for the quarter, which I think are obviously really strong. And I would say that the consistency is the broad based and I think consistency of the momentum we're seeing, which just goes back to what we've talked about earlier today, which is our Accelerating the Arches strategy continues to really deliver pretty consistent results across the business. I mean, of course, when there are 100-plus markets, there are always a couple of markets that are maybe dealing with more kind of headwinds than others. I mean, I think in IOM, France would certainly be one of those markets. We spoke a little bit about that on the quarter two call. But I think if you look at the IEO sector in France still hasn't recovered back to where it was in 2019. I mean we have generally been taking share in the marketplace, but I think the consumer sentiment, with everything that's going on, which is consistent, obviously, across all markets, higher inflation, higher interest rates. And then I think in France, as we worked through the summer, you saw a level of social unrest. You saw some kind of violent activity coming out of that social unrest. I think that's all kind of dampened consumer demand. So I think our team in France is really, really focused on having good clarity on what we need to continue to do, and we're going to continue to deliver even in that more difficult environment. But broadly speaking, consistently really strong and consistent performance across the business that we're very, very pleased with.

Jon Tower:

Great. Thanks for taking the question. First clarification and then a question. Ian, could you provide potential range of the size of the property gain in the fourth quarter? And then second, I'm just curious to gain your thoughts on the recent NLRB ruling that's to be implemented, I believe, in December. And how you think this might influence your own business or that of the industry in the years ahead?

Chris Kempczinski:

Yes. And on the NLRB ruling, I mean, as you would expect, we strongly object to the last week's NLRB ruling. We think it's going to undermine small business ownership in the U.S. If you think about it, the franchise business model, it's really a great American innovation. It's created wealth for thousands, particularly underrepresent minorities and women. And this is something we think that needs to be supported, not attacked. And so in our mind, this is yet another example of agency overreach coming out of D.C. And we expect it's going to be contested. It's going to be contested in the courts. It's going to be contested in Congress. In fact, you may have seen already the Senate has, as indicated, they're going to seek to pass the continuing resolution, which is an opposition to this ruling. So McDonald's certainly opposes it. We're going to support others who oppose it. How it all plays out in time, I think it's tough to say, but this is something that's going to affect everybody. And as we've shown throughout time, so long as there's a level playing field and McDonald's is on the same level as everybody else, we tend to win. And so even if this NLRB ruling were to pass, it's going to affect the industry at large, and we think we're better positioned than anybody else to withstand it.

Andrew Barish:

Good morning. Just shifting gears to IOM for a moment. Can you give us roughly how much of the $100 million to $150 million in subsidies has shown up so far? And then on the company-owned margin question, but related to IOM, I mean, this used to be 20% margin business, obviously, more pricing in the business today. Any thoughts longer term about kind of realizing back to 20% restaurant level margins in this segment?

Mike Cieplak:

We have time for one more question, Brian Mullan with Piper Sandler.

Chris Kempczinski:

So you're right, we will talk a little bit more about this actually a lot more about this when we get together on December 6. We're continuing to follow and assess the test that we have down in Texas. I think you can say that certainly there is going to be an opportunity for us to have restaurants that are smaller footprint that don't have a dining room. You will see some of those. But I think from a development standpoint, the vast majority of the development opportunity that we see is for our traditional restaurants. We think that there's still quite a bit of opportunity for traditional restaurants. That will be the bulk of it. You might see, again, something around the edges, which is some of the smaller formats, but the big idea is traditional restaurants that we'll talk more about on December 6.

Operator:

This concludes McDonald's Corporation Investor Call. You may now disconnect, and have a great day.

Mike Cieplak:

Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Ian Borden. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our Website as are reconciliations of any non-GAAP financial measures mentioned on today's call along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. Please limit yourself to one question and then reenter the queue for any additional questions. Today's conference call is being webcast and is also being recorded for replay via our Web site. And now I'll turn it over to Chris.

Ian Borden:

Thanks, Chris, and good morning, everyone. As Chris mentioned, the second quarter was yet another demonstration of consistently strong performance, guided by our Accelerating the Arches strategy and fueled by our outstanding execution. We're delivering delicious feel good moments to our customers in new and exciting ways by doubling down on our creative excellence and highlighting our core menu, all with the value and convenience our customers expect. Our performance speaks for itself and is a testament to the passion and dedication of our entire McDonald's system. With global comparable sales of 11.7% and consistent performance across our segments, it's clear that the McDonald's brand has never been stronger. In fact, the brand was at the center this quarter as we engage with customers in authentic and culturally relevant ways with campaigns rooted in consumer insights. As Chris touched on a few minutes ago, we took the nostalgic experience of celebrating birthdays at McDonald's and repackaged it for a new generation with none other than Grimace at the center. It quickly became one of our most socially engaging campaigns of all time with millions of reactions on our social media posts, a true demonstration of how the power of our brand emerges in organic and creative ways in our fans. It contributed to the strong double digit comparable sales growth for the quarter in the US. The passion for the brand was also evident in Italy with the launch of a truly unique creative platform. It celebrated the most loved and best selling beef burger in the market by asking customers, what would you do for a crispy McBacon? The answer came in the form of customers getting tattoos of their favorite McDonald's sandwich, driving brand affinity and elevating share gains. I've certainly seen a lot in my 30 years at McDonald's but this was a new one for me. Truly remarkable. As I’ve mentioned before, our chicken equities remain at the core of our growth strategy. The UK celebrated the 40th anniversary of another fan favorite, the Chicken McNuggets, by offering limited time sauces to reconnect with the Gen Z consumer. This was coupled with compelling media that showcased the fan truth that sharing your nuggets isn't guaranteed, even if your best friends. China also highlighted the Chicken McNuggets anniversary in a creative way with an integrated marketing campaign. Featuring our 20-piece nuggets, it quickly went viral on social media and generated significant positive buzz among consumers. Spicy McNuggets, one of our most popular line extensions, were offered across various markets this quarter, including Australia and Germany. It is yet another example of how we modernize our core menu, adapt it to meet changing customer taste profiles and scale these new ideas across the globe. Both markets achieved significant lifts to the McNuggets line as a result and Spicy McNugget sales reached an all time high in Australia. Our ambition on chicken includes further scaling emerging equities across markets. The McCrispy Chicken Sandwich, for example, has now scaled to over 10 of our largest markets, including Spain just this past quarter. The sandwich is already resonating with our customers, bringing attention to our chicken portfolio and driving significant chicken share gains. A recent addition to our portfolio of billion dollar brands, the McCrispy continues to be an important catalyst of chicken growth for many of our markets. The UK, for example, has achieved market share leadership in chicken, a remarkable growth over the past few years with the launch of both the McCrispy and the McSpicy Chicken sandwiches. We look forward to further scaling these new global favorites to customers around the world. A challenging macro environment including rising interest rates and elevated costs continues to create volatile consumer confidence levels and put pressure on consumer spending. Providing customers with an affordable option has always been core to McDonald's. But in these challenging times, it is even more important for us to remain agile, proactively meeting the needs of our customers. Germany continued the success of its McSmart menu. Initially introduced last quarter to provide entry level affordable meals, it's contributed to our best sales quarter ever in the market and lifted value perceptions with consumers. The UK unveiled a similar offering with its new Saver Meal deals in June, and the early results are encouraging. A permanent addition to the menu, it aims to provide consistent everyday affordability and ensure customers can still enjoy their favorite treats like the Double Cheeseburger despite the rising cost environment. Maintaining our leadership position in value is crucial to future success, and McDonald's holds the number one position in good value for money and affordability across most of our major markets. This shows that even in the most challenging of environments, our customers know that they can rely on McDonald's to provide an affordable destination for the food that they love. But we know that customers' perceptions on value are made up of more than just the price of our food. It's also about the experience that we provide. We've continued to enhance the customer experience, providing the seamless and memorable interactions our customers have come to expect. Last quarter, we introduced an enhanced ordering process through our app in the US with the goal of delivering a faster and more enjoyable experience for the customer. While we're still learning from this deployment, early results have been extremely positive with elevated sales initiated through the app, increased customer satisfaction and improved service times. Canada also introduced new experiences in the app with the launch of the Frequent Fryer program. Tapping into Canadians’ passion for travel, the digital campaign celebrated McDonald's fries and the opportunity to taste them in other countries. This creative approach to reengage with our loyalty members resulted in lifts to both digital acquisition and digital customer frequency during the campaign. Now in over 50 markets across the globe, we're continuing to build stronger relationships with our loyalty customers and fueling growth of our digital sales in the process. In our top six markets, digital sales represent nearly 40% of system wide sales and our loyalty members remain highly engaged with over 52 million 90 day active members across our top six markets. As our relationships with these customers continue to grow, we will unlock additional customer needs and explore investments for continued digital innovation at a scale that only McDonald's can achieve. Strong execution across all elements of Accelerating the Arches is creating additional customer demand and share gains across most of our major markets. But we recognize that we're operating in a challenging macro environment where costs remain elevated, customer discretionary spending is limited and industry traffic is pressured. In line with industry trends and as inflation begins to normalize later in the year, we expect top line growth to moderate. Turning to the P&L. Our strong top line performance across each of our segments drove adjusted earnings per share of $3.17 for the quarter, an increase over the prior year of 25% in constant currencies, excluding other charges and gains in both periods as well as a prior year tax settlement. Our company operated margin performance for the first half of 2023 is in line with our expectations and remains hampered by continued cost pressures. As we look to the remainder of the year, we expect macro headwinds will continue. Total restaurant margin dollars grew by nearly $450 million in constant currencies or nearly 14% for the quarter. Strong franchise sales performance continues to be offset by targeted and temporary franchisee assistance, provided mainly to our European franchisees where elevated costs continue to pressure restaurant cash flows. We're still anticipating that these efforts will have an impact of $100 million to $150 million for the year. G&A for the quarter decreased 6% in constant currency, primarily driven by prior year costs incurred for our worldwide convention last April and timing of anticipated current year spend. We are pleased with our strong adjusted operating margin of just over 47% for the first half of the year. This was driven by the continued strong top line growth that I mentioned and timing within our G&A spend. For the full year, we now expect adjusted operating margin to be about 46%, reflecting heavier G&A spend in the back half of the year, along with an expected property gain in other operating income in quarter four. And our adjusted effective tax rate was just over 18% for the quarter. And with that, let me turn it back over to Chris.

Operator:

[Operator Instructions].

Eric Gonzalez:

My question is about your expectations for the US consumer. I think last quarter, there was some discussion about your base case that the US would expect a mild recession. And I think you called out that you're starting to see some evidence of trade down in your check management at that time. So I'm wondering, has there been any change in your current thinking and whether those consumer behaviors have intensified or moderated in the last quarter.

Ian Borden:

I just might add a little bit to Chris' comments. I think we've talked -- if I just focus on the US over the last couple of quarters about kind of these two broad areas of probably consumer adjustment that we've seen. I would say the first one is we are seeing some consumers that are kind of trading down from those more premium or higher priced items in the menu to more core and value. And then I think as Chris said, we have consumers that continue to visit but probably are just buying a little less. So their basket sizes are a little bit smaller than what they've been previously. I think the context is those two factors, though, have been really, while they've been in play for a number of quarters now, have been very consistent. So we're not seeing any further kind of deterioration, I think that, which is encouraging. And as Chris touched on, I think, speaks to our leading value for money and affordable positioning in the US business, which we know is industry leading and where we've maintained a really strong gap to the competitive set. I mean, I think it is -- I think the consumer still remains under pressure, obviously, with the macro context, with all of the inflationary impacts that they're seeing on their kind of their basket of goods and obviously with rising interest rates, But we know we had obviously positive traffic growth in the quarter in the US business. We know that on a comp basis, we continue to outperform the broader sector. And I think as Chris touched on in his opening remarks, we continue to focus on the experience and we know based on the feedback that we're seeing from our customers that we're delivering an improved experience. I think that's a credit to the US business and all of our franchisees and the really strong focus they've got on executing and make sure we deliver for the customer when they do choose us.

David Tarantino:

Ian, I wanted to follow up on your comments about sales moderating as the year goes on, which is understandable given the starting point here. But specifically, I was hoping you could perhaps break down the guest count growth versus the check growth in the US, and if you have it in IOM as well for the second quarter. And then how do you expect the check growth component to moderate as kind of the inflation environment gets a little bit more moderate? So I guess if you could just frame that up for us that would be helpful.

Mike Cieplak:

Our next question is from Jeff Bernstein with Barclays.

Ian Borden:

Well, let me start with that one. So let me start, I think, with 2023. And as you touched on, I think we started the year with an op margin guidance of about 45%. We've updated that now to say about 46%. We're really pleased with our performance in the first half of the year where we were about 47% from an op margin standpoint. And I think that connects to what we've talked about pretty consistently, which is we do believe that over time, as we continue to drive top line growth that we can continue to get leverage in our op margin line. I think we saw that in the first half. As we head into the second half, I think there are a couple of things that kind of are specific to the guidance for the full year. Firstly, I think it's the inflationary pressures and margin pressures, we certainly believe will continue. I just talked about kind of the moderation of the top line as we kind of work through the rest of the year. Also expect, as I touched on in my opening remarks that our G&A spend for the year will be more back half than front half weighted. So that's a factor. And the other call out and I kind of touched on this again in my opening remarks was we do expect, and this is in the guidance, that we will have a onetime property gain in the fourth quarter. I think as we look forward, again, I would just reiterate that we certainly believe as we're continuing to being able to drive that top line growth that we can continue to gain leverage in the op margin line. And I think it's something we'll certainly talk about further in the Analyst Day at the end of the year.

David Palmer:

I would love to hear more detail about the IOM trends and insights from those countries. Where are you seeing relative strength and weakness and what do you ascribe those trends to? I mean, I asked partly because we're still dealing with post-COVID dynamics in some of those markets that are perhaps greater than the US with some back to travel, back to work in center cities. But I'd also be interested to hear about macro headwinds you're already seeing in the business. You mentioned the value menu launches in Germany and UK. So wondering if you were doing those as proactive launches or perhaps reactionary?

Mike Cieplak:

Our next question is from John Ivankoe with JPMorgan.

Chris Kempczinski:

So I think the starting point is to just emphasize, we're winning on value. So the programs that we have in place are working and delivering for us, And it shows up not just in our overall performance, the fact that we're driving both check and we're driving guest counts, but it shows in our consumer sentiment scores where we are maintaining our leadership in affordability and in value for money. So there's nothing broken from a value standpoint that from my vantage point you would need to change. I think we feel really good that the value programs that we have in place are actually driving the success. The probably only thing that teams would be looking at is as they think about marketing communication in the back half of the year, do they maybe emphasize a little bit more of driving awareness of the value programs that already exist in the market, that may be something that some markets consider doing. But we feel great about the value programs that we have in place in each of our markets today and I wouldn't expect to see any changes from the programs that we have.

Mike Cieplak:

Our next question is from Brian Bittner with Oppenheimer.

Ian Borden:

Well, look, I would start with the headline. I mean, our belief is that the best way to drive sustainable margin improvement is for us to focus on driving strong momentum in the business. And I think the US business is the perfect example of that. While certainly as you work through these kind of rapid and accelerated periods of inflation, there's pressure from a percentage basis and we've clearly seen that in the US business. I mean, I think, that the example would be that the strength of our momentum in the US actually means that our owner operator cash flow is up year-over-year obviously in a continued challenging environment. And that's what we're focused on is how do we drive sustainable margin dollar cash flow growth for ourselves and for our franchisees. I think from a percentage basis, you're right. I mean, I think we continue to see pressure, obviously, from food and paper inflation, labor inflation. I think our -- where we talked about earlier in the year remains in place. We said this and I think we are consistent with that in the sense that we thought our McOpCo margin in the US business would be kind of roughly in line in terms of '23 with where we were at quarter four 2022. But we have a lot of confidence that as we continue to drive that strong top line momentum as we go forward that will continue to be able to drive both margin dollars and over time, margin percentage growth within the business.

Mike Cieplak:

Our next question is from Dennis Geiger with UBS.

Chris Kempczinski:

It all goes back to the strategy of Accelerating the Arches. And when we laid out Accelerating the Arches, we talked about our MCD framework, it's about great marketing, it's about focusing on core menu, it's about three Ds, now the four Ds. And so one of the things that I -- and that underlying all of that is about great execution. And I think one of the things that, for me, gives me confidence about the strength and resiliency of our business, not just in the US but around the world, is that it's broad based. It's not being driven by one-off promotion. It's not being driven by kind of just silver bullets. You're seeing it because of consistent execution across the entire strategy. So you're seeing evidence of where we continue, I think, to up our game from a marketing standpoint, that's driving strength around our brand scores. Our brand has never been in a better place than it's been. Our focus on core menu and things like best burger, the focus that we have on chicken, we're gaining share in both chicken and beef which -- off of core menu, which has a lot of benefits. And then we continue to do a great job of executing against our three Ds and will against our four Ds. Digital for us is something that is actually, I think, a virtuous loop, where you're seeing the stronger our digital business becomes, the more that it's driving customer engagement in digital. Our app downloads, and when you compare us to anybody else in the industry, it's orders of magnitude difference and that creates some economies of scale that become self perpetuating over time. So as I look out for the business, for us, it's going to be about continuing to do all the things that we're doing on that. And underneath that is the execution that we're seeing in our restaurants. And with the PACE program that we put in place last year, it was in most of our major markets. This year, we added the US. But you're seeing service times come down across the board in our major markets. You're seeing CSAT or customer satisfaction scores go up in all of our restaurants. So I wouldn't attribute our success to any one thing. It's the fact that we're executing across the entire Accelerating the Arches playbook that gives me confidence. And this is a momentum business. When you've got momentum, it helps and it can be self perpetuating. Now you don't want to get complacent on that. But the fact that we have momentum, I think, is driving an ambition. It continues to drive our operators' willingness to invest because they do see that as we play this out, we've got a long runway, and we certainly believe we have a long runway here at McDonald's.

Chris Carril:

So Chris, I know you touched on this in your prepared remarks and you plan to share more at the Investor Day, but could you maybe expand a bit more on the development outlook as we think about the second half of this year as well as beyond 2023? You've seen strong top line momentum, improving margins and you've made organizational changes to help support development. So what are the key unlocks here or next steps going forward to accelerate new restaurant openings?

Mike Cieplak:

Our next question is from Andrew Charles with Cowen.

Ian Borden:

So let me just kind of touch on a few things. Look, I think as we've talked about before, providing support to our franchisees is kind of normal course of business for us. Obviously, the difference this year is just the kind of the pace, the scale and the breadth of the pressures, and as you highlighted, obviously probably most centered in Europe. So I think on the backdrop of all of that, we decided towards the back end of last year to kind of provide some more extensive support, as we talk about always, it's always targeted and temporary. It's always fact based support, that support goes to franchisees that need support. And I think as you've heard me talk a little bit on some of the other questions this morning, that inflation is kind of coming to play the way we predicted it. So I don't think there's been a difference versus our expectations, which is why we've reiterated that we continue to expect that we will spend between the $100 million to $150 million for the year this year. I think the other thing I just want to go back to because it's so important and it's certainly something I strongly believe in. I've given you the example before of as we work through COVID and we provided support at particular moments as we work through that with our franchisees, I think that was fundamental to the exit velocity and momentum that our business had. I think what you can see now if you look at our IOM segment, and Chris talked about this earlier, is the strength of our underlying momentum, the consistency of our momentum. And I believe that's fundamentally connected to decisions like this because they keep our system fully aligned, they keep our system front footed and focused on the opportunities that we have to continue to drive growth in our business. I believe that's a significant strategic advantage that we have. And I think it's been a key contributor to why we continue to outperform even in markets that maybe more difficult from a macroeconomic context.

Mike Cieplak:

Next question is from Sara Senatore with BofA.

Ian Borden:

Well, let me start with G&A. just I mean, I think a bit of a headline there. I mean I think our normal, let's call it, cycle of spend in the business is probably always a little bit more back half than front half weighted. I think this year, that's a little bit more pronounced. I think there are kind of a couple of probably more substantive factors for that. I think the first one is around our continued investment in technology and digital. I mean, I think you've heard us talk, and me in particular previously, that we will -- we have the capacity and the capability. And we will continue to invest in areas in the business where we believe there's a significant opportunity to drive growth and generate a return. And I think our digital and technology investments have been a clear strong example and continue to be one of our key growth drivers. And I think as Chris touched on previously, we continue to believe we've got significant opportunity as we go forward to unlock further capabilities around our digital and technology platforms. And so we're continuing to accelerate investment in those areas. I think the second one is back to our global business services organization. As you know, as part of our ATO changes earlier this year, we stood up a global business service organization at an enterprise level because we felt there was a relatively significant opportunity to look at how we can digitize, I'll call it, the operational part of our business and drive sustainable efficiencies as we go forward. So we're doing a fair bit of work and investing right now and looking at that opportunity to understand how big is it, what's it going to take to get after it, how should we think about sequencing and prioritizing the investments. Obviously, once you go into those sorts of journeys, there are multiyear journeys and commitments to kind of deliver that sustainable end benefit. But if we think of the kind of the broader environment today, the ability to kind of drive sustainable efficiency, the ability to get data and analytics in a sustainable way, I think, is becoming more important. And we think there's a significant opportunity there that we're looking at. So I think our guidance remains intact as we stated at the beginning of the year, which is we expect our G&A to be in that 2.2% to 2.3% of sales range. I would say I think I certainly expect that we'll be closer to the higher end versus the lower end of that range, but that's a bit of texture on G&A. I think on pricing, I mean, obviously, pricing varies significantly based on the context in the individual markets. So maybe what I can do is just give you a little -- I mean, obviously, pricing remains elevated as inflation more broadly remains elevated in the majority of our markets, maybe a little texture on the US, which is, I think if you look at the second quarter, we were kind of on average at a low double digit level of pricing in the business. I think as we work through the rest of the year, we'll probably end the year in that kind of low double digit range. A lot of the pricing in the second quarter is kind of carryover from 2022 in the US business as we work through that kind of peak inflationary period. And obviously, as I talked about earlier, we're kind of getting those two offsets to the pricing we're taking, which is kind of the trade down and consumers that are kind of continuing to visit but buying a little bit less, again, those two offsets have been very consistent. And as Chris and I have both talked to, we continue to see traffic growth in our US business. We continue to see market share gains, and we continue to see this kind of strong leading value for money and affordability positioning. So I think what I've talked about before, which I think is really important is the work we've done in the couple of years before we've kind of got into this more challenging macroeconomic environment around our capabilities that we've put in place with our third party advisers that we work with and who make recommendations to our business, including our franchisees on how we price, obviously, our franchisees make those decisions. I think we've had a significant improvement in our capability. I think as Chris has talked about, we've had pretty good discipline from our system and the pricing that we've taken to really kind of get the balance of working through the short term challenge with a long term focus on continuing to make sure we're driving momentum. And we feel pretty good about how we've been able to navigate, obviously, a complex environment.

Operator:

This concludes McDonald's Corporation Investor Call. You may now disconnect, and have a great day.

Mike Cieplak:

Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Ian Borden. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website as are reconciliations of any non-GAAP financial measures mentioned on today's call, along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. [Operator Instructions] 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.

Ian Borden:

Thanks Chris. The first quarter of 2023 was yet another demonstration of McDonald's at its best. We entered the year with global momentum and remained laser focused on executing against our strategic growth pillars. Though challenging macro dynamics are still evident across many parts of the world, each of our segments and our global comp sales grew nearly 13% for the quarter. This demonstrates that no matter the operating environment, our customers continue to rely on McDonald's as an affordable destination for the delicious food they love delivered with the great service that they expect. Throughout the quarter, we showcased our iconic core menu equities while further scaling emerging equities across markets. I'll share a couple of examples of this in our chicken portfolio where we continue to expand and grow market share and an area where there is strong opportunity for growth. The U.S. leveraged learnings from the U.K., Canada, and Germany by relaunching its Crispy Chicken Sandwich under the McCrispy global equity umbrella. While there was no change to the core product, compelling creative, along with a new flavor offering supported demand, and help drive double-digit sales growth in the market, in fact, we now offer the McCrispy in 10 of our largest markets around the world, adding to our portfolio of billion dollar brands. Another example was in China where in March we featured the McSpicy Chicken Sandwich through a creative campaign that included a partnership with a popular streetwear brand tapping into local cultural relevance. The campaign generated significant social buzz, an increased brand relevancy with a younger generation. It's worth noting that China and Hong Kong originally introduced customers to McSpicy nearly 20 years ago, and it's now part of our core menu in 17 markets reflecting consumers growing preference for spicy across the globe. And while I'm on the topic of China, I want to point out that we saw steady recovery in the market with China posting positive comp sales growth for the quarter. Chicken was also critical to Canada's strong results. With the successful execution of the Chicken Big Mac promotion, a popular limited time offering that had significant success in the U.K. last year. By creating these fresh takes on our classic menu items, we've continued to build affinity and have consistently gained share across our top markets in the growing chicken category over the last few years. In parallel, we continue to maintain our market share leadership in beef, making our core menu offerings even better through enhanced cooking procedures and other slight changes such as improved buns. Now in over 50 markets around the globe, these improvements are resulting in hotter, juicier and tastier burgers. We're seeing improved taste perception scores across markets, giving customers yet another reason to eat at McDonald's. We recently began to introduce these changes to our U.S. customers through a rolling deployment, and the initial reaction has been positive. The Big Mac was also prominently featured across many markets this quarter with strong activations in both Canada and France. While each campaign came to life in its own way, the resulting lift in beef sales across both markets shows that this iconic menu item which became popular more than 50 years ago still resonates with consumers today. As I've mentioned before, rising costs continue to pressure consumer spending across markets. Our ability to meet customer needs in challenging times makes McDonald's value proposition even more important to highlight. In Germany, for example, the launch of the new McSmart Menu refreshed our everyday value bundles, providing smaller, more affordable meals to our consumers, and contributing to Germany's eighth consecutive quarter of double-digit comp sales growth. Our marketing excellence was also on full display during the quarter, demonstrating our position as an affordable destination with iconic equities and strong execution. The Raise Your Arches campaign in the U.K. was a prime example of our marketing excellence in action, bringing to life the true power of the McDonald's brand in a new and unique way. This campaign did not feature our food or our restaurants. Yet by illustrating a simple gesture, the raising of eyebrows, our customers instantly recognize the semblance of the Golden Arches, and the engagement was remarkable. In fact, within the first weekend alone, Raise Your Arches reached millions of people and our customers reacted on social media more than 30,000 times. As the campaign quickly scaled to more than 30 markets across the globe, Raise Your Arches drove brand affinity around the world and once again proved the true power of the McDonald's brand. This is an example of how one singular idea can drive impact when shared across our markets. This is the One McDonalds Way that Chris mentioned earlier. MyMcDonald's Rewards is yet another example of how we've tapped into our marketing engine to deploy our loyalty platform throughout the system. Now in 50 markets, loyalty is building even stronger relationships with our customers, and the results continue to shine. In our top six markets, digital sales now represent almost 40% of system-wide sales, or nearly $7.5 billion growth of more than 30% over the last year. We have nearly 50 million, 90 day active members across these top markets, and our relationship with them continues to grow. We're learning when they visit, how they visit and what they buy. With more and more of our sales coming through identified channels than ever before, we're also continuing to improve our customers' mobile app experience with new initiatives that provide a more seamless interaction. The U.S. market, for example is piloting a new way of ordering through our app. Using existing location data, it allows our crew to start assembling a customer's order prior to their arrival at the restaurant, ultimately delivering hot, fresh food when customers arrive to pick up their order. While it's still early days deploying this new digital enhancement, initial results are already pointing to improve service times and elevated customer satisfaction scores. Australia and Canada enhanced the digital customer experience by officially integrating the ability to order and pay for McDelivery, all within the McDonald's app. This not only brings added choice and convenience for our customers but also allows them to earn loyalty points while they enjoy McDelivery at their doorstep and ensures that we maintain that direct connection. Across our digital and marketing initiatives, McDonald's continues to put the customer at the center of our strategy, driving top line growth and further strengthening the brand. Turning to the P&L. Strong sales performance across each of our segments drove adjusted earnings per share of $2.63 for the quarter, an increase over the prior-year of nearly 20% in constant currencies. This excludes restructuring charges of about $180 million primarily consisting of employee termination benefits and lease termination costs as we look to become faster, more innovative and more efficient as part of Accelerating the Organization. Our company-operated margins remained hampered this quarter by continued pressure from elevated commodities and wages. As we look to the remainder of the year, consistent with the expectations we communicated in January, we expect macro headwinds will continue with the potential for a recessionary environment across both the U.S. and Europe. Total restaurant margin dollars grew by over $375 million in constant currencies or more than 10% for the quarter driven by higher franchise margin dollars. One of the benefits of our franchise business model is the predictability and stability of our franchise margins particularly in a strong comp sales environment. As expected, strong franchise sales performance across our markets was offset by increased franchisee assistance as elevated cost inflation continued to put significant pressure on restaurant cash flows, particularly for our European franchisees. As I've mentioned before, we're providing targeted and temporary support, investing proactively to maintain focus on driving long-term growth during this challenging time. We still anticipate these efforts will have an impact of between $100 million to $150 million for the year. G&A for the quarter decreased slightly primarily driven by prior-year costs incurred for our worldwide convention last April, and our adjusted effective tax rate was nearly 21% for the quarter. Adjusted operating margin was 46% for the first quarter, a reflection of the strong top line growth. As we've said before, we expect to gain leverage on operating margin over time. And while this will not necessarily be linear based on a strong start to the year, we're pleased with our operating efficiency in quarter 1. Based on current exchange rates, we expect foreign exchange to reduce both the second quarter and full-year earnings per share by about $0.03 to $0.05. As always, this is directional guidance only as rates will likely change as we move through the year. Despite the economic uncertainty that may persist, we are well positioned with the unique strength and scale that only the McDonald's system can provide. As Chris talked about upfront, we are focused on how we can even further leverage this advantage in the future. With our strong underlying momentum and aligned focus on the right strategies moving forward, I remain confident that we will continue to deliver long-term growth for our system and for our shareholders. And with that, let me turn it back over to Chris.

Operator:

Thank you. [Operator Instructions].

Dennis Geiger:

Thank you very much. Chris, with the robust momentum that the brand continues to see in the U.S., can you talk a bit more about your latest thoughts on the biggest opportunities that you see to continue to drive this guest count strength? I mean, you seem to be clearly executing against core points of focus. You highlighted some newer initiatives in detail today. So just curious if you kind of help loosely rank some of these opportunities for the U.S. business. Thank you.

Mike Cieplak:

Our next question is from Brian Bittner with Oppenheimer.

Chris Kempczinski:

Yes. Thanks for the question. Going back to Q3 I think of last year is when we started getting asked questions about our outlook for the macro environment in 2023. And I would say our view remains unchanged, which is our base expectation is for a mild recession in the U.S. In Europe, we expected it to be more challenging. I think things are looking better in Europe than they were certainly back in Q3, but still compared to the U.S., I think more challenging in Europe. So our base expectation from a macro standpoint for 2023 is unchanged. I think how we're positioned, it goes back to the word I used in my opening, which is consistency. And our job is to make sure that no matter what the environment, whether you're in a boom cycle or whether you're in a more challenging macro environment like I think we are in right now, our business has to continue to perform. And one of the things that I feel really good about is, as you mentioned, in good times or in bad times, McDonald's tend to do well. I would just add a little color, which is we do see some of the pressures that give us reason to believe that our view on the macro outlook is accurate, which is, one, we are seeing a slight decrease in units per transaction. So things like did someone add fries to their order, how many items are they buying per order, we're seeing that go down in most of our markets around the world slightly, but it's still going down. And then the other thing is we continue to monitor very closely the acceptance of our pricing. I'm really proud of how our system has executed pricing in light of the double-digit inflation that we have been experiencing. But we are seeing, in some places, resistance to pricing, more resistance than we saw at the outset. So I think all of those things are reflective of, again, a more challenging macro environment. But again, McDonald's, we perform well in good times and in bad. And so that's what gives us the optimism as we go through the rest of this year.

Mike Cieplak:

Our next question is from Sara Senatore with Bank of America.

Ian Borden:

Good morning, Sara. Thanks for the question. Look, I think -- and Chris touched on this upfront, but just I think the consistency of how our strategy is being brought to life across each of our three operating segments is really what's behind the performance. I mean, obviously the context, the pricing is different across different markets depending on level of inflation, et cetera. But I think if you go back to what Chris talked about upfront is we're seeing really good consistency from what I'll call the mix of check and traffic growth. I think we're seeing a lot of consistency around how we're positioned from a value for money and affordability standpoint. And if you look at the key parts of our Accelerating the Arches strategy, there's a lot of consistency and how those are being brought to life for our system. And we feel really good also, as Chris highlighted, just about the focus on execution, which is coming to life across every part of our business and how that's translating into a better experience. And we're seeing really good consistency in that, feedback from our customers and the improvement in the customer satisfaction scores that we're seeing. And so I think that's really what's behind. I think the consistency of results is when our system gets focused on the opportunity ahead of it and brings that to life with a lot of execution and discipline. I think that's what drives the consistency in our performance.

Mike Cieplak:

Our next question is from Brian Harbour with Morgan Stanley.

Chris Kempczinski:

Sure. Well, from an overall how do you assess whether the work changes that we announced as part of Accelerating the Organization have an impact, it doesn't show up in the numbers. And it needs to show up in the top line, and it needs to flow through to the bottom line. So I wouldn't get too nuanced in any particular metric other than top line growth, how that flows through to EPS and ultimately, what that's also doing for the system economic health. But as I said in my comments, I do think that we have an opportunity to get faster, more innovative, more efficient. The only way that, that was going to happen is we needed to change some of our ways of working where there was just too much internal, what I just call it, obstacles that were impeding our ability to move with that sort of speed. So as we get all of this in place, I think it should give you confidence that we're going to be able to continue to drive the performance. And then what that ultimately means is there's going to be -- there needs to be an efficiency component to that, but it also allows for us to reinvest in the business. I don't think for 2023, everything that we've said around our G&A guidance, that's already embedded in. We'll talk about it at Analyst Day at the end of the year what our outlook is longer-term for G&A. But ultimately, the metric that you should hold us to is the one you always hold us to, which is, are we growing the top line? Are we growing EPS, and what's the health of our franchisee base?

Christopher Carril:

Hi, good morning. So in the context of maintaining your operating margin outlook of about 45% for the full-year because even with the strong start to the year, could you provide us with any additional detail on your latest thinking around the cost inflation outlook, maybe particularly food and packaging costs and then just the pacing of those inflationary pressures over the balance of the year as you see them today? Thanks.

Mike Cieplak:

Our next question is from David Tarantino with Baird.

Ian Borden:

So I'll take the first bit on the clarification, David. That's a non-GAAP, the 46% I talked about is a non-GAAP number.

Mike Cieplak:

Our next question is from Eric Gonzalez with KeyBanc.

Chris Kempczinski:

Thanks for the question. We are -- we have seen, as you know, historically very strong performance from delivery. I think it is fair to say that the growth of delivery whether that's a function of it just being at a large number now or if it might, in fact, be some of the consumer pressures, but the growth of delivery has certainly slowed. There is still growth, but it's not nearly the growth that we saw previously. So I think as we look at it, delivery is going to remain an important part of the business, but it's certainly not going to be the degree of growth driver that it has been historically, which goes back to why having a very balanced playbook, where you're getting growth from multiple levers is so important.

Jon Tower:

Great. Thanks for taking the question. Just curious on the $100 million to $150 million in rental abatement that you're offering to franchisees in Europe, how many of those franchisees have actually taken you up on the offer? And what you might be asking of them in return going forward? Are you maybe asking them to hold the line on pricing to the extent you can?

Chris Kempczinski:

I would just add, our message to franchisees in Europe, in this case, but it goes back with the same message that we delivered during COVID, which is so long as you're doing the right things to drive the business in the long-term, if there are short-term pressures out of your control, we'll work with you to help and support you through that. That's very much an organization-by-organization, restaurant-by-restaurant decision. But what we want to do is we want to make sure that our system always remains focused on the long-term. And that's about ensuring that we're doing great service to our customers. We're running great restaurants. We're providing the necessary value. If you're doing all of those things from a long-term that you've got the benefit of McDonald's being able to help you if there are short-term pressures outside of your control.

Lauren Silberman:

Thank you for the question. Congrats on the quarter. Can you expand on what you're seeing across your low, middle income consumers in the U.S. and where you think you're gaining share across cohorts? And then can you just break down the contribution to comp from guest count and average check? Thank you.

Ian Borden:

Yes. Maybe just a bit of texture I would add. I think as Chris touched on, I think what we're pleased about, particularly in the U.S., if we use that as the example, is just that balanced growth between check and guest count, probably two-thirds check, about a third guest count, I think if you look from a comp basis, on both sales and traffic, we know we are outperforming the competitive set. And I think it goes back to what we've talked about a fair bit today, which is just that really strong focus that we've got on value for money and affordability. Despite the pricing again that we're having to take in the context we're in, I think the discipline that both our owner/operators and our company restaurants are bringing to life and the pricing that we're doing is ensuring that we're kind of maintaining that healthy balance, kind of resonating with consumers despite their kind of individual circumstances and continuing to drive really healthy momentum as we go forward.

Jeffrey Bernstein:

Great. Thank you very much. First, I just wanted to clarify the comment you made earlier about a little bit of resistance from a consumer standpoint on pricing. I know you often refer to food at home versus food away from home. And it seems like maybe there are some limiting factors going forward where you might be encouraging more cautious price increases as we move through the year. So any color you could provide there as a clarification. Another one, I'm just wondering if there's any common theme in your conversation with franchisees. I know you have 5,000 worldwide, but there's always lots of chatter in the headlines. It seems like you said, significant returns, I mean, they're far exceeding the cost of capital, relative benchmarks, positive cash flow. I'm just wondering if there is any common theme of pushback from the franchise community? Thank you.

Ian Borden:

Maybe just a small build on that. I think as Chris said, obviously, when you're in a period of higher inflation and cost pressure, that's always going to be a topic to discuss. I mean, I think our job as a system and as McDonald's is to make sure that we've got a set of strategies and plans in place that's going to deliver that strong top line momentum. And I don't think you're hearing any lack of confidence from any part of our system about the strategies and plans that we've got in place. And I think as Chris touched on earlier, the proof point, if that's obviously the best way to work through any significant cost pressure environment, if you look -- the U.S. is a great example, obviously, not only in the results they're delivering, but in that first quarter proof point that Chris talked about where our owner/operator cash flow is actually up. That's what's going to get our system through these short-term pressures and ensure that as we come out of those pressures, we're going to be on the path to recovering margin as we go forward with that strong momentum behind us. And I think that's certainly what we're all focused on delivering against.

John Ivankoe:

Hi, great. Thank you. The question is on your pricing relative to the informal eating out market. I think you're always very clear that you want to stay competitive with that. But there typically is more inflation at food at home and more deflation at food at home. It's actually a lot more volatile than food away from home pricing, at least looking at the U.S. So do you think there is anything that's changed in the environment that maybe makes the McDonald's brand specifically less at risk to kind of lose any traffic, lose any transaction count to food at home, would presumably it becomes deflationary at some point in the near-term as kind of the first part of the question. And secondly, in terms of the customer promotion within the McDonald's app, the customized promotion within the McDonald's app, how effective do you think that is? Where are we in that overall journey in terms of customized promotion that is going to drive an incremental purchase, incremental profit versus still being done in some fairly general terms with some opportunity to maybe refine that over time? Thank you.

Mike Cieplak:

Okay. We're at the bottom of the hour. That completes our call. Thanks, Chris. Thanks, Ian. Thanks, everyone, for joining. Have a great day.

Mike Cieplak:

Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Ian Borden. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website as our reconciliations of any non-GAAP financial measures mentioned on today's call, along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. Please limit yourself to one question and reenter the queue for any additional questions. Today's conference call is being webcast and is also being recorded for replay via our website. And now, I'll turn it over to Chris.

Ian F. Borden:

Thanks, Chris. By putting our customers at the center of Accelerating the Arches, we're driving top line momentum and broad-based global strength for our brand. Global comparable sales were up double digits for the fourth quarter, and we continue to gain share across most of our major markets. Our performance is a direct result of executing against our strategy, making it clear that we're operating from a position of strength and proving once again that our business remains resilient despite the dynamic macro environment. In our international operated markets, we leveraged our digital channels and highlighted our core menu delivering comp sales growth of nearly 13% for the quarter. As our big five international operated markets continued to recover from COVID throughout the year, we consistently created delicious feel good moments for our customers, achieving strong performance across each of these markets. The UK continued their focus on chicken with an early fourth quarter launch of the McCrispy Chicken Sandwich. This emerging global equity builds on iconic core favorites like Chicken McNuggets and drove a meaningful lift to the chicken category. The UK market also leaned into the power of our brand with the popular Reindeer Ready holiday campaign returning for the sixth consecutive year. The fourth quarter also brought the return of McDonald's monopoly to the Canadian market, but this time utilizing our app to elevate the experience. We leveraged learnings from recent UK and Australia activations, where we combine the nostalgic peel off game pieces with the option to digitally scan and track progress on our app, which helped accelerate top line momentum and sales through our digital channels. Fueling digital growth was also central to Germany's strong performance with the market's first My McDonald's branded affordability campaign. This promotion featured daily offers alongside mobile order messaging to drive full digital platform engagement. It was followed by the launch of Digital Monopoly in the market, which helped grow digital to over 60% of total sales. It's examples like this that once again highlight the power of the McDonald's system, allowing us to tap into proven successes in one market and then scale those ideas. In Australia, we continued to leverage the strength of our McCafé brand with an iced coffee promotion in the summer months. This campaign built upon our coffee leadership in the market as we continue to drive share gains. And we maintained our market leadership in France with always on family messaging and a fully integrated chicken campaign highlighting our iconic chicken McNuggets paired with unique and trendy sauces. Moving to the U.S., comp sales were up over 10% for the quarter, a testament to our work together with franchisees over the last several years, which has created a strong foundation. The collective decisions to put brand at the center of our marketing, along with simplifying our menus, strengthening our digital business, and recommitting to our core have resonated with consumers and are continuing to drive growth. Strategic calendar planning from marketing to restaurant execution has enabled our teams to stay laser focused on what truly matters most for our customers. Higher average check supported by strategic price increases as well as positive guest counts, contributed to our performance this quarter. Memorable marketing campaigns, including our collaboration with Cactus Plant Flea Market, Blue Buckets, and McRib brought nostalgia to our customers fueling top line momentum with limited added complexity in our restaurants. Turning to our international developmental license markets, comp sales were up over 16% for the quarter, with strong sales growth across all geographies in the segment. Japan achieved an impressive 29th consecutive quarter of positive comp sales with continued strength at the dinner day part. A focus on driving digital affordability helped increase the frequency of our most loyal digital customers. Recovery in China, however, remain challenging as COVID related government restrictions were still in place for a majority of the fourth quarter, resulting in some temporary closures and limited operations. While comp sales in China were negative, we focused on showcasing our strength in beef with the Big Mac Best Burger launch and continued to gain traffic share in a shrinking QSR market. And despite the ongoing operating challenges, we opened over 700 new restaurants last year, which is an all-time high. Turning to our P&L, company operated margins were just over 15% for the quarter, reflecting the continued pressure from elevated commodities, wages, as well as higher energy costs. Foreign currency translation negatively impacted fourth quarter results by $0.16 per share, with earnings per share of $2.59 for the quarter. For the full year, adjusted operating margin was nearly 45%, reflecting higher restaurant margin dollars across all segments. Despite the significant P&L pressures that we've discussed, top line results generated restaurant margin dollars of over 13 billion for the year, an increase of nearly 1.5 billion in constant currency. Franchise restaurants, which now represent 95% of our global portfolio, contributed nearly 90% of our total restaurant margins, reflecting the stability of our business model. Lastly, before I hand it back over to Chris, I want to touch briefly on our capital expenditures and free cash flow profile. Our CAPEX spend for the year was approximately 1.9 billion, which included remaining reinvestment to substantially complete our experience of the future efforts in the U.S. market. Over the last few years, we've invested billions of dollars in modernizing our estate, and it's clear in our results that these investments are paying off. After reinvesting in the business, our free cash flow conversion was nearly 90% for the year. And with that, let me pass it back over to Chris.

Ian F. Borden:

As Chris just discussed and as I talked about last quarter, we continue to operate in an extremely dynamic environment. Looking ahead to this year, we anticipate macro-related pressures will continue to weigh on both our consumers and our business. With significant inflationary headwinds across commodities, labor and utilities, our company-operated margin percent will be hampered in the near term, and we expect full year 2023 company-operated margin percent will be slightly lower than our quarter four results. This elevated cost environment is also impacting restaurant cash flow for our franchisees, particularly in our European markets. As we've previously mentioned, our financial strength and scale gives us the ability to provide temporary and targeted support, ultimately keeping our entire system aligned on proactively investing to drive long-term growth. We estimate that these efforts will have an impact of between $100 million to $150 million in 2023. Turning to G&A, the digital and technology investments that we've made over the past few years have been strong contributors to our top line growth. Moving forward, focusing on our evolution of Accelerating the Arches, and in particular accelerating the organization, will enable us to work more efficiently and effectively, harnessing our scale and reallocating resources to drive growth in the future. In 2023, we expect G&A to be between 2.2% and 2.3% of system wide sales. Despite the cost pressures throughout the P&L in 2023, we anticipate an operating margin of about 45% driven primarily by strong top line growth and franchise margin performance. We're projecting interest expense this year to increase between 10% and 12% compared to 2022 primarily due to higher average rates on our debt balances. And we expect our effective tax rate for the year to be between 20% and 22%. We anticipate currency translation will negatively impact earnings per share of between $0.07 and $0.09 in the first quarter. As of now, we expect currency translation to be a slight tailwind for the full year but as you have seen, currency rates have been fluctuating quite a bit recently. So we'll continue to keep you posted on the anticipated impact to our results. Transitioning to capital expenditures, we plan to spend between $2.2 billion and $2.4 billion this year, about half of which will be dedicated to new unit openings. Globally, we plan to open about 1,900 restaurants with more than 400 of these openings in our U.S. and IOM segments, where we continue to see strong returns. The remaining 1,500-or-so new restaurants, including about 900 in China, will be across our IDL markets. As a reminder, our strategic partners provide the capital for these restaurant openings. Overall, we anticipate almost 4% unit growth from about 1,500 net restaurant additions in 2023. We expect this will contribute along with restaurants opened in 2022, nearly 1.5% to system-wide sales growth. As Chris mentioned, work is underway on our fourth D, restaurant development, within Accelerating the Arches. We'll have more details to share later this year, but we're excited about the opportunity to accelerate the pace of our new unit openings moving forward. And finally, we expect to generate strong cash flow in 2023, enabling us once again to convert more than 90% of our net income to free cash flow. Going forward, our capital allocation priorities remain unchanged

Operator:

[Operator Instructions].

David Palmer:

Thank you. A big-picture question tied into some of the stuff you were talking about in the U.S. It's been fascinating to see how McDonald's traffic in the U.S. has largely declined, most years at least, even as you've added about $1 million in sales per unit. And your customer satisfaction scores and the external stuff that we see, it's been stubbornly and surprisingly low. It's almost like the consumers being more honest with his or her spending rather than these surveys. So I'm wondering, in your work, where do you see the customer satisfaction opportunity in the U.S., whether that's in convenience and speed or food or other? And do you think the U.S. will have a different same-store traffic outcome over the next year or decade based on some of the stuff that you're doing? Thank you.

Mike Cieplak:

Our next question is from David Tarantino with Baird.

Ian F. Borden:

Great. Good morning David. Thanks for the question. Well, I think as you've heard us and particularly me speak to, I think, particularly in Europe, we're seeing some quite strong headwinds due to the levels of inflation on things like commodity costs, energy prices and, of course, labor. And I think the pace and scale of inflation mean that those headwinds are creating relatively significant levels of short-term impact to our margins and then, of course, to our franchisee cash flows. And I think one of the competitive advantages that we have as a global franchisor with our size, our scale, and our brand strength is that we're able to provide that temporary and targeted support for our franchisees, which we always, of course, direct to where it's most needed. I mean I would use the UK as a bit of an example and Europe. I mean, I think -- obviously, we've seen significant levels of food inflation, significant levels of energy inflation, even though energy maybe hasn't gotten to the peak of where some were predicting because Europe's had a warm or milder winter so far. I mean still significantly above where it was 12 to 18 months ago. And I think, again, just the pace and scale of that impact is creating quite a bit of pressure on margins and cash flow, as I said. And our size and scale, as I said, just allows us -- puts us in a position to provide that support, direct it to where it's most needed. I think, honestly, that's nothing new for McDonald's. I mean it occurs from time to time around the world when conditions warrant. It's just a little bit more significant now just due to the broader nature and scale of some of those short-term impacts that we're seeing. And if you remember, during COVID, we did provide support to our system. It was critically important because it allowed all of our systems to stay focused on our plans and was really fundamental to the accelerated momentum that we saw through and then coming out of the pandemic. This is a very similar situation. I mean our system is highly aligned, it's confident, and it's focused on our strategic plans and is continuing to proactively invest against the opportunity areas that we have. So I think it's this that's really going to help us stay focused on the category-leading momentum we have and make sure that we -- as we get out of these headwinds, we're in the strongest possible position.

Eric Gonzalez:

Hey, thanks for the question. Maybe if I can ask one about unit growth, if I can. I'm not sure you already finished 2022 on a gross basis. But I'm guessing based on the year-end CAPEX number that it was maybe slightly below your expectations. And then this year, you're expecting development to be a bigger focus and an uptick in unit openings to about 1,900. So maybe if you can comment on where you're starting to see maybe some improvement in the construction and permit timing and also what you're seeing in terms of build-out costs, perhaps directionally new unit economics given those higher costs and presumably the lower margins that you're signaling with your guidance? Thanks.

Christopher J. Kempczinski:

Yes. I would just add a couple of things. I mean think about the U.S. for a moment. We haven't added new units in the U.S. in eight years. I mean 2014 was the last year that we actually grew restaurants in the U.S. So we've had eight years where we have been focused largely on a remodel program. And in that same period of time, I think everybody would agree, our U.S. business is in a significantly better shape today than it was back then. And so you look at our three-year stack, our three-year stack in the U.S. is 25%. Our global three-year stack is also around 25%. We've grown the business to a great degree and what we haven't done is we haven't kept up with the new unit pace, particularly in our owned markets, U.S. and IOM. And so we're spending the time right now to get a very granular look at where we would build, at what pace, and what types of restaurants, and that's the -- what we plan on sharing with you at the end of 2023.

Jeffrey Bernstein:

Great. Thank you very much. Just a question on the U.S. and Europe. Clearly strong double-digit comp performance. I'm just wondering as you kind of look beneath the top line, any sign of slowing macro impact in the consumer or perhaps any concern of consumer pushback on the outsized menu pricing or maybe just looking more broadly, any color on McDonald's versus the industry in terms of market share in key markets since we know everyone is being more aggressive on price, any kind of color you could provide would be great? Thank you.

Ian F. Borden:

Maybe I'll just hook on to that a little bit because I think as Chris touched on, I mean, we're laser-focused on those two consumer-facing metrics and value for money and making sure we've got those affordable choices across our menu. And I think, as Chris said, we're in a leadership position across the majority of our top markets in both of those metrics. And we know that even though those metrics have probably come down a little bit over the last 12 months or so on the back of higher pricing, the gap to the competitive set that we have has remained consistent. And so as Chris talked about, I think we've had a good discipline around pricing and making sure we keep that strong value for money in place. I think the other thing that's important to highlight is we know that we're continuing to gain share across all of those key markets. And so another kind of proof point of, I think, how we're navigating and continue to resonate with consumers. I mean, I think at the end of the day, value for money is about the experience we deliver over the price we charge. And I think it goes back to what Chris touched on earlier that we've made a lot of investments over the last couple of years in the experience. We've got a fully modernized estate. I think we've upped our game in terms of our marketing, creativity, and execution. We've invested a lot in our digital capabilities and interaction with consumers. And I think all of those strengths are coming together now. And I think our focus as we head into 2023 is really on making sure that each and every time consumers choose to come into one of our restaurants, we deliver them a great experience and continue to ensure that we earn those visits each and every time.

Brian Harbour:

Yes, thank you, good morning. Maybe I'll just ask about the kind of 45% operating margin outlook for the year and the components of that. Do you think that as a result of kind of the Accelerating the Organization strategy that there will be some savings in G&A over time or is this just perhaps a reallocation, would you expect to continue to see some leverage on the franchise margin side, for example, I guess I'm just trying to think through some of the drivers of that?

Mike Cieplak:

Our next question is from Lauren Silberman with Credit Suisse.

Christopher J. Kempczinski:

Yes. So focusing just on the U.S., I think what we saw from a performance standpoint was very balanced growth across the dayparts. So nothing particularly noteworthy there. Late night for us continues to be the opportunity just because of some changes that we've made around operating hours due to the staffing environment. But around kind of our core dayparts, that's been very strong. We're also seeing strong growth on our core menu, particularly on chicken, where we've been gaining share quite a bit of share on chicken. We've gained about a point of share on chicken in the last year. And then if you think about beef, we're also continuing to grow our share in beef despite having a very strong presence in that already. So nice balanced growth with the U.S. Digital and delivery, of course, are driving outsized growth. So digital, if you look at digital transactions, up close to 40% in the U.S., which is above obviously the 25% -- or the 10%, rather, growth that we saw in Q4. And then on the low-income consumer I'd say the only thing that is probably noteworthy there is while the units per transaction is maybe down slightly, we're seeing a little bit of an uptick in frequency of visits. And so I think that's maybe something where the customer is coming in, being a little bit more cautious about how much they're ordering. They're probably spending to an absolute dollar amount, but we're seeing a little bit of an improvement around frequency with that low-income consumer.

Mike Cieplak:

Next question is from Dennis Geiger with UBS.

Christopher J. Kempczinski:

Yes. It really just goes back to the pillars that we have in our strategy. It's marketing for menu and now the 4Ds. I think each of those still has quite a bit of runway of growth. I'm encouraged by what we're doing from a brand standpoint. But there's a lot more we can and will be doing on that to continue to strengthen our brand and marketing excellence. And we're still not as good as we could be around lifting and shifting great ideas around the world and so we're going to get better at that through this Accelerating the Organization effort. On core menu, chicken for us is a big opportunity as is coffee. I think on burgers, we're very well developed. But chicken and coffee, in particular, offer us, I think, a good growth opportunity. And we're going to be focused on that with some very specific products as opposed to having that maybe be something in the past that was a little bit more left to individual markets to kind of chart their course. And then on the 4Ds, I think all of those for us have growth. So it's not a different playbook than what we're talking about with Accelerating the Arches. It's very much the same playbook. And what we're adding into the U.S. this year, as I mentioned in my comments in the opening, is on the operational side. With PACE restarting, I've been very encouraged to see how PACE has been driving customer satisfaction when we put that in, and we're seeing improvement around service time. So you take all of the top line-driving initiatives related to the MCDs and you overlay on top of that improved operations or improved execution at the restaurant, and that gives me confidence in the outlook.

Sara Senatore:

Thank you. I wanted to sort of just ask about this -- some of these initiatives in the context maybe of McDonald's history, which is to say, when -- you mentioned, Chris, that it's been since -- 2014 since you had unit growth in the U.S. As I recall, unit growth had picked up a few years before then, but same-store sales slowed. And so there has -- historically, it seems like there's maybe a trade-off there. So that was one sort of piece that I wanted to ask about and how you think about that balance? And then related, Chris, when you joined, there was an initiative, I think, around reducing some of the management layers and really streamlining and making the lines of communication clear between the markets and the headquarters. I guess, what's happened since then or it feels like it's maybe a renewed initiative to do that, so if you could just compare perhaps where you were to what you're doing now and where the reinvestments might be this time versus the last time? Thank you.

Mike Cieplak:

Our next question is from Jon Tower with Citi.

Ian F. Borden:

Good morning Jon, let me start on that one. And maybe just to give a bit of texture to my answer, I'll talk about it in a couple of pieces. I'll start with the U.S. and then talk a little bit about IOM but maybe with a focus on Europe. I mean, I think in the U.S., we would say we're past the inflation peak and kind of heading on that downward slope. But certainly, we had high inflation, mid-teens in 2022 from a food and paper perspective. I think in 2023, we think our food and paper inflation is going to be kind of mid to high single digits. So still obviously very elevated from where it's been for a long time. And so in combination with that, you've also got energy prices that are up and interest rates and things like that, that are impacting us. I think if you move to IOM with a focus on Europe, I think we're still working through the peak period of inflation. I don't think we think inflation will -- in Europe we will start to ease probably until mid-2023. In fact, we'll see some markets in Europe with higher levels of inflation in 2023 than we saw in 2022. And so I would say, on an IOM basis for 2023, we probably expect food and paper inflation to be kind of in that mid-teens, not substantially lower than what we saw in 2022. So I think that gives you an indication of the level of the inflationary pressure. Of course, energy prices in Europe, maybe while they haven't hit the peak, as I was talking about earlier because we've had a warmer winter in Europe so far, I mean the underlying tensions aren't fully resolved yet, and inflation levels and energy prices are certainly up significantly where they were 12 months or so ago. And so I think from a pricing perspective, what we're trying to do is be very disciplined and be very consumer-led in our thinking. You may have heard me talk in the third quarter call just a little bit about the investments we've made over the last couple of years to really improve the tools, the data, and the analytics that our advisers use to provide recommendations to the business. Of course, as always, our franchisees make their own pricing decisions. But I think as Chris talked about, we feel good that we're being very disciplined around the pricing we're taking. We're using a long-term mindset, knowing that what we want to continue to do is drive strong top line momentum so that we have that momentum through these pressures and then, of course, out of the pressures and begin to kind of recover margins and gain leverage as we go forward. And we think our system has done a really good job on that because when we look at our value for money and affordability scores, we continue to maintain those leadership positions. And so I think 2023 is kind of a moment in time where we're seeing kind of the peaks of those pressures but feel really good as we get out of 2023 that the momentum that we're going to continue to drive will keep us in a really strong position to start gaining leverage again.

Mike Cieplak:

Our next question is from Andrew Charles with Cowen.

Christopher J. Kempczinski:

Why don't I have Ian cover the housekeeping item, and then I'll get to your broader question about Europe and the consumer.

Christopher J. Kempczinski:

Yes. And to the question about trade-down and the benefits of that, we're seeing good balanced growth in Europe and in our IOM markets. So I wouldn't say that we are disproportionately benefiting from some sort of trade-down to the degree that we have visibility kind of at the different strata of the consumer, we're continuing to see that hold up well across sort of all consumer segments.

John Ivankoe:

Hi. Thank you so much for that question. The question is on CAPEX and just overall capital needs of the business. Certainly, appreciate the guide for fiscal 2023 at $2.2 billion to $2.4 billion, but that includes new units on 400 IOM in U.S. units. So I guess there's a couple of different parts to this. Do you think -- is that 400 number kind of the right number to think about in these developed markets going forward or could that number necessarily increase, I guess, the first part? Secondly, you did mention the completion of EOTF in the U.S., largely in 2022 and I'm wondering if there's another large project, specifically, I guess, in the IOM markets, that may kind of take up for existing unit CAPEX? And finally, in the release, and I think this has been a really important thing for McDonald's' 90% cash conversion. I mean I suppose you mean of earnings of your net earnings, I mean, is that the right ratio that you expect to hit on an annual basis going forward, maybe getting a little bit of a preview of what you will talk about later this year at your analyst meeting? Thanks.

Mike Cieplak:

Thank you, Chris. Thanks, Ian. Thanks everyone for joining. Have a great day.

Mike Cieplak:

Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Ian Borden. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website as our reconciliations of any non-GAAP financial measures mentioned on today's call, along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. Please limit yourself to one question and reenter the queue for any additional questions. Today's conference call is being webcast and is also being recorded for replay via our website. And now, I'll turn it over to Chris.

Ian Borden :

Thanks, Chris, and great to be with everyone this morning from my first earnings call. So let me start with a few headlines on our overall performance. Our global comp sales of 9.5% for the quarter are a testament to the continued resilience of our business. It goes without saying that we are seeing global macroeconomic challenges that haven't been experienced in many years. Inflationary pressures and related interest rate increases taken by central banks are combining to put significant pressure on the consumer and our industry. Despite the challenging backdrop, our systems focus on accelerating the arches that I've seen it work across more than 100 countries gives me confidence in our ability to navigate these challenges. The power of our strategy is brought to life through our actions against our M, C and D framework, working together with the customer at the center. In the third quarter, we remain focused on delivering delicious and affordable food with the convenience McDonald's is known for, which is now more important than ever, to our customers. This continued to drive our market leadership and strong underlying sales growth across all segments of our business. In our international operated markets, comp sales grew 8.5% for the quarter with positive comps across all markets. This demonstrates the underlying strength of the IOM segment where we continue to gain market share. In France, we're operating from a position of market share strength, particularly with families as French consumers have resumed more normal routines. And we continue to grow loyalty in the market with a record mix of our transactions coming through our mobile app. By utilizing global mobile app offers in combination with traditional value offerings, Germany further highlighted our affordability and accelerated loyalty adoption at the same time. This drove strong growth in digital sales, which now represent more than 50% of system wide sales in the market. Australia showcased our beef equities with a winter together and Loving It campaign. Tapping into the role McDonald's plays in making everyday moments special. The campaign featured both the Angus and quarter pounder sandwiches and resulted in a meaningful lift in beef sales. And with the UK launch of My McDonald's rewards in July, we now have loyalty programs in place across all of our top-six global markets. The UK built on the successful rollout driving additional adoption with exclusive app offers throughout the quarter. And with the monopoly promotion in September, the team developed an innovative incentive that allowed customers to virtually peel their game board pieces right in the app. The focus on driving digital engagement paid off as our active loyalty members grew to over 3 million in just the first three months. While the expiration of VAT benefits impacted our quarterly comp sales in the market, we continued to grow QSR our market share. Although our business performance has remained resilient, as I mentioned earlier, we recognize that this is a challenging environment. The inflationary impact on costs is putting pressure on restaurant cash flows for our franchisees, particularly in our European markets. Similar to actions that we took during COVID, our financial strength puts us in a position to be there for franchisees that may need temporary and targeted support to ensure our system is financially healthy and aligned on continuing to drive growth. Moving to the U.S., the efforts and investments by our franchisees employees, restaurant teams and suppliers over the last several years are paying off. The modernization of our state combined with strong discipline and execution across our core menu and backed by award winning marketing is connecting with customers and driving results. In the U.S., third quarter comp sales were up more than 6% marking our ninth consecutive quarter of growth and achieving positive comp sales in 22 of the last 23 quarters. Higher average check supported by strategic price increases and positive guest counts contributed to performance. Loyalty remained a significant growth driver for the quarter, in part fueled by the camp McDonald's promotion. A year after the launch of my McDonald's rewards in the U.S. we continue to increase digital customer frequency quarter-after-quarter of the customers that have engaged with the app over the last year, about two thirds have been active in the last 90 days. Turning to the international developmental license markets, comp sales were up nearly 17% for the quarter, with strong sales growth across all geographies in the segment. Japan delivered strong growth at the dinner day part with popular returning limited time offerings across both chicken and beef. We also highlighted our off-premise channels, further elevating customer convenience, with an emphasis on MC delivery. It continues to be a challenging operating environment in China. With ongoing COVID resurgences and government restrictions, consumer confidence remains low. While comps for the quarter were slightly negative, the market continued to grow share, leaning into the strength of our delivery and digital business with the team on track to open about 800 restaurants this year, an all-time high. And now let me turn it back over to Chris.

Ian Borden:

Thanks, Chris. Our strong performance during the third quarter resulted in earnings per share of $2.68. This reflects an adjusted increase of 4% in constant currencies after excluding the prior year gain for the partial divestiture of our ownership in McDonald's Japan. Company-operated margins remain pressured by significant commodity and wage inflation as well as elevated energy costs. We believe these pressures will continue to impact margins for the next several quarters. G&A costs increased about 7% in constant currencies for the quarter, driven by a combination of continued investment in growth-driving initiatives such as restaurant technology and inflationary pressures on costs. For the full year, we now expect G&A to be between 2. 3% and 2.4% of system-wide sales. This is primarily due to the inflationary pressures I just mentioned as well as a stronger U.S. dollar having a greater impact on sales, which are predominantly outside of the U.S., whereas most of our G&A expense is U.S. dollar based. However, despite these headwinds, our year-to-date adjusted operating margin percentage has grown and is now in the mid-40s. Our effective tax rate was 21.9% for the quarter. The strong U.S. dollar I just mentioned, created a foreign currency headwind to quarter three earnings per share of $0.19. And based on current exchange rates, we expect foreign exchange to impact fourth quarter earnings per share by between $0.14 to $0.16, but the full year headwind totaling about $0.50. As always, this is directional guidance only as rates will likely change as we move through the remainder of the year. And transitioning to capital expenditures, we now anticipate spending about $2 billion, an adjustment from our previous guidance due to foreign exchange rates and slightly lower spend. A few weeks ago, our Board of Directors approved a dividend increase of 10%, the company's 46th consecutive annual increase. As we've talked about today, the Accelerating the Arches plan is driving strong financial results and cash flow. As we continue to execute against this plan, we remain very confident in our ability to deliver sustained long-term profitability for our system, all of which is reflected in the recent dividend increase. Before I close and hand it back to Chris, I just want to take the opportunity to personally congratulate Kevin on his successful tenure as McDonald's CFO. He's been a great partner to me as I've transitioned into this role, and I look forward to building on the strong foundations that he has put in place. It was a pleasure to meet so many of you last month. As I mentioned then, I expect that you'll find a great deal of consistency between Kevin and myself particularly when it comes to the financial priorities of our business. While the environment remains dynamic and challenging times may lie ahead, I remain incredibly confident in our strategy our business momentum and our system. I look forward to meeting and working with all of you. And with that, let me turn it back over to Chris to close.

Operator:

Thank you. [Operator Instructions].

John Glass :

Thank you and good morning. Hi, good morning. Can you hear me okay.

John Glass :

Great. Good morning. I was curious about the IOM markets and your comments about the economic pressures there. Have you seen evidence of trade down, it wouldn't seem such given same-store sales, but maybe underneath that, is there evidence of consumer strain and maybe it's trade down or what have you. And can you also talk about or update your inflationary expectations for that market? I thought the margins were strong, but you also talked about the need to support franchisees given their cash flow situation. So maybe just an update on where you think inflation in the back half or fourth quarter and early next year leads you to in IOMs.

Ian Borden:

Yeah. Thanks, Chris. So maybe just a little bit of a build on what Chris has talked about. I mean I think certainly in Europe, we're seeing higher levels of inflation. I think you've heard us talk to that before, in food and paper and also in energy prices, which obviously are impacted, particularly in Europe, knowing some of the European markets were quite dependent on Russia as an energy source and have had to obviously look for alternative supply. So I think you've got the combination of those pressures hitting some of our European markets. What I would say about Europe is it's obviously a wider range of scenarios because the context is not consistent. There are differences across the European markets that we do business in. I think if I took a step back, though, I just go to the -- you look at IOM an 8.5% comp in quarter three. I mean, I think as Chris talked about, we continue to see strong, broad-based and consistent momentum across the business. I think we're -- we've got some inherent strengths in Europe, as I'm sure you've heard us talk about previously which is the fact that we've got a modernized asset base. We've done a lot of work, I think, on marketing and around our MCD framework. There are less competitive activity across a number of our European markets. And so our business and our brand is in a position of strength. And I certainly think that's a strong tailwind for us as we kind of head into this more volatile period that Chris referred to.

Dennis Geiger :

Great. Thanks for the question. And I wanted to just ask a similar question as it relates to the U.S. If anything different from a behavior perspective and I guess more with your customer. And I guess, more importantly, given you've got positive guest counts in the U.S., maybe one of the only brands seeing that right now and the strength that you've seen over the last few quarters last years. Is there anything more you can say about the customer now? Has the customer evolved at all, Chris, over under your tenure? Anything more that you can about that customer, how it may have changed? And what that means kind of on the go forward. Thank you.

Mike Cieplak:

Our next question is from Eric Gonzalez with KeyBanc.

Chris Kempczinski:

Yeah. I'm going to maybe take you back to where we were several years ago in the U.S., where we talked talk about, and we were in a different time and performance was in a little different place. And we talked about needing to do a number of things to improve our relative position. We talked about needing to invest in our asset base. And as you know, we've cumulatively invested about $9 billion over the last five or six years between us and the franchisees in updating our asset base in the U.S. We talked about improving the quality of our food, improving our operations, which we've done, where speed of service is faster today than it was in 2019. We've been able to do that despite a more challenging labor environment. And I also talked about the brand and digital. So for us, at least the way I look at it, and I think the U.S. team would look at it, it's not any one thing that is the answer. It's the fact that we've been able to move over a number of years on a number of these things that gives us the momentum that the team is driving right now. And of course, I want to acknowledge also just the great partnership we're getting from our franchisees and from our suppliers in the U.S. because it's certainly a team effort.

David Tarantino :

Hi. I have a question about Europe. I think you referenced that you may need to provide support to some of your franchisees. And I was hoping that perhaps you could elaborate on what you mean by that and how extensive that support might need to be in the current environment, just to kind of frame up, I guess, the health of the system in general? Thanks.

Mike Cieplak:

Our next question is from Lauren Silberman with Credit Suisse.

Chris Kempczinski:

Thanks for the question. For us, one of the things that I've certainly believed about our brand is McDonald's is one of those brands that actually is very much a part of culture. And you see it when you just look at social media and all the ways that consumers will talk about on their own, McDonald's and their McDonald's experience. And I think what we in the past maybe didn't do enough of is lean into our relevance and how our brand is a part of culture. And so I think what you've seen over the last several years for us and credit to the marketing team and our agency partners on this is just finding more ways that we can connect our equities that we can connect our experience to what's also going on in culture. And whether it's Famous orders or Can McDonald's or now more recently the adult happy meals and the McRib coming back, just all these different things shows to us and just as a reminder that we are charged with shepherding and stewarding one of the most fantastic equities in the world and that we've actually got to find ways to continue to keep it fresh. In terms of evidence of it, it's just -- it's the little things. So when you see actually that we're selling out of our adult happy meals, and it's happening in days, not weeks. That is a real proof point when you see that people are posting on social media the fun ways where they've got their buckets and ready to go out and do Halloween. All of those are proof points for us. And what I say to our team as well is if you're having to sort of look with the microscope to see the impact of marketing on your P&L, then it's not big enough. And I think what we're starting to see now is we're starting to see marketing and our marketing programs show up as significant meaningful comp drivers for us. That's what gives us confidence about that we're finding that right engagement with the consumer.

Jared Garber :

Great. Thank you for the question. I wanted to ask about the health of the U.S. consumer. Obviously, the trends you posted remained really strong and encouraging. But I guess, two pieces. One, can you help frame maybe the level of price that's running through the system right now as a component of the comp with that encouraging sign of positive traffic. And then I wanted to see if you're seeing any sort of deltas or differences between dayparts as the consumer is increasingly pressured by the macro and if you're seeing any consumer behavior changes related to that just yet. Thank you.

Ian Borden :

Yeah. Thanks for the question, Jared. So let me I think you talk a little bit about pricing and just kind of, I think the reactions that we're seeing in the U.S., just knowing the U.S. is a little further along, and I think our data is a little clearer there. So I think if you look at our quarter three comp in the U.S. of just over 6%, that was obviously largely driven by average check. But as you noted, we had a slightly stronger positive contribution from guest counts in quarter three than we saw in quarter two. So again, the majority of that check growth continues to come through price. Year-over-year in quarter three, our price -- average price increase in the U.S. was just over 10%. And that's roughly where we expect the kind of the full year pricing in the U.S. to be. We continue to see pretty good flow-through in the U.S., about 70%, which would be close to our historical range. And so if you think about that price increase of roughly 10% flow-through of about 70%, the difference between that and the average check growth that we're seeing is really -- continues to be driven by two factors that we've talked about previously. The first one would be less units per transaction. Most of that is being driven by kind of a reversion of ordering channels. So obviously, during COVID, we saw elevated ordering through kind of off-premise channels like delivery and drive-through. We're getting obviously more traffic now back in restaurants, for example, drive-thru is basically back to kind of what it was pre-COVID in terms of percentage of sales. Obviously, we continue to see elevated delivery ordering. But in total, we still see more units per transaction than we were seeing pre-COVID, but you had a reversion to more traditional ordering channels. And then the second factor but to a lesser extent, would be we are seeing some trade down. That trade down is mainly with our lower income consumers, and we're seeing that shift from meal purchases to more value offer items. And so those would be the two factors that are kind of offsetting pricing to get to that net average check growth. I think to the second part, so I would say, in total, we're getting pretty healthy continued flow through, I think, which is a good sign that we're getting the pricing between balance right with our U.S. consumers. I think on the second part on day parts, what I would say is we're seeing pretty consistently strong comps in the U.S. business across all of the dayparts. I think dinner and breakfast would be a little better. But as I say, pretty consistently strong. And again, that gives us a pretty good indication that what we're doing is resonating with consumers pretty broadly.

Mike Cieplak:

Our next question is from Andrew Charles with Cowen.

Ian Borden :

Yeah. Thanks, Andrew. Look, I'm not going to get into talking about 2023 today. To be honest, we're still in the midst of working through our 2023 plans. In fact, we've got our Managing Directors coming into Chicago in a couple of weeks to take us through their plans for 2023. So I think that's something that we can give you more texture around when we get into our quarter four earnings call.

Chris Carril :

Yeah. Good morning. Thanks for the question. So maybe following up on some of the earlier questions, I did want to ask about the competitive environment in the U.S., maybe both for the burger category and just broader fast food. And specifically, I mean, do you see potential for increased promotional activity here going forward? Or are you expecting the industry and peers to kind of remain largely rational here going forward just given the still dynamic and evolving backdrop here? Thanks.

Mike Cieplak:

Our next question is from Jeff Bernstein with Barclays.

Chris Kempczinski:

So thanks, Jeff. Let me start knowing in the last role that I had, I was overseeing China as part of that remiss. Look, I think as you heard in my opening comments, I think China continues to be impacted by the Zero COVID policy that continues to be in place. And obviously, that continues to be disruptive, not just to us, but I think to consumer confidence in the kind of broader macro environment in China. So I think that's certainly what we feel is the driver of the shorter-term results and challenge in China. As you heard me talk to, we continue to gain share. It's a pretty competitive marketplace, as you would know. So I think we feel the team in China has done a pretty nice job to work through this more challenging period. The 800 openings, I think you can expect that'll be kind of consistent as we go forward. I certainly think I think, speaks to the confidence we have in the longer-term opportunity in China, which remains in place, but that volatility, I think, is going to exist until there's a change in kind of focus about how they're handling COVID.

Mike Cieplak:

Our next question is from John Ivankoe with JPMorgan. You there, John?

Ian Borden:

Yeah. Thanks, John. Let me take those two questions. I think on G&A, as you kind of heard me talk to in my commentary, there are really a couple of drivers for this year that resulted in that adjusted outlook. The first one is the stronger impact of the stronger U.S. dollar. So if you think of our G&A, let's call it, formula to get to the percentage, 60% of our sales come from outside of the U.S. So obviously, we're translating those sales back into less U.S. dollars and 70% of our G&A spend is U.S. dollar based. So that's the first impact. The second impact is obviously just the general inflationary pressures that we're seeing on costs, which obviously is also coming to play in our G&A expenses. I think what I would say coming into the role is certainly, it's an area that I'm going to be focused on. I think we continue to believe that in terms of the running the business part of our G&A spend, we should be able to drive efficiency and gain leverage as we continue to go through our top-line as we go forward. That's important for two reasons, one, the efficiency part, but also we want to make sure we've got the G&A capacity to ensure that we can spend on areas like technology and digital or innovation where we want to drive things that are going to drive growth. But I think the net of that formula is that we continue to believe we should gain leverage in G&A as we go forward. I think the second part on capital I think capital, there were kind of two reasons why we adjusted guidance down from the $2 billion to $2.2 billion to now about $2 billion. Again, one of them is just the stronger U.S. dollar, about 60% of our capital spend is outside of the U.S. So we're just translating that spend back into fewer U. S. dollars. I think the second bit is slightly less openings due to kind of the permit time lines in some markets, slightly fewer projects getting done, just the project lead times. What I would say on capital is, I think -- and again, coming out of my previous role, we continue to believe we've got an opening opportunity across many of our owned markets, we continue to get really good returns on new restaurant openings. I think that's something that we'll continue to look at as we go forward. And I think, Chris, you want to just jump in.

Mike Cieplak:

Our next question is from Brian Bittner with Oppenheimer.

Mike Cieplak:

You're breaking up a little bit, Brian. We'll try to maybe answer your question that we could hear.

Mike Cieplak:

Our next question is from David Palmer with Evercore.

Chris Kempczinski:

Yeah. Thanks, David. Well, look, I think what I would say in Europe on trends is I think we've seen pretty good consistency of strength across our European markets. So don't think we've been impacted by the weather factor that you talked about, perhaps as others have. I think our momentum there is really strong. And as you and I have talked about before, just as Chris talked about, the strength of our brand in Europe, again, modernized asset base. I think strong teams, strong alignment with our franchisees and our system in Europe. All of those things are coming to play. And as you heard Chris talked about a little bit in the U.S. context I just think all of those things coming together put us in a position of strength. And if you look at things like value for money and affordability across the majority of our European markets, we are the leader on those measures, which I think are really important as we head into this more dynamic environment. I think on margins, as you heard me talk to in my opening remarks. Certainly, in Europe, if you look at food and paper, we think inflation in Europe is going to be a little higher and last a little longer than what we are seeing in the U.S. Energy prices, as I talked to earlier in some of our European markets are up two to three times what they were 12 months ago. So those are certainly pressures that are facing some of our markets and certainly our franchisees in our European business. I think we've done a lot of work over the last couple of years around pricing capability. And what I mean by that is the advisories that we use, the tools, the data and the analytics. So I feel like we're in a good position where we're using the right facts and data the right consumer insights to make really, I think, consumer-facing decisions, and we're taking the right levels of pricing and getting that balance right between recovering inflation, but also not getting ahead of the consumer. And I think the momentum to Europe kind of speaks to how we're doing on that.

Mike Cieplak:

As we near the hour, we got time for one more question. From Greg Francfort with Guggenheim.

Chris Kempczinski:

Well, the McRib is the goat of sandwiches on our menu. And so like the GOAT of Michael Jordan, Tom Brady and others, you're never sure if they're fully retired or not. Ian, over to you.

Mike Cieplak:

Okay. Thank you, Chris. Thank you, Ian. Thanks, everybody, for joining. Have a great day.

Mike Cieplak:

Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Kevin Ozan. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website as our reconciliations of any non-GAAP financial measures mentioned on today's call, along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. Please limit yourself to one question and reenter the queue for any additional questions. Today's conference call is being webcast and is also being recorded for replay via our website. And now, I'll turn it over to Chris.

Kevin Ozan:

Thanks, Chris, and thank you for the kind words. As Chris mentioned, global comp sales were up nearly 10% in the second quarter, demonstrating the continued resilience of our business, despite the challenging environment. In fact, when we look at our three-year comp growth with the US over 19% and our IOM and IDL segments, both more than 15%, we see that our business around the world has been extremely resilient through the tumultuous last few years. Our quarterly results reflect strong underlying sales growth across all segments, a direct result of remaining customer focused and executing against our strategy. In our international operated markets, we continued to gain QSR traffic share, as markets showcased our iconic core equities and further capitalized on our digital channels. This fueled comp sales growth of 13% for the segment, with positive comps across all markets. Recovery in Germany and France continued, as remaining government restrictions eased early in the quarter. Germany built on their successful launch of loyalty at the end of last year and ran a Big Mac celebration campaign using mobile app offers to further drive digital adoption. In France, we highlighted our core burgers with strong marketing behind our triple cheeseburger, helping grow QSR market share to another record high level. Canada continued to prioritize convenience, as the market accelerated digital momentum with always on Loyalty messaging. We also featured a summer drink days promotion, highlighting our strong value proposition across all dayparts. Australia built on their first quarter launch of Loyalty and accelerated digital engagement across the market with a strong lineup of mobile app offers. And we partnered with Australian Pop Star, the Kid Leroy, whose famous order was available exclusively through our mobile app and McDelivery. In the UK, the return of the McSpicy Chicken Sandwich and Big Tasty promotion drove significant incremental sales. A daily digital sales calendar also helped build our digital customer base, leading up to the recent launch of Loyalty. While the expiration of VAT benefits impacted our quarterly comp sales in the market, we continue to grow QSR market share. Moving to the US. We posted positive comps across all dayparts in the second quarter, led by breakfast. Overall comp sales were up nearly 4% due to higher average check supported by strategic price increases. We continue to focus on everyday affordability that customers are looking for, across both our everyday value menu and digital offerings. Turning to the international developmental license markets. Comp sales were up 16% in the quarter, largely driven by strong comps in Japan and Latin America. Japan achieved an impressive 27th consecutive quarter of positive comp sales with strength across our delivery and digital channels and our growth at the dinner daypart continued with popular limited time offerings across both chicken and beef. Recovery in China remains challenged with negative double-digit comp sales in the second quarter due to ongoing COVID resurgences and related lockdowns across key cities. This resulted in temporary restaurant closures throughout the country for most of the quarter. While operating conditions are challenging, restaurants remained focused on the consumer, offering core menu favorites and targeted digital coupons. And now I'll turn it back to Chris.

Kevin Ozan:

Thanks, Chris. Our strong top line performance resulted in adjusted earnings per share for the quarter of $2.55, an increase of 15% in constant currencies. This adjusted EPS excludes $1.2 billion of charges related to our exit from Russia and a gain of $270 million from the sale of Dynamic Yield. Adjusted EPS was hurt by $0.16 of currency as the dollar strengthened significantly in the second quarter. That was double the amount we estimated in our first quarter earnings call based on exchange rates at that time. Our G&A costs increased 10% in constant currencies for the quarter, reflecting higher investments in restaurant technology and incremental expenses related to our worldwide convention and proxy contest. As expected, company-operated margins were hampered by significant commodity and wage inflation as well as rising energy costs. Given macroeconomic conditions, we expect these inflationary pressures will continue to impact margins for the remainder of the year. Our company-operated margin dollars for the quarter were also negatively impacted by our exit from Russia, which was a heavily company-owned market. Even with these cost headwinds and our exit from Russia, our strong system-wide sales growth contributed to healthy flow-through to operating income. Total restaurant margin dollars grew $270 million in constant currency, as a result of sales-driven growth in franchise margins, which now make up nearly 90% of restaurant margin dollars. This resulted in an adjusted operating margin of 45% for the quarter. Lastly, based on current exchange rates, we expect FX to reduce third quarter EPS by about $0.14 to $0.16 and full year EPS by roughly $0.40 to $0.50 again, double the impact that we estimated on our first quarter call. As we certainly saw last quarter, this is directional guidance only, as rates will likely fluctuate as we move through the year. Before I pass it back to Chris, I want to take a moment to say thank you. It's been an absolute privilege to serve as CFO of this iconic brand for over seven years. During this time, I've met many people who are on the call this morning from analysts who follow our industry, to investors in our company. I've had a lot of thought-provoking conversations with many of you. You offered your opinions and challenged me and my interactions with you over the years helped make me a better CFO and helped make McDonald's a better company. I'm extremely grateful for your engagement through the years and for the confidence you placed in us with your investments. I look forward to passing the baton to Ian Borden who I worked closely with on our senior leadership team for many years. We will continue to work together to ensure a smooth transition. Thank you again. And now back to Chris.

A - Mike Cieplak:

Thank you. [Operator Instructions] Our first question is from David Tarantino with Baird.

Chris Kempczinski:

Thanks, David. Well, as you saw in the announcement, we continue to have broad-based growth in, and our European business overall is performing quite well. I'm actually very happy with how the European business is performing. There's a few things that we're seeing consistently across that we are seeing, that we're gaining traffic and comp sales share in every market -- major market where we operate, we feel great about that. We're gaining share in beef and chicken, which were priority areas for us. And we're doing quite well in delivery. And I expect digital, particularly as we bring on the UK, is going to be a performer for us. So headline is, Europe is doing very well for us. I think what is weighing on our mind and we're certainly attentive to is, consumer sentiment as one area and a number of markets in Europe, France, as an example, Germany is another market. Spain is another market we're seeing consumer sentiment down, and in many cases, down at record levels. So that's one area of concern. The second is, we do know that the inflationary pressures in Europe are elevated even beyond what we're seeing here in the US, and that has an impact on sentiment, but that also has an impact on what we're needing to do from a menu board standpoint and pricing. And so, I think while we look at Europe right now, and we're seeing strong results, it is a challenging situation. It's challenging for our franchisees. And as you think about what we plan for under a variety of scenarios, it goes to essentially what are our marketing levers and what are our investment scenarios. And do we need to lean into harder, for example, the value end of our menu platform, that could be one scenario. On the other hand, if it continues at its current pace, maybe we don't need to lean in as hard as that. So, these are things that happen at a market level on a country-by-country basis, but I think the way our teams are looking at it is because of this uncertainty around consumer sentiment, we're just having to plan for more different scenarios and that means having more flexibility in the marketing calendar to pivot, if need be.

John Glass:

Thanks, good morning and Kevin, let me just add my congratulations and best wishes as well. My question is similar, but to the US. Last quarter, you talked about a little bit of trade down in the US as maybe early evidence the consumer is changing. Where does that stand now? And what is the conversation now about pricing with the franchisees? Pricing has been used, obviously, to cover inflation, but maybe is there -- are you coaching them now to be easier on that factor, just given the changing dynamics in the US, how do you view pricing today versus maybe 90 days ago?

Kevin Ozan:

Yes, I can take it. And thanks, David and John for your kind comments. Let me talk about the US and the comp and what drove the comp, and I think that will help talk about some of the trade down that you're talking about. Our Q2 comp of a little under 4, was driven completely by higher average check. Our guest counts were relatively flat. So, it really was check driven. And that average check was driven obviously, mainly by price increases. Year-over-year in the second quarter, our menu prices were up high single digits, relatively consistent with what I talked about in the first quarter, a little bit higher than that. And we expect for the year to be in that high single-digit range for the full year. What we are seeing still is, flow through it similar to what we've seen historically, still strong flow-through of roughly 70% or so. So, if you think about an 8%, 9% price increase with a 70% flow-through, the difference between that and our comp of a little under 4% was driven by 2 main things. First, one of the things I started talking about in the first quarter was a decline in units per transaction, that's partly driven by a reversion in the number of people per transaction. You'll recall during COVID, what happened is, we had a significant shift in channels from front counter to things like delivery and drive-through and that increased the number of people per order. What we're now seeing in the US but also around the world is a little bit back to some normal channels as restaurants open up. So delivery is still a little bit elevated versus where it was pre-COVID, but drive-through percentages are pretty much back to where they were pre-COVID. So we're seeing a number of people per transaction go down. We knew that would happen at some point, we didn't exactly know timing. The other thing to a lesser extent, and again, I mentioned last quarter is that we are seeing some trade down. We're seeing customers and specifically lower income customers, trade down to value offerings and fewer combo meals. So those dynamics are kind of what's driving both the comp and our pricing. We do, as we've talked about historically -- we do work closely with our franchisees on pricing. We use a third-party adviser that advises the franchisees as well as the company on pricing. It's a consumer-based research approach. And I've talked before about specifically this year, how we're taking smaller, more frequent price increases, because it gives us the flexibility to be able to see how consumers are reacting and then adjust if or when necessary. One of the most important things that we keep an eye on is, obviously, there are cost pressures, both on the commodity and labor side, but we have to balance that with continuing to provide value for our customers. And there's a couple of key metrics that we look at. One called good value for money, which is one of the customer scores we look at. And another is affordable options that I like. And we still continue to do well on those metrics which is the most important thing to make sure that our customer still are perceiving our offerings as value.

Mike Cieplak:

Our next question is from Andrew Charles with Cowen.

Kevin Ozan:

Yes. Thanks, Andrew. Let me give you a perspective on Russia. They were in our comp through first quarter and then they wouldn't be in our results or comp beginning second quarter. Russia represented roughly 2% of system-wide sales, about 7% of revenue and about 2% of operating income. So, if you use that for modeling purposes, that should get you kind of to hopefully, the adjusted numbers that should be representative of our trends going forward.

David Palmer:

Thanks. Kevin, congratulations on your career at McDonald's. Just a follow-up for you on pricing and inflation. Could you talk about inflation relative to pricing in the US and IOM in the quarter and how you see that gap progressing through the year to the degree that it might be closing that would be interesting. And I sense that, that gap is relatively larger for IOM than it is in the US? And then, Chris, if I could just squeeze one more in. I'd just love to get your take about aside from getting ready for the need for value. What are the biggest improvement areas for the company that you see on the horizon kind of thinking out a couple of years? You've teased out things like menu with chicken and beverage and technology benefits in CRM and the operations, but I'd love to get your sense about what's most important on the horizon? Thanks.

Kevin Ozan:

I'll start with the inflation and then we'll go back to Chris on your second question. So let me give a perspective. Right now, second quarter year-over-year in the US, food and paper inflation -- well, let me talk about it this way. For the full year in the US, we expect roughly 12% to 14% inflation. It's a little higher than that in the second quarter, likely a little higher than that in the third quarter. And then we expect to see it to moderate some in the fourth quarter. Obviously, that's based on what we know today. That's on food and paper. On the labor side, we're probably seeing a little over 10% labor inflation right now. Part of that is, we had strategic wage rate increases in our company-operated restaurants kind of mid last year. So, we won't start lapping those until the second half of the year. So more of that inflation was hit in the first half of the year than the second. To your point on the international side, right now, the range is probably similar on average, the 12% to 14% for the year, but a couple of things there. One, we're probably at the higher end of that range on the international side. Two, there's probably a wider range of scenarios like Chris talked about. And three, different than the US, we don't see that moderating. Their increases will actually likely be higher in the third and fourth quarter than they were in the first and second quarter. So, to your point, Europe is getting hit harder on the inflation, certainly on the food and paper. The other thing I would just say, it certainly varies by country. You have some countries that are getting hit dramatically by energy prices based on kind of Russian oil, etcetera. And so, it really is a country-by-country dynamic. But in general, the international side will get hit a little bit harder than the US and it will last a little bit longer later in the year than the US right now.

Mike Cieplak:

Our next question is from Dennis Geiger with UBS.

Chris Kempczinski:

I think there's probably more consistency than not. And when I think about Europe, one of the things that we're seeing in Europe is we're seeing that, that was a business that was largely a dine-in business that through COVID, we are seeing that the dining or takeaway portion of the business continues to be elevated. And we're seeing a much greater traction on digital as being one of our service channels there. That, I think, creates some opportunities for us that we need to get after that are probably different than what you would see in the US, because the US has always been more of a takeaway market. But what does that mean for Europe? So that's one area for us that I think we've got more to do in that. I think -- when we look also at what's going on in Europe, we've got a very strong coffee business in a number of markets, and I think driving that and using that particularly as a way to drive transactions, I think that's also an opportunity for us. The other thing that Europe is focused on like chicken as an example, those tend to be more consistent. If you move over to the US, I mean, the US team has done a great job over the last several years and it's shown up in a strong multiyear run in comp sales. So, I think a lot of what is currently in flight in the US is just continuing to do that. And I've talked about it in a number of different occasions and was in our press release around this. It's execution, execution, execution. And part of that means that we need to make sure that our restaurants are properly staffed. It needs to make sure that we're getting our crude trained and make sure that we are operationally, delivering on things like service times that we know can have a big impact on customer satisfaction. So those are the priorities for Jill and the team in the US.

Lauren Silberman:

Thank you. And Kevin, I also echo my congrats. A follow-up on the value commentary. Can you expand on how you're thinking about everyday value and balancing the elevated cost in the US, whether that's dollar drinks or $1, $2, $3 menu. I guess what's the franchisee appetite for value, should we see a more challenging environment? And then related, you offer an array of promos to the app. How do you think about your composition of value offers as it relates to digital versus in-store? Are we getting to a point where personalization might be something on the horizon? Thank you.

Kevin Ozan:

The only thing I'd add is, just to demonstrate what Chris was talking about, if you think about this transition or evolution, historically, we would have had a big national value menu. Today, value is primarily driven at a local level, specifically at the breakfast daypart. So, we do have a $1, $2, $3 nationally advertised value platform, but it's really complemented with a localized approach that allows the individual field offices to promote products that make sense in their local markets and based on their competitive set. We'll continue to have some national programs, whether it's two for $6 or a buy one get one, but we've moved really more to a local approach, which then becomes ultimately a personalized approach, as Chris talked about. So we're in the middle of that evolution going from national to local to ultimately really more personalized.

John Ivankoe:

Hi. Thank you. I wanted to get back to the comment on labor. And if you think the stores, and this is both US and IOM, are staffed to the extent that you can properly meet demand? In other words, do you have unmet demand that's in the system because of your staffing levels at the store. And if that is the case, I mean, are there any capital or technology type of investments in coming years that could allow you to reduce your demand for labor while increasing overall customer service. Thanks.

Mike Cieplak:

Our next question is from Jeff Bernstein with Barclays.

Chris Kempczinski:

Yes. Thanks for the question. Let me start with that at a macro level. We have about 5,000 franchisees globally. And so, when you think about franchisees and I've talked about this in the past, it's hard to talk about them as one group of franchisees because we have, like I said, 5,000 franchisees of different sizes of different constructs, etcetera around the world. Think, if I get underneath your question, you're probably asking about some of the headlines that have occurred in the US of late. And I would just point out a couple of things. Our aspiration as McDonald's, frankly, one of the things that we pride ourselves on, we absolutely believe that we're the best franchisor in our industry. And we think we've demonstrated that over the last 70-plus years. We only get to say that, if you continue to have the best franchisees. And the moves that the team announced in the US are designed to ensure we continue to have the best franchisees in our industry, which then makes us the best franchise or and the way that they're going about it is two ways. They're going about it in some areas, raising standards. And in other areas, improving access for people who want to join our system. And I would say that the announcement that the US team made recently, it connects to an earlier announcement that we made that I think maybe many of you had saw, which was our commitment to put $250 million into financing options to be able to continue to attract new people to become franchisees, many of whom we hope, our crew working in our restaurants to then become franchisees. So, everything that was announced is about for us continuing to make sure that we are going to be the best place for the best franchisees. You only get to make those announcements in my view when you're doing it from a position of strength. And that's what we've got in the US right now, earned over the last several years through our performance. And the position -- what it's given us is, it's given us a very nice situation where the demand for our restaurants significantly outstrips the supply [ph]. If you get our current franchisees, the vast majority of our current franchisees are continuing to look for ways to grow their organizations by buying new restaurants and they're also looking for ways for their children to continue to run and continue in the system. That's a good thing. At the same time, we've got strong external demand, especially with the support on financing for people who want to come into our system and become franchisees. So, from my vantage point, I'm excited when I see demand for our restaurants outstrip the supply. I think that makes us a better business. There are people that are exiting the system that's been written about as well. I would say, what they're doing at this point is they're taking advantage of the strong health of the business to get multiples of 8-to-10x when they're selling, which is the best that we've seen in, I think, anybody's recent memory on this. So, there are some people looking at taking money off the table right now, but they're doing it at incredibly multiples. If you step back on this and think about it again, I'm talking more about the US, but everything that we've announced, if you are a strong performing franchisee, you're going to be excited about this because what it means is that you're going to continue to have the opportunity to grow, and you're going to have stability around your equity. I think where there is concern is if you are maybe not one of our stronger performing franchisees, this probably does some of the announcements that the team made probably does raise your concern. But the US team, I know, is committed to helping improve there and I would be delighted to see that if we can get improvement in maybe some of the lower-performing franchisees. But broadly, I would say our relations with our franchisees globally, the 5,000 franchisees is strong. And when we're a great franchise, when we're great franchisees, this business tends to do pretty well over time.

Mike Cieplak:

Our next question is from Sara Senatore with Bank of America.

Kevin Ozan:

Yes. Thanks Sara. Let me take a shot at both of those. On the unit growth in the US, you're right, it's come down a little bit. that's mainly due to timing. Some permitting is taking a little bit longer in some areas. We do still expect net unit growth in the US this year for the first time in several years, but it's certainly not an access to capital, as you mentioned. It really is just a timing thing. And we are finding that openings are taking a little bit longer between some supply chain challenges and some permitting just timeframes. I think there's a backload making just getting through all the government processes take a little longer. On operating margin, we upped that guidance a little bit right after the Russia announcement. It really is a function primarily of selling our Russia business. The Russia business, as you know, was primarily company-owned and actually had an operating margin below our global average. So, by taking them out now actually helped improve the operating margin. So, it is just a function of mix in the near-term. We do still believe that longer term, there's leverage to be gained both in operating margin and specifically on the G&A side that should help that operating margin longer term, not in 2022, but longer term that should help improve that operating margin going forward.

Jared Garber:

Hi. Thanks for taking the question. Just sort of two for me. I'm curious on daypart, if you're seeing any shift in daypart usage across the US system. I know you talked about some maybe some easing on the lower income side of the consumer, but wondering if you're seeing anything specific to any of the dayparts, whether that's breakfast, lunch, diner or late night that you'd like to call out. And then I also wanted to know if you could help quantify or provide some incremental color on the gains that you're seeing either on average check or frequency from the loyalty program now that we've effectively launched one year past the launch in the -- or last one year since the launch in the US. Thanks.

Kevin Ozan:

Yes. I mean, loyalty is an interesting dynamic related to check. Loyalty is really about driving frequency and increasing frequency. And we are seeing definite increases in frequency everywhere where loyalty has gone in. If you take into account redemptions on the loyalty, you actually see a little bit lower average check because of the redemptions that occur there. But it is significantly driving frequency. So when you look at it in total, it's clearly additive to sales. But if you just look at an actual average check and take into account redemptions, you end up with a little bit lower check because of that.

Nicole Miller Regan:

Thank you so much. Good morning. In the US, can you talk a little bit -- finished up the conversation essentially just having about cohorts. Can you do that a little bit by income? So let's say, the lower income you said a few times now is coming a little bit less. How much less does that matter? So by cohort of income, who comes the most or spends the most, such that we can't really understand when you're saying they come less. Like what is the impact of that, if that makes sense?

Mike Cieplak:

Okay. Thank you, Chris. Thank you, Kevin. Thanks, everyone, for joining. Have a great day.

Mike Cieplak:

Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer Kevin Ozan. As a reminder the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website as are reconciliations of any non-GAAP financial measures mentioned on today's call along with their corresponding GAAP measures. Following prepared remarks this morning we will take your questions. Please limit yourself to one question and reenter the queue for any additional questions. Today's call is being webcast and is also being recorded for replay via our website. And now I'll turn it over to Chris.

Kevin Ozan:

Thanks Chris. Global comp sales were up nearly 12% in the first quarter, reflecting strong underlying performance across all segments. In most of our major markets we sustained QSR traffic share gains by elevating our brand, accelerating digital channels and showcasing our core equities of chicken and beef. We entered 2022 expecting it to be a year of continued recovery in our international-operated markets, as several markets were still experiencing COVID-related stops and starts throughout 2021. In the first quarter, comp sales in our IOM segment increased over 20% and average unit volumes have now surpassed pre-pandemic levels across the segment. The U.K. continues to be one of our strongest performing markets. In the first quarter performance in the U.K. was fueled by sustained digital momentum and strong menu initiatives like the national rollout of McPlant and the extremely successful Chicken Big Mac promotion. In Australia, the Welcome to My World convenience campaign showcased how we make consumers' lives easier and helped drive significant share gains in delivery. And the launch of MyMcDonald's Rewards in March has already increased app adoption among consumers. Canada also experienced strong digital growth building on their successful fourth quarter launch of Loyalty. Over the past couple of years, consumer mobility was particularly challenged in France and Germany, but we saw great improvement in both markets throughout the quarter. We highlighted our core menu in both markets, with a successful QPC campaign in France and the launch of our new premium beef platform McDonald's Supreme, in Germany. As Chris mentioned, the quarter also brought more macroeconomic challenges including rising inflationary pressures and supply chain challenges, all of which were elevated by the crisis in Ukraine. All of our restaurants in Ukraine were closed at the end of February. And in early March we made the decision to suspend operations in Russia. While these markets represented about 2% of system-wide sales in 2021, the closures had a negligible impact on consolidated sales results for the first quarter this year. In the U.S., comp sales were 3.5% for the first quarter. Higher average check driven by strategic price increases continued to be a significant growth driver and strong marketing campaigns across loyalty, value bundles and our Crispy Chicken Sandwich delivered incremental sales and continued to drive digital adoption. Turning to the international developmental license markets. Comp sales were up nearly 15% for the quarter largely driven by positive comps in Japan and Latin America, partly offset by negative comps in China. In Japan, we focused on off-premise channels as a result of elevated COVID levels, meeting shifting consumer needs and continuing to grow market share. We also delivered strong growth at the dinner daypart with limited time offerings like the re-hit of the Samurai Mac and the launch of Spicy Chicken Nuggets. And in China, a surge in COVID cases and renewed government restrictions created challenging operating conditions in the quarter, resulting in temporary restaurant closures throughout the country that continue today. While comps were negative for the quarter, we expanded our app engagement with digital-only promotions including delivery offers and subscription cards. And with that, I'll turn it back to Chris.

Kevin Ozan:

Thanks. Our strong performance for the quarter resisted in adjusted earnings per share of $2.28, an increase of over 20% in constant currencies. This excludes about $125 million of costs for employees, landlords and suppliers in Russia and Ukraine while our restaurants are closed. It also excludes $500 million of non-operating expense to reserve for a potential settlement related to an international tax matter. Adjusted operating margin for the quarter was 43.1%, reflecting improved sales performance, partially offset by higher G&A costs. Total restaurant margin dollars grew by over $450 million in constant currencies, or 17% for the quarter, primarily driven by improvement in franchise margins. Our franchise margin in the IOM segment showed significant recovery over the prior year, reflecting strong sales performance across markets. As expected, our company operating margins were hampered by significant commodity and labor inflation. Given macroeconomic conditions, we expect these elevated inflationary pressures to continue throughout this year. G&A for the quarter was up about 20% in constant currencies, due to costs incurred for our worldwide convention earlier this month, higher long-term performance-based compensation and higher depreciation related to investments in restaurant technology. And our adjusted effective tax rate was 21.3% for the quarter. Based on current exchange rates, we expect FX to reduce second quarter EPS by about $0.08 to $0.10 and full year EPS by $0.22 to $0.24. As always, this is directional guidance only, as rates will likely change as we move through the year. And now, I'll turn it back to Chris to close.

A - Mike Cieplak:

[Operator Instructions] David Tarantino your question, please.

Chris Kempczinski:

Sure. Thanks, David. I think as you know from our results, the business in the international markets, particularly in Europe it performed very strongly during Q1. We saw great growth in UK and France Germany many of our large markets in Europe. So I would say that based on Q1 results we didn't see a significant impact on it. I think what's obviously on everybody's mind is around sentiment. And what you're seeing is concern around consumer sentiment probably most pronounced in Europe but it's not yet showing up in business performance but it's certainly something we're keeping an eye on.

David Palmer:

Thanks. I was wondering if you could perhaps characterize the recovery to date in your IOM countries? Perhaps you could speak to the percent back to – versus pre-COVID levels in traffic or sales? And what is your general feeling about the path back to pre-COVID levels in these markets or any of these do you anticipate coming back faster than others based on what you're seeing? Thanks.

Mike Cieplak:

Our next question is from Dennis Geiger with UBS.

Chris Kempczinski:

Sure. I'll start with that and then Kevin can add on. But I think we were happy with how we performed in Q1, and we're also pleased with how we're entering into Q2. So I think overall we feel good about the US business performance. A big thing for us in the US, which is driving our growth and our success as digital, which for us has exceeded our expectations. So, we feel really good about digital. We feel really good about chicken and then we're also getting good growth continuing on delivery. To your point about, what's changed and what's not changed, I think I'll start with what hasn't changed, which is delivery despite things kind of reopening delivery is still growing in a significant part of the business. And that's consistent with what we've seen in other markets elsewhere around the world that have reopened delivery continues to remain elevated. Digital also continues to be a growing and highly preferred means for our consumers to be interacting with the brand, I think the only thing that we are keeping an eye on is we've seen average check come down a little bit as perhaps you're seeing those large groups that were going out and ordering in the pandemic you might see that – we're seeing some of that splintering where it's breaking up into two transaction, which was maybe previously one transaction. And then we are seeing also that, certain parts of the business and in certain geographies there is a little bit of a trade down that we're seeing that we're just keeping an eye on there. But overall feel good about the business in the US and confident about performance heading into Q2.

Mike Cieplak:

Our next question is from John Glass with Morgan Stanley.

Kevin Ozan:

Sure. Let me give a shot to try and cover a little of all of that, and I'll try not to talk for the next 30 minutes. So let me start with inflation. In the U.S., I think last quarter, I mentioned that we thought commodities were going to be up roughly 8% or so for the U.S. That number is now more like 12% to 14% for the year. So U.S. commodities clearly have risen. That's our current estimate. Obviously, the landscape is changing pretty rapidly. So we'll need to keep a close eye on that, but that certainly increased substantially. Similarly, in our IOM markets that number, I think, last quarter was more around six-or-so percent that's now doubled and is similar to the U.S. kind of that 12% to 14% range. So the commodity side, food and paper inflation has definitely increased substantially for various reasons including the Russia-Ukraine crisis. On the labor side, in the U.S., it's probably over 10% right now. Part of that is because you'll recall that we made adjustments to our wages in our company-owned restaurants mid-year last year, so we haven't lapped that. So part of it is due to that and part of it is due to just continued wage inflation. If I -- on the price -- so let me try and walk through the U.S. to help understand some of the dynamics you were talking about. Right now in the first quarter year-over-year, our pricing is up and these will all be rough numbers, so take them as round numbers. But our pricing is up roughly 8%. Again, that's first quarter this year over first quarter last year. We are still seeing similar flow-through from the pricing we're taking to our comp. So kind of from a resistant standpoint, we haven't seen any substantial increase in consumer resistance from this pricing. So that flow-through is roughly 70% or so. Again, not an exact science, but roughly 70%. So if you take that 8% pricing with a roughly 70% flow-through, you're around 5.5% from pricing, let's say, that's hitting comp sales. Chris just mentioned that we're seeing a little bit of trade down in our product mix and we're seeing a little bit lower items per transaction or smaller order sizes. Those order sizes are still much higher than pre-COVID. But on a year-over-year basis, it is a little bit lower. Those two impacts gets to our average check increase then of about 4.5%. So pricing gives me about 5.5% by overall is 4.5% that little bit of trade down a little bit of lower items is taking me from 5.5% to 4.5%. The last piece is obviously guest counts or transactions. Those were roughly down 1% in the first quarter which then gets you to our comp sales of around 3.5%. So, hopefully that helps us lay out kind of the different pieces that are going on. I got a lot of changing dynamics a lot of complex things going on. But roughly that's the way the business performed first quarter this year.

Andrew Charles:

Great. Thanks. Kevin, hopefully, a simple question for you. How should we think about the next few years of CapEx relative to 2022's $2.2 billion to $2.4 billion as US reimaging winds down, but restaurant development is ramping up? And within that as well I know China is an asset-light market for you guys. If you could just comment on the 800 stores you previously planned to open there? Is that still on track, or is the COVID flareup you're seeing there weighing on that? Thank you.

Mike Cieplak:

Our next question is from Eric Gonzalez with KeyBanc.

Chris Kempczinski:

Sure. I'll start and then Kevin can maybe talk modeling. But I think it's probably as you would imagine best that we not get into the variety of different options that we're looking at, considerations for our people over there lots of different constituencies. So, I think it's probably best that we not go through that at this point. But we will be providing -- as I said in my opening comments, we will be providing clarity on that by no later than the end of the second quarter. I would tell you that we are being exhaustive. So, my guess is that there probably isn't a scenario that you could come up with on your own that we're not looking at. But I'll just leave it at that and let Kevin answer any of the modeling questions.

Mike Cieplak:

Our next question is from Lauren Silberman with Credit Suisse.

Chris Kempczinski:

Sure. Well the -- we're actually in field right now getting detailed feedback from the 14,000 participants that we had. But I would say anecdotally, what I heard back from people was just a tremendous excitement of being back together again. And when you haven't seen some of these people in four years, which is true for many of our franchisees, who typically use convention as a way to connect with their colleagues around the world, just a lot of excitement to be back together. And also talk about what we've been through and also where we're headed to. And I think there was a nice balance of looking back, but also making sure that we're being forward-facing on that. I did hear many people talk about this being one of the best conventions that they've attended or can remember attending. Now part of that maybe it's been four years since the last one. But there was I think a sense amongst franchisees when they consider all the things that have gone on in the world, boy it feels really good to be part of McDonald's. And that goes to my comment about there's never been a better time to be part of McDonald's. All you have to do is look at sort of what everyone else has gone through and compare our relative position on that. And I think you come away that sentiment. We did share as finally a number of things that we are looking at, particularly around restaurant operations. This includes everything from automated order taking which -- many of our international franchisees have not seen, our US franchisees have had more visibility on that, a lot of interest and attention in that as you would imagine. We also showed them some different ways that we're thinking about dual lane drive-thru and perhaps adding a second percent window at a dual lane drive-thru. That was also interesting for people and other ways for us to bring automation into kitchen operations. So that was kind of everything that was going on at convention, but just a lot of connecting and socializing as well.

Jeff Bernstein:

Great. Thank you very much. Just a question on the US loyalty rollout. I think you mentioned 26 million members, which seems like a pretty quick ramp. And I know you mentioned it being above plan. That number is kind of similar to some of the other industry leaders in the US business. I'm just wondering maybe you can give some color maybe on the average check learnings for those or the traffic implications? And where you think that maybe can go? Obviously, I'm assuming you know maybe your total unique customer base or initiatives you're using to push that number. So any color you could give would be great? Thank you.

Mike Cieplak:

Our next question is from Sara Senatore with Bank of America.

Chris Kempczinski:

Yeah. I think the headline is that the overall US consumer from our vantage point is in good shape. And consumer balance sheets in the US broadly speaking again at the average are strong, which gives us the optimism as I talked about earlier as we head into Q2. Now you deaverage, which is what you always have to do in these situations. And I think you do start to see that the lower income consumer particularly around gas prices and the pressure that that puts on pocket book the pressure around rents that there probably is an increased value sensitivity with that lower income consumer. We don't have the detailed type of data that you would love to have that would allow us to slice and dice it. So we're having to use ZIP codes and other things as proxies for that. But I think it's probably fair to say that the lower income consumer is probably feeling more pressure than the average consumer or certainly the wealthier consumer. And that's why for us, we need to make sure that we continue to have value be an important part of our proposition. It always is one of the things that defines McDonald's is making sure that we stay strong on value. We're pleased right now because as we look at our value scores relative to our competition, consumers are still giving us a lot of credit for being a good value. But we just need to make sure as we're working through some of the inflation that Kevin talked to earlier, that we don't lose track of -- we still need to be providing good value to consumers. And -- there's a lot of different ways for us to do that. Joe and the team are spending a lot of time with US franchisees on how to think through that and navigate it. But we've always got to stay competitive on value. When we lose sight of that, there's a long history of that being where we've kind of gotten off track. So I can promise you, we're not losing sight of it. But broadly the US consumer from our vantage point is still in good shape.

Mike Cieplak:

Our next question is from John Ivankoe with JPMorgan.

Chris Kempczinski:

Sure. Well, without getting too much into decomposing our comp into various dayparts, I would tell you that, whether you look at it on a Q1 basis or you look at it on a three-year basis, we've actually seen from a comp sales standpoint, we've seen breakfast and dinner be standout performers for us. Lunch has been a little bit more modest from a performance standpoint. So we feel really good about what we've seen again at breakfast and dinner. Late night traded off as you would have imagined for a variety of reasons. Some of it was related to operating hours there et cetera. But those two elements are strong. As we think about what lunch is going to look like going forward, it's certainly the biggest part of our daypart mix. We're still seeing growth in that. It's just not at the same levels that we're seeing in those other two dayparts. Kevin, I don't know if you want to add?

Chris Kempczinski:

The only thing, I would add which may be is the question behind the question. I don't know, but I'm just – I'll throw this out there. I said in the last earnings call that, our whole mentality is we're in a share-taking mode. And we saw that play out in Q1 and it's played out not just on the quarter, but it's played out over the last several quarters. And it's played out from both a comp sales standpoint as well as from a guest count standpoint within QSR. So the relative mix within our own is interesting, but it's also about how is our performance compared to our QSR peers and our mindset is about stealing share and that's what we're seeing in the numbers both on sales and on traffic.

Nicole Miller Regan:

Thank you so much. And perfect timing because I wanted to ask something that really coincides with that. So I wanted to reconcile or validate that you're taking share traffic down. So you're not losing share to legacy QSR peers. Are people going to convenience stores? Is your customer taking a break at home and eating there? And if so what are the tools or messages you used to get them back from those places?

Mike Cieplak:

Our next question is from Chris Carril with RBC.

Kevin Ozan:

Yeah. I think for this year we still feel pretty good about that low to mid-40% range. We won't get the leverage obviously that we all would hope for going forward. So I think there's opportunity to get leverage on that post these large inflationary pressures which is why we're still remaining with that low to mid-40 range. I think last quarter someone asked why it wasn't higher than that. And I think the near-term inflationary pressures are keeping that at the low to mid-40% range for this year. I think post-2022, again obviously depending on what happens with all these inflationary pressures, but if those get back down to a, I'll call it a low to a reasonable level, we believe there's opportunity to gain leverage on that operating margin line going forward.

Brian Mullan:

Hey, thank you. A question on the US business kind of back to the share gain mentality. You've called out chicken as an area of focus for the business this year. Just wondering if you could give a sense of the opportunity however you see it? And how much share do you have today or versus what did you have in 2019? And then from here is this a multiyear runway you see to take share in the menu side?

Mike Cieplak:

Our next question is from Jon Tower with Citi.

Chris Kempczinski:

Yes. I'll give my own thought and then Kevin can chime in. But I think for the last -- since COVID hit basically at the beginning of 2020, we've -- in all of the various calls with you and I think probably across the entire industry we've all struggle to figure out what is the right way to think about traffic. And probably our historic approach which is guest counts we -- we've recognized that there are shortfalls with that which is why Kevin came up with his other category, which was called stuff and just selling more stuff or said another way just more units. I would say, on all of that it's still unclear to us what is the right way for us to be assessing. We're still seeing a lot of changing consumer behavior whether it's through digital, whether it's through delivery and how all of that sort of levels out and then you get a clean read of what the go-forward means. I don't think we're there yet at this point. But we certainly look at our relative performance versus our competitors on that. And so long as we're beating our competitors we feel good about it. And we worry may be a little bit less about what the absolutes are and it's more about are we stealing share.

Mike Cieplak:

Nearing the hour Mark we'll take one more. Jared Garber with Goldman Sachs.

Chris Kempczinski:

Sure. Well I'd start with I think digital changes everything. So today I don't know 90% plus of the customers -- 90% of the customers coming into my restaurant, I don't know who they are. I don't know there prior purchase. I don't know what their buying pattern is. I don't know are they a deal seeker. Are they someone who always orders the same thing? Do they like to try new things? So as I get better and better visibility into that customer I can actually track and identify their preferences over time it starts with I'm going to be able to give them a better experience. I'm going to be able to give them faster speed of service. I'm going to be able to give them a cleaner app a cleaner menu board. And I'm going to be able to give them deals offers programs that are more personalized to what they're looking for. It's not going to necessarily be a one-size-fits-all type of thing it's going to be much more bespoke to what each customer is looking for. And digital allows us to do a level of personalization at scale at McDonald's that is almost impossible for us to do through sort of more of our analog type of approach. As you start to then get much more of this data about buying behaviors purchases you can get it integrated into restaurant operations, and it gives you opportunity to do automation. It gives you speed of service opportunity positioning that has labor benefits. So it can change I think just the entire unit economic profile for the better of what a restaurant looks like. We're still very early on this. So I don't want -- I want to caution against anybody out going out there and running and building a new model off of this. But if you go 10 years out that's where we're headed to because I think we all recognize those of us who are in the business day to day there is tremendous opportunity there if we can make further inroads.

Mike Cieplak:

Hello, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Kevin Ozan. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website, as are reconciliations of any non-GAAP financial measures mentioned on today's call, along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. [Operator Instructions]. 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.

Kevin Ozan:

Thanks, Chris. As we've talked about before, the customer-focused actions we've taken over the past couple of years continue to drive strong top line momentum. Our global comp sales were up over 12% in the fourth quarter or nearly 11% on a 2-year basis. As a result of these actions, we've gained QSR traffic share across most of our major markets since 2019. This is particularly evident within the International Operated Markets, where off-premise channels remain a significant competitive advantage in this fluid COVID environment. Our IOM comp sales for the fourth quarter were nearly 17% or just over 8% on a 2-year basis, with strong 2-year double-digit growth in the U.K. and Canada and high single-digit growth in Australia. Later in the quarter, we had stops and starts in markets like Germany and France, where elevated COVID trends and heightened government restrictions interrupted recovery. Our U.K. performance was driven by continued growth in our delivery business and strong marketing featuring core menu items such as the Double Big Mac. Canada also saw increased delivery momentum, with October being the strongest month of delivery sales to date. And a highly successful launch of MyMcDonald's Reward loyalty program drove significant digital engagement. Australian consumers began to emerge from stay-at-home restrictions throughout the quarter. Our 30 Days, 30 Deals value platform was a strong contributor to comp growth for the quarter and drove app usage as we prepare for our loyalty launch in the first half of this year. As I mentioned, there are still challenging operating conditions in Germany and France, but we remain confident about our market share opportunities. Germany continued to benefit from a strong third quarter rollout of loyalty as well as a digital advent calendar in December, accelerating both app adoption and digital sales in the market. And in France, we highlighted our core menu with the launch of our new premium chicken line, featuring wraps and the Chicken McBaguette. In the U.S., we finished the year strong with comp sales up 7.5% for the quarter and over 13% on a 2-year basis. We saw positive comps across all dayparts, which are still benefiting from average check growth, driven primarily by strategic menu price increases. Our MCD pillars continued to drive U.S. comps as strong marketing efforts behind McRib and the Crispy Chicken Sandwich were complemented with digital adoption by our customers. Digital growth remains a key driver of success in the U.S. Our loyalty program continues to build with digital sales growing month over month. Chris will share additional headlines on our digital strategy and success in a few minutes. All of this top line growth has also fueled franchisee cash flows to record highs in the U.S. with average growth in 2021 of around $125,000 per restaurant, putting our franchisees in a strong position to weather the inflationary pressures Chris talked about earlier. Turning to the International Developmental Licensed segment. Momentum accelerated in Q4 with comp sales up over 14% or 10% on a 2-year basis. Performance was largely driven by positive results in Japan and Latin America, partly offset by negative comps in China. Japan achieved its 25th consecutive quarter of comp sales growth with strength across our delivery and digital channels, while our dinner daypart benefited from compelling value programs and the introduction of new menu items. Recovery in China, however, continues to be impacted by COVID-related government restrictions, which significantly disrupted the restaurant industry in the fourth quarter. While comps were negative for the quarter, we expanded our digital presence with a successful year-end festival for app members, and we opened over 650 restaurants for the year. Turning to the P&L. Company-operated margins, particularly in the U.S., were pressured for the quarter as a result of higher labor and commodity costs. G&A for the quarter increased 9% in constant currencies. As I've mentioned before, the increase was primarily driven by higher incentive-based compensation expense as a result of company performance significantly exceeding our plan for the year. Foreign currency translation negatively impacted fourth quarter results by $0.03 per share. And after a tax rate of over 22%, which included some one-time items, adjusted earnings per share was $2.23 for the quarter. For the full year, adjusted operating margin was 43.4%, reflecting higher restaurant margins across all segments and higher other operating income. Despite some of the P&L pressures I mentioned, top line results generated restaurant margins of over $12 billion for the year, an increase of over $2.5 billion. Before I hand it back to Chris, I want to touch on CapEx and our free cash flow profile. Our overall capital spend for 2021 was a little over $2 billion, slightly lower than our original expectations, primarily due to the timing of projects. With the improvements we've made to our business model over the last several years and the consistent strength of our global business, our free cash flow grew to $7.1 billion in 2021, an increase of nearly 25% over 2019. And free cash flow conversion was 94% for the year. With that, I'll pass it back to Chris.

Kevin Ozan:

Thanks. Looking ahead this year, as Chris said, we're confident that our Accelerating the Arches strategy will continue to drive growth against an uncertain macro backdrop. We expect that our 2021 net new restaurant openings of about 2%, along with planned expansion in 2022, will contribute about 1.5% to our system-wide sales growth in constant currencies this year. We're focused on increasing our overall operating margin over the long term, as it serves as the most comprehensive gauge of operating performance. In 2022, we anticipate our operating margin percent will continue to be in the low to mid-40s range as strong top line momentum and minimal other operating income will be hampered by significant commodity and labor inflation in the near term. We've seen our digital and technology investments over the past few years drive top line growth. As we continue to strategically invest in digital and technology, we're also carefully managing our G&A. In 2022, we expect G&A to be about 2.2% to 2.3% of systemwide sales. Beyond 2022, we expect to gain leverage on both G&A and operating margin through continued sales growth. Based on current interest in foreign currency exchange rates, we're projecting interest expense this year to be relatively flat compared to 2021. And under current tax legislation, we expect our effective tax rate for the year to be between 20% and 22%. Finally, based on current exchange rates, we anticipate currency translation will negatively impact EPS between $0.05 and $0.07 in the first quarter and between $0.18 and $0.20 for the full year. As usual, this is directional guidance only as rates will change as we move through the year. Transitioning to capital expenditures. We anticipate spending between $2.2 billion and $2.4 billion this year. About 40% of this will be allocated to our U.S. business, where we expect to have net restaurant unit growth for the first time in a few years. Most of the U.S. spend will go towards reinvestment, including the completion of our restaurant modernization efforts. About half of our total capital spend will be dedicated to new unit openings. Globally, we plan to open over 1,800 restaurants, with more than 500 of these openings in the U.S. and IOM segments. The remaining 1,300 new restaurants, including roughly 800 in China, will be across the IDL markets, where our strategic partners provide the capital for restaurant openings. We anticipate net new restaurant growth of about 3.5% for the year. We also expect our strong cash flow growth to continue in 2022. And after the CapEx spend I just talked about, we'll continue to convert more than 90% of our net income to free cash flow as we have the last few years. Going forward, our capital allocation priorities remain unchanged

Operator:

[Operator Instructions].

Andrew Charles:

Great. Kevin, this quarter is a little different that the formal outlook in the 8-K did not provide a 2022 system sales outlook. And usually, you guys provide some commentary around the forward quarter and around how you see sales and margins progressing. And I recognize that media reports 2 weeks ago, around a 10% reduction in operating hours due to staffing challenges, is probably presenting some lack of visibility. But if you just help level set what are you seeing out there at the start of January, just given the staffing dynamic? And kind of how you see the potential for U.S. sales progressing over the course of 2022, just given the [indiscernible] you saw last year as the strategy really is working.

Christopher Kempczinski:

Yes. And I would just add, our franchisees have done a phenomenal job working through what is a really challenging staffing environment. Omicron certainly didn't make that any easier. But as of this week, we are now down to only about 1% of our restaurants in the U.S. are operating with limited hours. So franchisees have been able to make significant progress in ensuring that they've got the staffing that they need. And we actually are exiting 2021 with our roster size, the average number of people that work in the restaurant. Our roster size at the end of '21 is greater than where we were entering into the beginning of the year. So franchisees, again, have done a nice job, but it certainly is challenging. I think we're in a good place, though, in terms of having the vast majority of our restaurants, 99% of them, operating now with normal hours.

David Tarantino:

A couple-part question here on the unit growth outlook. One, I just wanted to get more perspective from you on what's driving the big uptrend here in openings? And whether there's certain markets you'd call out as particularly strong in terms of the outlook? And then secondly, Kevin, if you could just explain a little bit why a 3.5% unit growth number for this year would only translate to 1.5% of system sales. And I understand there's some mix impacts on that with respect to IDL, but was curious to sort of understand the dynamics there and what perhaps the run rate contribution to system sales would be from that type of growth?

Mike Cieplak:

Our next question is from Eric Gonzalez with KeyBanc.

Kevin Ozan:

Okay. There's definitely a lot in there between cash flow and commodity and pricing. Let me try and hit a few things there. Let me start with the cash flow perspective because we did say our cash -- unit cash flow is up about $125,000 for the year. Again, looking over a 3-year period, it's up about 50%. It does get to over $500,000 on an individual restaurant basis. It is fair to say, to your point that, there is commodity pressure going into 2022. Just to give a perspective, in 2021 in the U.S., our food and paper costs were up about 4% for the year. If we look forward to 2022, our expectation is that will be about double or in high single digits increases for 2022. Most of that pressure or more of that pressure will be in the first half of the year. And as the year progresses, we expect that to ease somewhat. On the international side, just to give a similar perspective, we saw about a 3% increase in food and paper costs in 2021, and that increase is supposed to be around double also in 2022, similarly more pressured early in the year. So there is some pressure, certainly, again, more early in the year, on margins and therefore, on cash flow also. We certainly don't expect it to wipe away what we gained either in 2021 or prior to that. But it certainly will pressure, again, both margins and cash flow. From a pricing perspective, our franchisees, I think you know they obviously decide pricing for their individual restaurants. They're advised by a third party, and the pricing mechanism or methodology that's used is a consumer-based research approach. We take into account market conditions, economic environment, competitive landscape, et cetera, generally try and take small increments of pricing at various times versus take a lot at one time. And really, the most important thing that we're trying to balance is cost pressures with making sure that we provide good value to our customers and that our customer ratings on value remain high. We do keep a close eye on that. Our customer ratings have continued to score well on the idea of providing good value for money, and that's a really important metric for us because, obviously, a lot of our customers are looking to make sure that they're getting value as inflation rises. So that's some of the pricing dynamics that go on.

John Glass:

I wondered just on loyalty, if you think about -- how you think about that impacts sales in the various markets in '22? Is there a way to quantify early on what you've seen in later stages of '21 in the U.S., for example, or earlier markets, like for example, France, where you've had loyalty for a number of years, maybe as a benchmark, how has that contributed to their sales growth as we think about how that may benefit the system in '22 and beyond?

Mike Cieplak:

Our next question is from Dennis Geiger with UBS.

Christopher Kempczinski:

Sure. We definitely see digital more broadly as the long-term macro trend that's going to affect our business. We're now at about 25% of our business is through digital channels. I think that number is going to continue to grow. We have some markets where that number is north of 50% of the business, like in China, like in France, others are very close, like in the U.K. where it's right at about 50%. So digital for us is a long-term play. It's part of why, as you know, earlier last year, we made a move to create the Global Chief Customer Officer, because I think our opportunity is to meld more seamlessly the physical experience with the digital experience. And I think that's a big part of what Manu and his organization is going to be able to do. So for us, we're excited about what digital can do. And I do think that there's -- right now, there's a lot of focus on what it can do for the customer experience. But as you digitize more of your transactions, I do think it opens up opportunities on the operations side as well. And so for us, this is going to be something we'll be talking about for years to come.

Jared Garber:

Yes. Sorry about that. I had a phone issue. I wanted to ask a question about unit growth. Obviously, the franchisee free cash flow seems really strong, so not a demand issue. But wanted to get a sense of what you're seeing in terms of maybe the construction environment with respect to labor and staffing or permitting or equipment availability and supply chain?

Mike Cieplak:

Our next question is from Jeff Bernstein with Barclays.

Christopher Kempczinski:

Sure. I'll address a couple of those, and then I think Kevin will pick up on a couple as well. So in terms of the progress that we've made, I would point out, the 10% number that I referenced was -- when I actually had that comment, that was middle of December. And we were in peak Omicron. I know the report on that came out later. But actually, the time I had that interview, that was mid-December. So we've had about 6 weeks or so, call it, 5 weeks of ability to continue to work away on the staffing side. And that's where, again, our franchisees have done, I think, just a terrific job of finding ways to get the talent that they need into the restaurants to keep the restaurants running. And so that is where we're now at, which is this 1% of restaurants with limited hours. I think for us, part of what we've needed to do in 2021 to be able to leave the year with expanded roster size, as you've certainly seen that there has been labor inflation. And we announced, as you know, back in April of last year, a move from McOpCos, where we were going to take up the average wage in McOpCos, we are -- had about low teens, I'd say, increases at that point. We went up probably a tick higher as the year progressed on that in McOpCos. And our franchisees similarly saw inflation, call it, in the mid-teens from a labor standpoint. One of the things that we also did though, and I think Joe and the U.S. team did a lot of good work with our franchisees on this, is talking about our employee value proposition, and beyond wages, other things that we can be doing to make sure that we've got the best proposition to get people in our restaurants. Things like paid time off, Archways and what we do around tuition reimbursement. And just a focus on making sure the reward and recognition is there. All of those things cumulatively, wages, focus on the employee value proposition and just engaging with the crew is what allowed us to make the progress. As you go into this year, we are expecting that there is going to continue to be pressure on wages. Certainly, as we're thinking about our pricing, we're thinking about how do we put pricing that can anticipate that, but I'll let Kevin tell you more on that.

Mike Cieplak:

Our next question is from David Palmer with Evercore.

Christopher Kempczinski:

Yes. So that's a good question. It's one I haven't gotten before in terms of the actual percent of consumers that were loyalty consumers. I think probably maybe a different way. I don't know precisely that number. But I would say, right now, when you look at app usage in the U.S., which probably for me is the best proxy that we have. Most of our app usage, I think we certainly see people opting in for the loyalty program when they do that. And so app usage is right now running in the mid-single digits on that number right now. So I think that's probably as good a proxy as I can give you for the percent. But certainly, that's something that Mike and the team on Investor Relations can follow up with as well.

Sara Senatore:

A question about margins and sort of related pricing. The couple of commentary you made about like G&A leverage and expecting to drive operating margins higher. So I guess, part one, is that an allusion to the idea that maybe the low to mid-40s is no longer the right range? And specifically in G&A, should it be lower than 2%, which I think was kind of your previous expectation. Are we -- or should we think about that range as still in place, but maybe towards the high end? And the related question is, given how strong your cash -- your franchisee cash flows are, given how strong your performance is, is now the right time to instead of taking price to press that advantage? And I know you said that you're seeing what you expect in terms of elasticity, but is there any thought to kind of really, I guess, turning the screws on competitors with respect to your ability to price aggressively?

Christopher Kempczinski:

Yes, I would just add, I talked about this on the last call. I mean, in the U.S., we've had several years where we have been outcomping the industry. And as we go into 2022, we are in a share-taking mentality. as you noted, we are in a very strong position. And so my message to the U.S. team is about continuing to find ways for us to create further separation between us and the competition, because I think we are relatively at an even better position on that. How they go about doing that? Value can be one component, but there are other things as well. But certainly, our aspiration and expectation in this year is we are going to continue to take share.

Mike Cieplak:

Our next question is from Lauren Silberman with Credit Suisse.

Christopher Kempczinski:

So for -- as we think about innovation, if you go back to kind of our Accelerating the Arches strategy, the C of the MCD is about core menu. And I think our focus needs to be on continuing to drive our global core because those are our most powerful equities. They're ones that we see a lot of consumer excitement about. An interesting thing that we've learned through the pandemic and just the latest on consumer sentiment, the vast majority of consumers, call it, still 80% or so of consumers in our top markets, are saying that they are still looking to buy products that they are familiar with. And so that consumer psyche, I think, plays well to our global core menu. What I love about the hacks, what I've loved about the Famous Orders, we're finding ways to create news without adding complexity into the restaurant. And so I think you're going to see us continuing to do that as kind of a primary focus area. That doesn't mean that there aren't going to be innovations that we do with new menu items, limited time offers. Those are certainly part of what keep the consumer excited and can help drive frequency. But I think we need to stay focused on driving core menu and creative ideas like the hacks ideas, just one way to go about doing that.

Mike Cieplak:

Our next question is from Chris Carril with RBC.

Christopher Kempczinski:

Sure. We did see a little bit of a step back in service times because of the -- I think, the operating environment, that the challenges of just making sure that we have the staffing that we need. And as we head into this year, I think every market -- we've had conversations in the last several weeks, every market is laser-focused on opportunities that we can have to get back to sort of continuing to make progress on reducing service times. The reason that that's so important is when we reduce service times, we see customer satisfaction go up. And so that is something that we're all focused on. I think the other thing is, as we're able to open more service channels, and I'll use the dining room as an example, that takes pressure off of channels like the drive-thru. We put extraordinary pressure on the drive-thru as we had some dining rooms closed in 2021. Right now, in the U.S., about 80% of our restaurants have the dining room open. Expectation is that more of those will continue to open. As we're able to do those things, as we're able to make sure that we've got the staffing at the size that we need and with the predictability that we need, I think the expectation is we're going to see service times start to come back down. And again, we are -- versus 2019, we're better off than where we started in 2019, but we think there's opportunity for us to continue to be showing progress on that.

Brian Bittner:

My question relates to the IOM segment. And obviously, there's a lot of several important large markets that make up this segment. But can you update us on how much market share, you believe, you've taken in the overall IOM segment since the beginning of COVID? And what's been the primary drivers of these share gains? And how does it frame how you think about the potential strength of the IOM business in a post-COVID world?

Kevin Ozan:

Yes. The only thing I'd add is, I mean, to your point and to Chris' point, obviously, IOM is a conglomeration of several different markets. So the markets are in different places. Markets like U.K., Canada have been really strong even throughout the pandemic, whereas some markets like France and Germany are still more in recovery mode. I'd say we expect 2022 to -- again, I'm assuming no more stops and significant restrictions. But assuming that, that is the case, I think our expectation is that as we progress through the year, we will see the markets that needed to recover, recover nicely through the year, and the markets that have been doing well continue to be strong. And as Chris mentioned, most of the major markets have gained share throughout the pandemic. And so we, again, hopefully are coming out of the pandemic in a really strong place in substantially all of those markets.

Operator:

This concludes McDonald's Corporation Investor Conference Call. You may now disconnect.

Mike Cieplak:

Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Kevin Ozan. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website as our reconciliations of any non-GAAP financial measures mentioned on today's call, along with their corresponding GAAP measures. Following prepared remarks this morning, we'll take your questions. Please limit yourself to one question and then reenter the queue for any additional questions. Today's conference call is being webcast and is also being recorded for replay via our website. And now, I'll turn it over to Chris.

Kevin Ozan:

Thanks, Chris. Our third quarter top line results represent a continuation of our broad-based business momentum around the world, with global comp sales up nearly 13% or 10% on a two-year basis. Our international operated markets have continued to recover, accelerating two-year comp trends in the third quarter to nearly 9% as most markets operated with fewer government restrictions. There's still varied performance across the big five markets within the IOM segment, ranging from strong double-digit two-year growth in the UK and Canada to low-single-digit two-year growth in Australia, Germany, and France, as those countries have been slower to recover from the pandemic. The UK continued to lead the segment in the third quarter, driven by growth in delivery and digital channels, as well as strong menu and marketing promotions like Monopoly. In Canada, the strong two-year comp momentum was driven by successful marketing activity, including core extensions like the Grand Mac and spicy nuggets and growth in the 3Ds of drive-thru, delivery, and digital, even as dine-in restrictions have lifted. In France and Germany, comp sales exceeded 2019 levels for the first time in the third quarter. Germany 's positive performance was supported by expanded deployment of delivery, the national launch of our loyalty program, MyMcDonald's Rewards, and a taste of McDonald's promotion featuring value offerings like McChicken. France benefited from continued strength in delivery and strong menu and marketing promotions with a focus on family. Market conditions are challenging with the adoption of vaccine past restrictions for both customers and crew in France and several other countries. Performance in Australia was impacted by significant stay-at-home restrictions, affecting over half of the restaurants for nearly the entire quarter. While comp sales were relatively flat for the quarter, the market was positive on a two-year basis and continue to grow its delivery channel, achieving record delivery sales for the quarter. As we look ahead to the fourth quarter, we expect the IOM segment to maintain a relatively similar two-year comp trend as Q3. In the U.S., we maintained our momentum with Q3 comp sales up nearly 10% or 14.6% on a two-year basis. We continued to see positive comps across all dayparts on a two-year basis, with sustained double-digit comps at dinner and breakfast. At the same time, franchisees continue to achieve record high restaurant cash flow. Our U.S. franchisees have never been better positioned to weather the labor and inflation pressures while still investing in growth. Performance in the U.S. remains driven by strong average check growth, reflecting larger order sizes and menu price increases. The big bets we've made during the pandemic are paying dividends across the business and enabling us to maintain our QSR leadership. Menu and marketing efforts with products like the Crispy Chicken Sandwich and successful famous orders like the Saweetie Meal have elevated our brand and help drive underlying sales growth across the business. The launch of our loyalty program in the U.S. has exceeded expectations and is driving increased digital adoption. In just a few short months, we already have over 21 million members enrolled, with over 15 million active loyalty members earning rewards, and we expect that number to continue to grow. Chris will share more loyalty headlines in a few minutes. We've reopened nearly 80% of our dining rooms in the U.S., roughly 3,000 dining rooms remain closed in high-risk COVID areas as we continue to prioritize the health and safety of our customers and crew. In restaurants, where we have reopened dining rooms, front countering kiosk sales remained below pre-pandemic levels. But we're seeing that even modest increases in these channels helped to relieve operational pressure in the drive-thru. The strong performance in the U.S. has continued into October. We're currently seeing low double-digit comps on a two-year basis, and we expect that to continue through the rest of the fourth quarter. Turning to the International Developmental License segment. Comp sales were up nearly 17% for the quarter, or about 5% on a two-year basis. Performance was largely driven by positive results in Japan and Latin America, partly offset by negative comps in China. Japan maintained momentum in Q3, with comps up 13%, achieving an impressive six consecutive years of quarterly comp sales growth, despite restaurants operating with government restrictions. The market's performance is being driven by a continued commitment to serve customers safely and conveniently through our drive-thru and digital channels, as well as strong marketing and limited time promotions. China continues to be impacted by both COVID resurgences, which restarted in June and lasted throughout the quarter, and a softening economy. While comps for the quarter were negative, the market continues to build its digital presence as they now have over a 100 million active digital members. In addition, we've accelerated new restaurant growth in China. With over 500 new restaurants already opened this year, we now expect to open roughly 650 restaurants for the year, exceeding our original plan. China remains a critically important market for us, and one where we have confidence in the long-term opportunity. So, we plan to get even more aggressive in opening new restaurants in this market. With our strong overall sales performance for the first three quarters of the year, we now expect system-wide sales to be up in the high-teens in constant currencies for the full year. Now I'll turn it back to Chris to talk more about MCD growth pillars driving our global business.

Kevin Ozan:

Thanks, Chris. Our strong performance for the quarter resulted in adjusted earnings per share of $2.76, which excludes the gain as we completed the partial divestiture of our ownership in McDonald's Japan. Our strong sales generated an increase in restaurant margins of about $500 million for the quarter. G&A increased about 20% in constant currencies for the quarter, driven by higher incentive-based compensation expense as a result of Company performance, exceeding our plan this year. We still expect G&A to be about 2.4% of system-wide sales for the full year. Year-to-date adjusted operating margin was 44.3%, reflecting the improved restaurant margins across all segments and higher other operating income compared to last year. Foreign currency translation benefited Q3 results by $0.04 per share. Based on current exchange rates, we expect currency to have a minimal impact on Fourth Quarter EPS, with an estimated full-year benefit of 0.21 to $0.23. As usual, this as directional guidance only as rates will likely change as we move through the rest of the year. And finally, in September, our Board of Directors approved a 7% dividend increase to the equivalent of $5.52 annually. This marked 45 years of increasing our dividend for shareholders, further reinforcing our confidence in accelerating The Arches. We also announced the resumption of our share repurchase program. As a reminder, we had suspended share buybacks at the beginning of the pandemic as we took on additional debt to provide liquidity support to the McDonald's system. Since then, we've been focused on returning to pre-COVID debt ratios that support our strong investment-grade credit rating. Going forward, we're confident that our operating performance will continue to fuel growth in our already strong free cash flow profile. As a result, we're committed to our historical capital allocation priorities. First, to invest in new restaurants, existing restaurants, and opportunities to grow the business. Then we expect to return all free cash flow to shareholders through a combination of dividends and share repurchases over time. Now, I'll turn it back to Chris to close.

Operator:

Thank you. [Operator instructions]. Our first question is from Andrew Charles with Cowen.

Chris Kempczinski:

Sure. I'll start and then let Kevin fill in any other points on this. But certainly, it's a very challenging staffing environment in the U.S., a little bit less so in Europe, but still challenging in Europe. In the U.S. for us, we are seeing, as I've mentioned a few calls ago, that there is wage inflation. Our franchisees are increasing wages, they are over 10% wage inflation year-to-date that we're seeing in our McOpCo restaurants. We're up over 15% on wages, and that is having some helpful benefits. Certainly, the higher wages that you pay, it allows you to stay competitive. But we're also seeing that it's just is very challenging right now in the market to find the level of talent that you need. And so, for us, it is putting some pressure on things like operating hours where we might be dialing back late night, for example, from what we would ordinarily be doing. It's also putting some pressure around speed of service where we are down a little bit on speed of service over the last kind of year-to-date and maybe even in the last quarter. That's also a function of not being able to have the restaurants fully staffed. But I would just – I would tell you that it's not unsolvable either, and we're seeing in our McOpCo restaurants that a really strong focus on the shift manager and providing the training to the shift managers to keep engaged with the crew to keep the crew motivated, that that can make a difference. But certainly, I was hoping and expecting that we were going to see the situation improve maybe a little bit more quickly than what's materialized. And I think it is going to continue to be a difficult environment for the next several quarters. Kevin, I don't know if you have anything you want to add.

Mike Cieplak :

Our next question is from Eric Gonzalez with KeyBanc.

Kevin Ozan :

Yeah. Thanks for the question, Eric. Certainly, pricing and cost pressures are a bigger focus over the last few quarters than they had been previously. Last quarter, I think I talked about how we were seeing roughly a 6% increase year-over-year in the U.S. We are still seeing that and that -- that's pretty much the level we expect for the full year 2021 over 2020 right around that 6%. And that's really to cover both labor cost pressures and commodity cost pressures that we're seeing. If we step back for a second, obviously, we're all seeing the environment out there on a global basis, which is some pressure on commodities, certainly some pressure on labor availability and cost, supply chain disruptions, et cetera, that are all putting some pressure. We haven't seen, I’ll say, any more resistant to our price increases than we've seen historically. So that the 6% has been pretty well received by customers. We do certainly have a very big focus to make sure that we are balancing cost pressures and being able to cover those with making sure that our value perceptions by customers continue to be favorable. And we are continuing to see those surveys and scores from a value favorability perspective still positive from customers. So, we'll continue to keep an eye on it from a commodity perspective. Commodities were up roughly 2% or so through the first nine months, but we expect for the full year for those to be up roughly 3.5% to 4%, which will put a little bit of additional pressure on the fourth quarter, obviously. And then going into next year from a food and paper cost perspective, we would expect our cost to be up relatively in line with the industry right now. That expectation is roughly mid-single digits. And so, we will continue to keep an eye both on the cost side and the pricing side. Both we and our franchisees over the last couple of years have been using a third-party for pricing advisory services, if you will, using a pretty deep consumer-based research approach. And so, we have, I think, more science built into our pricing decisions that take into account market conditions, competitive factors, et cetera. So, like I said, we'll keep a close eye on cost and pricing, but right now, so far, it's been received okay by customers.

Jared Garber :

Great. Thanks so much for the question. I wanted to shift the topic a little bit over to the unit growth side of the equation. And if you can give us an update on what you're seeing in terms of unit opens and the availability of both labor and equipment and construction and permitting across both the U.S. and international segments. I think the IOM segment came in a bit light in terms of unit opens this quarter, but you also increased the net unit growth for the year. So just any color on framing out some of the puts and takes, that will be really helpful.

Mike Cieplak :

Our next question is from Jeff Bernstein with Barclays.

Chris Kempczinski :

Yeah, sure. I'll start off and then, again, Kevin can pick up anything that I miss here. But I think, overall, we remain very optimistic about our international portfolio in the markets where we're seeing restrictions relaxed. Those businesses are bouncing back and bouncing back in a very healthy way. The markets that you mentioned like an Australia, like a France, they have certainly had to navigate a more restrictive COVID environment. We did get a peak earlier in the year when things appeared to be getting better before the Delta variant that those markets were poised to spring back. So, from our expectation, as soon as the conditions in those markets start to become more favorable in terms of being able to return to normal operating conditions, we expect those markets are going to perform in a very healthy way because that's how they were performing pre -pandemic. So, there's nothing structural that would make us concerned about their ability to bounce back.

Operator:

Our next question is from Brian Bittner with Oppenheimer.

Kevin Ozan :

Yeah. Thanks for the question, Brian. Relating to our operating margins, I think in our investor update last year, we talked about for 21 and 22, we thought operating margins would be pretty much in the mid-to-low 40's. I think that's still our thinking right now. There will be some near-term moderation, potentially at restaurant margins as some of the labor costs and commodity costs kick in. But we also expect to get leverage as sales are improving. We're currently in the midst of working through our 2022 plan, so I don't have exactly specifics, but I think generally that mid to low 40s is the way we've been thinking about it, both for this year and for next year.

David Tarantino :

Hi, good morning. I was hoping that you would elaborate a little bit more on the loyalty program and what you're seeing there in the early stages, and just in terms of what it's doing to the business currently. And then, also, if you could give some perspective on how you're collecting data and what you're planning to use or to do with the data that you're collecting as you move into the next few years. Thanks.

Operator:

Next question is from Dennis Geiger with UBS.

Chris Kempczinski :

Sure. Well, I think, shout out to the U.S. team and our own operators for doing a great job of sustaining that momentum as you mentioned, through what continues to be a challenging environment for all the reasons that have come up on this call; labor challenges, commodity inflation, et cetera. I think the momentum that we're seeing in the U.S. business is not something that just came about in the last couple of years. This was something that started several years ago with the foundation that we put in place in the U.S. and the foundation was around modernizing our state, improving the food, making investments in digital and delivery. And I think the fact that we were able to get all of those things sort of embedded in the business back-end, call it 2017, 2018, set us up really well for what none of us could have predicted, which is what we've now experienced through, through COVID. So, I think for us, what I feel good about with the U.S. is we've got the foundational elements in place for this business to outperform or perform quite well for extended period of time. As to how you do that, it's going to be back to the strategy that we have with accelerating the urges. It's a focus on great marketing, driving core menu and outperforming on the 3Ds delivery drive-thru and digital. And so, for us, a message that I'm talking about to the teams internally is we have the right strategy. It's all about execution, and we've got to execute at a really high level. If we do that on those three dimensions, then I'm confident. But we also can't get complacent, and I think there's a good healthy level of dialogue going on in the U.S. right now about just keeping that hunger, keeping that momentum going. And once you've got it, you don't want to give it up and that's the mindset right now.

John Glass :

Thanks very much. First, on delivery, can you just update? I know you gave the total digital mix. What delivery makes up of that and maybe a quick -- since post - COVID, there's been acceleration in that -- where it stands now versus prior. You also -- Chris talked about maybe being more strategic in your partner -- picking your partners in delivery. I just wondered if you could expand on that. And just probably just want to make sure I understand, if you're selling that Tech Labs or transferring it to [Indiscernible], is there anything material we should know about, either G&A or anything that would impact the financials due to that transaction?

Chris Kempczinski :

I'll do the delivery question, while Kevin is going through his notes, the other parts of this. But so, we don't share a specific breakout on delivery, but suffice to say, delivery for us continues to be a really important driver for us. The business has grown by billions and billions, I think it's fair to share, over the last several years and we're continuing to see even as markets reopen and things start to get back to normal in places where they're able to get the dining room, etc., back open. Delivery remains elevated. And so, for us, I think what has become apparent is delivery was meeting a customer need that I don't think any of us fully appreciated, even maybe a few years ago. So, it's here to stay. What we're trying to do with our partners, the way that we had approached some of our delivery conversations previously with our 3PO partners, in many cases those were discussions that were happening at the market levels. And when you are a Company the size and scale of McDonald's, we believe a great proposition for 3PO partners on a global basis. And so, what we're trying to do through these conversations is leverage the fact that we are the largest restaurant Company in the world that we have an ability to drive traffic onto 3PO apps that we think is second to none, and that that should be reflected in the rates that we're paying with our 3PO partners. So those conversations are proceeding, but I'd say there is a good recognition on both sides that we need each other. And I'm optimistic that we'll be able to get to a good resolution on that in the next couple of months. And then just to follow up on your question related to our transaction with IBM and the potential impact of that. There shouldn't be much of a financial statement impact of that. We had generally, I forget maybe about less than a 100 people I think that were associated with that business. And so those folks will now go work with IBM. Really the reason we're doing this with IBM is to be able to have someone that can take how far we've gotten right now with the solution and be able to finish the development and then help us deploy this at scale. And so, we're going to use their expertise certainly in AI and everything that they've learned from Watson, etc. But it is indeed a big financial statement impact. Plus, or minus, I’ll say going forward from that.

Chris Carroll :

Hi, good morning. Thanks for the question. Just following up on the U.S. business, you noted the benefit to average track from larger order sizes and menu pricing which you gave us some detail on a little while ago. Can you comment on your view of the sustainability of recent average check drivers? It seems like some of the recent guest behaviors are remaining consistent around group ordering, maybe perhaps longer than expected. So, curious as to your thoughts around your ability or focus on maintaining check growth, and perhaps how digital helps drive this going forward?