Hello, welcome to McDonald's April 30th, 2018 investor conference call. At the request of McDonald's Corporation, this conference is being recorded. Following today's presentation, there will be a question and answer session for investors. At that time, investors only may ask a question by pressing star one on their touch-tone phone. I would now like to turn the conference over to Mr. Mike Flores, Investor Relations Officer for McDonald's Corporation. Mr. Flores, you may begin.
Hello, everyone, thank you for joining us. With me today on the call are President and Chief Executive Officer, Steve Easterbrook, and Chief Financial Officer, Kevin Ozan. Today's conference call is being webcast live and recorded for replay by webcast. Before I turn it over to Steve, I want to remind everyone that the forward-looking statements in our earnings release and 8-K filing also apply to our comments. Both documents are available on www.investor.mcdonalds.com, as are reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures. Now I would like to turn it over to Steve. Steve?
Thank you, Mike. Good morning. I'm pleased with our first quarter business performance as we continue to build momentum and grow customer visits with delicious food, compelling value, and enhanced convenience. We're managing the business for the long term, and with our Velocity Growth Plan, I'm confident that our strategy and actions we're taking will position the business for sustained growth. The U.S. market has embarked on an aggressive plan and one of the most significant transformations in our history. Since the start of the year, the market has modernized and improved hospitality in nearly 1,000 restaurants, setting the pace to bring Experience of the Future to an additional 1,000 restaurants every quarter this year. This is an aggressive pace. 1,000 projects would be like modernizing every McDonald's restaurant in Australia, and we're doing that each and every quarter in the U.S.
We've introduced cooked right when ordered Quarter Pounder burgers using fresh beef in thousands of our restaurants and trained hundreds of thousands of restaurant crew on the new procedures along the way. We've transitioned the entire market to a new value platform, offering our customers greater choice and variety. All of this has been accomplished while streamlining our marketing structure. We reduced our advertising co-ops from around 200 down to just over 50, allowing us to be more agile in decision-making and execution. Also, we're becoming more efficient and effective as we shift to a more national marketing approach. Our International Lead segment once again delivered strong results. Having executed the foundational elements of our plan in a majority of restaurants, these markets are providing better food, value, and convenience for our customers and capturing more of the potential from their growth initiatives.
What do I mean by this? The markets established a solid foundation. This starts with strong local leadership and franchisee alignment and also leverages delicious food at the core of our menu, effective value strategies rooted in deep consumer insights, and great running restaurants. These markets layered in multiple platforms to accelerate and sustain growth with modern and appealing restaurant designs, both inside and out, that signal to our customers we care about our business and care about them. Optimized kitchens that expand our capacity to serve more customers more quickly in a more productive and enjoyable work environment. Digital menu boards, self-order kiosks, and mobile apps that build awareness of the breadth of our menu and quality of our food.
Enhanced drive-throughs helping us quickly serve more of our time-pressed customers whilst creating a culture of hospitality with table service that unlocks the potential of the investments in technology and capacity optimization by creating a low-stress, personalized experience. It's the layering of these foundational platforms which has strengthened the brand in these markets whilst building the capacity and capability to drive growth. We're seeing the results, that's why I'm so confident in our ability to sustain momentum in these markets. It's what I look forward to in the rest of our system. Globally, we marked our 11th consecutive quarter of positive comparable sales with growth of 5.5% in the quarter. Guest counts grew by 0.8%, marking our fifth consecutive quarter of positive global guest count growth.
We listen to what our customers are saying by millions of surveys each month, they're telling us that we're getting noticeably better with fast and friendly service and great-tasting food. Satisfaction scores rose in 2017, the positive trends continued into 2018. Most significant improvements were in Japan, France, Australia, and Canada, where in many cases, we're seeing double-digit increases in the key measures of customer satisfaction. With these improving customer perceptions, guest count growth, and market share gains, we are building brand strength, which fuels future growth. Kevin will walk you through more details about our sales performance during the quarter.
Thanks, Steve. Our comp sales performance for the quarter was strong. Steve and I talk about the size and scale of McDonald's. To put our 5.5% comp sales increase in perspective, it equates to over $1 billion of growth across the system for the quarter. Each of our operating segments contributed to this growth, with the first quarter also benefiting from a shift in the timing of Easter and related school holidays. U.S. comp sales increased 2.9% for the quarter, with a positive comp gap of 270 basis points versus QSR sandwich competitors excluding McDonald's. Sales were fueled by higher average check, driven by two primary factors.
Menu price increases as part of a broader strategic pricing reset of the menu board, favorable shifts in product mix, consisting of trade-up to new premium products and a higher number of items per order for $1, $2, $3 Menu transactions. One of our challenges in the U.S. is consistently growing comparable guest counts, especially when current overall industry traffic is negative. U.S. guest counts declined in the first quarter due to the very competitive breakfast day part and our conscious decision to simplify our value platform, eliminating most local value offers. We remain focused on executing our plan to deliver guest count growth through offerings that appeal to customers, as well as taking actions to grow our breakfast business. In the International Lead segment, comp sales were up 7.8%, with positive comp sales and guest counts in all markets.
Leading the segment, the U.K. maintained momentum and posted its 48th consecutive quarter of comp sales growth. That's 12 years of uninterrupted quarterly growth in one of our largest and most competitive markets. Germany delivered its best guest count performance since 2005. Drivers of this growth included a fun digital Easter countdown calendar promotion and the successful Great Taste of McDonald's campaign, featuring products such as the Big Mac and Hamburger Royal TS. Canada continued to gain market share across most day parts, supported by continued success of all-day breakfast and premium products such as the Seriously Chicken lineup. Comp sales for the high-growth markets increased 4.7%, led by continued strong performance in China and Italy.
Italy experienced its best quarter in both comp sales and guest counts in the market's history, driven by digital engagement and the My Selection platform, featuring local ingredients on our premium burgers and chicken sandwiches. In the foundational segment, comp sales were up 8.7%. In addition to Japan's continued strong performance, comp sales were positive in each of the segment's geographic regions.
Thanks, Kevin. Our strong broad-based performance illustrates the traction we're gaining across the system with our Velocity Growth Plan. This gives us confidence we'll continue to drive business momentum as we scale what's working. We have strong market leadership teams which have effectively adapted the plan based on local customer insights, driving greater relevance and impact with the food we serve, the value we offer, and the experience we provide. We are reclaiming leadership in serving great-tasting burgers through product innovation and elevating our core offerings. This year, around the system, we're celebrating the 50th anniversary of the Big Mac. We're re-energizing the brand and rekindling the passion our customers have for this iconic and delicious sandwich. Many markets are extending the line, offering a limited time trio of Mac Jr., the classic Big Mac, and Grand Big Mac.
In the U.K., this was a key growth driver for the quarter, with Grand Big Mac sales far exceeding any promotional beef sandwich previously offered in the market. The Quarter Pounder with Cheese is another iconic core burger with tremendous potential. The U.S. is going after this in a big way with a national launch next week of fresh beef, cooked right when ordered in our Quarter Pounder burgers . We have already been serving these sandwiches in select markets throughout the U.S., and the response has been very encouraging. In our pilot markets of Dallas, 90% of customers who tried the burgers said they'd buy them again. These initiatives, on top of the improvements we've made to our core chicken products and the scaling of all-day breakfast in Australia and Canada, reinforce the notion that our core menu remains a strong growth driver for our business.
Most markets drove traffic and check with strong premium burger offerings like Gourmet Creations in Australia and Mighty Angus in Canada. Across the McDonald's system, value is foundational to our business and an integral part of our growth plan. Our strategic blend of iconic and relevant value platforms and high-impact deals drove traffic during the quarter. The $1, $2, $3 Dollar Menu is the platform that anchors our value strategy in the U.S. With the introduction of this menu at the start of the year, we're offering customers choice and variety through a simplified menu at multiple price points. It's performing in line with expectations as customer awareness continues to grow, and as Kevin mentioned, the $1, $2, $3 Dollar Menu was a key factor in higher average check for the quarter.
In France, the market is providing great taste at a low price with Petits Plaisirs and complete lunch meals under EUR 5 with Menu McFirst. With this successful value approach, McDonald's France achieved a sixth consecutive quarter of guest count growth and an all-time high for share in the IEO market. During the quarter, we also drove sales, traffic, and brand excitement with the continued expansion of our Velocity accelerators. As we enhance the customer experience and provide greater convenience through our Experience of the Future, delivery, and digital initiatives, we're learning more about what is most important to our customers and rapidly scaling what works. Table service, which was developed in France. Enhanced hospitality, which was perfected in Canada with their guest experience leader program, are proving to be critical drivers of customer satisfaction.
This has helped us unlock the potential of our self-order kiosks to build capacity, frequency, and average check. We've achieved a critical mass of EOTF deployment in Australia, Canada, and the U.K., and are well on our way to being there by year-end in Germany and France. The U.S. remains on pace to have EOTF deployed in about half of the market's 14,000 restaurants by year-end, integrating the best approaches we've learned from the international lead markets. Regarding another of our accelerators, more than 11,500 McDonald's restaurants now offer delivery. Whilst we continue to expand the base of participating restaurants, we're working closely with Uber Eats and our other partners to optimize the model, building awareness, trial, and more frequent repeat orders, and most importantly, customer and courier satisfaction. In most of our major markets, delivery is already a meaningful contributor to overall comparable sales.
With mobile order and pay now active in over 20,000 restaurants, we've turned our focus to building customer awareness, encouraging more app downloads, and driving active usage. One great example of this is Germany. As Kevin Ozan previously mentioned, the market had great success as it launched the McDonald's mobile app with an Easter countdown calendar, offering 32 straight days of different and compelling offers only available through the app. This generated over 5 million downloads, making it the most downloaded app in Germany in February, and it drove business results, double-digit comp sales increases, and the best guest count growth in 12 years. The success we're already seeing across the system reinforces my confidence that we still have significantly more potential in our plan. Our market leadership teams are focused on what works and resourced to execute for impact. Kevin Ozan will provide additional financial highlights for the quarter.
Thanks, Steve Easterbrook. As I mentioned earlier, our comp sales growth for the quarter reflects our broad-based strength around the world. Earnings per share for the quarter grew 12% in constant currencies to $1.72. EPS was impacted by $0.07 for some adjustments to amounts we recorded in 2017 as a result of tax reform. Excluding this impact, EPS was $1.79, an increase of 16% in constant currencies. Sales leverage offset the drag of refranchising activity, and we saw benefits from a lower tax rate and FX, which I'll cover in a few minutes. As we review our operating results, I want to remind everyone that for the first half of this year, we're comparing against China and Hong Kong results prior to refranchising those markets in the third quarter last year.
As we anticipated, we're beginning to see the benefits of our more heavily franchised business model in our operating margin as it grew from around 36% in the first quarter last year to nearly 42% this year. Looking at the components of operating margin, the impact of positive comp sales growth, coupled with refranchising, drove a 60 basis point increase in our franchise margins, which now represent over 80% of margin dollars. Whereas the most significant refranchising activity in 2017 was to developmental licensees, we expect that most of the refranchising this year will be conventional franchising. We also expect that most of this activity will occur in the first half of the year. Looking at 2018 and beyond, we still have a few markets that we're exploring to potentially refranchise via the developmental license model. Moving along to company-operated margins.
Consolidated margins declined 150 basis points to 16% for the quarter, primarily due to the impact of the China-Hong Kong transaction in 2017, along with wage increases in most of our major markets. In the U.S., company-operated margins increased 50 basis points to 15.8%, driven by positive comp sales, a lower advertising contribution rate, and refranchising activity, which helped us overcome higher wage rates and commodity costs this quarter. Turning to pricing and commodities. Our first quarter pricing in the U.S. year-over-year was slightly below food away from home inflation of 2.5%. I mentioned that commodity costs were higher in the U.S. for the quarter. They were up just over 2% versus last year. We continue to expect our U.S. grocery basket to increase about 1%-2% for the full year, reflecting less commodity pressure in the back half of the year.
Similarly, we anticipate commodity pressures to ease in the international lead markets in the back half of 2018. While commodities increased about 3% in the first quarter year-over-year, we continue to expect costs for the full year to increase about 2%. Our menu prices in the international lead markets were up just over 2% for the quarter. Continuing on to G&A. G&A for the first quarter was down 1% in constant currencies. We expect our G&A to increase around 5% in the second quarter as a result of costs related to our worldwide convention earlier this month and our corporate headquarters move in May. We continue to expect our full-year G&A to decrease about 1% in terms of currencies. Our effective tax rate was about 27% for the quarter, reflecting $52 million of adjustments as a result of tax reform that I mentioned earlier.
Excluding these adjustments, the tax rate was around 24.5%. While we may have additional adjustments this year as the guidance on tax reform continues to evolve, we still expect our full-year tax rate to be in the 25%-27% range. Turning to foreign currencies. For the quarter, foreign currency translation benefited EPS by $0.08 per share. At current rates, we anticipate a slightly lower benefit from foreign currency for the second quarter and about $0.19-$0.21 for the full year. As usual, this is directional guidance only because rates will change as we move through the remainder of the year. Our broad-based strength is a reflection of the power of our Velocity Growth Plan, and we're confident that the actions we're taking will continue to drive growth both for today and the long term. Now I'll turn it back to Steve.
During the quarter, we made a series of announcements intended to help us maintain and build trust with our customers. With our Scale for Good framework, we are innovating a select group of global priorities where we believe we can make the greatest difference and drive industry-wide change. McDonald's is stepping up to address major social and environmental issues that matter most to our customers, franchisees, employees, suppliers, and other stakeholders. Scale for Good is not a separate corporate responsibility platform, but rather an initiative embedded in our growth strategy. We've set goals to reduce packaging and increase recycling, take bold actions relating to kids' nutrition, and support producers in developing more sustainable approaches to raising beef. McDonald's is the first global restaurant company to address climate change by setting a real target to significantly reduce our greenhouse gas emissions.
We're expanding on our longtime commitment to restaurant crew and managers. Last month, we announced that we will increase our investment up to $150 million over five years to our global Archways to Opportunity education program. With Scale for Good, our goals extend beyond our direct reach. With initiatives such as beef sustainability and operating more energy-efficient restaurants and offices, we are working across our supply chain and collaborating with thousands of franchisees, suppliers, and producers. Whether it's with Scale for Good or other brand partnerships, McDonald's possesses a convening power like no other company in our sector. A prime example is the announcement during the quarter of a new alliance between McDonald's and The Walt Disney Company.
Building on our goal to offer more nutritionally balanced Happy Meals, Disney and McDonald's will collaborate with cross-promotional campaigns involving movies from Walt Disney Animation Studios, Pixar Animation Studios, Disney Live Action, Marvel Studios, and Lucasfilm. This alliance combines two of the most iconic and beloved brands for families, and we're excited by the fun and innovative opportunities it'll create for engaging with customers. Over the past couple of years, you've heard us talk about our higher appetite for calculated risk, greater personal accountability, and growing ambition. We're asking a lot of everybody in the McDonald's system. This is certainly the case in the U.S., where we've developed an ambitious plan over the past year with our franchisees. It's going to be hard work, and we're taking on a lot at once. This is what it takes to keep pace with today's rising customer expectations.
The McDonald's system is up for the challenge. We're fit for purpose and will continue to get better. We've seen the results when our other markets have executed strong plans, and we're confident about the U.S. Let me tell you why. Franchisees, suppliers, and corporate staff are energized and enthusiastic about our future. As I talked with many of them recently at our worldwide convention in Orlando, Florida, I was struck by their deep sense of commitment to our customers and robust determination to maintain our momentum. The convention was an occasion for the entire McDonald's system to reflect on the progress of our business over the past two years and align around the strategy guiding our future. The 15,000 people attending our convention were eager to share and learn the best approaches in our top-performing markets and restaurants.
We have one of the world's most powerful brands, with the Velocity Growth Plan, confidence is growing throughout the McDonald's system that we can make it even stronger. We're ambitious and hungry to unlock even greater potential remaining in our plan. As we look to maintain this pace in the quarters ahead, we're confident that we're on track to strengthen our leadership position. The McDonald's system is fully aligned and engaged. From the crew members in our restaurants to our franchisees to our suppliers and corporate staff, we're committed to showing our customers every day how we're becoming a better McDonald's. With that, I'll turn it over to Mike to lead Q&A.
Thank you, Steve. We will now open the call for analyst and investor questions. Please press star one if you have a question, and pound one to remove yourself from the queue. To give as many people as possible the opportunity to ask questions, please limit yourself to one question. We'll come back to you for follow-up questions as time allows. Now the first question is from Sara Senatore with Bernstein.
Thank you very much. Just on the U.S. comps, if I may. You pointed out that traffic is a priority. There was some softness in the breakfast day part and also
Just in terms of the $1, $2, $3 Menu, since it's driving average check, it sounds like maybe it's adding to existing customer orders but maybe not bringing in new customers. I was wondering if you could maybe talk about the tweaks you might be making. Is it on the value side? If not, in terms of breakfast, where do you think you're losing the customers? Is it to coffee shops? Is it to other QSRs? Just trying to understand the complexion of the U.S. comp.
Sure. I'll start, Sara. I think the reality is footfalls is down. I'm not sitting here thinking that there's share going to any particular competitor. It's just a market share fight overall. As you say, we're going to continue to sharpen our plans, if you want to talk about, for example, the value platform. This is the most significant value platform launch we've had in probably more than 10 years. It takes a while for customers to get familiar with the new menu, we've got three or four items each of $1, $2, and $3. We're beginning to get a better understanding now of how customers are buying from that menu. As we've seen, we know it can build average checks, so we're selling more items per order than we were previously.
Also, we're still very keen just to get that single dollar customer come in at the real value end as well. I think you'll just see us continuing to make sure that we can highlight the range we have. Actually, we've got some absolute knockout products on a $1 and $2 and like a $3 Happy Meal, for example. I think we'll keep finessing it. There is flexibility there. We're changing media weights. We're changing some of the creative work as well on the marketing side to better have some of the stronger items just pop out a little bit more from a customer perspective. We're satisfied with where we're at, although we do want to get the guest count piece moving again. We've never made any secret of that.
Our next question is from Andrew Charles with Cowen.
Great, thanks. Two parts to my question. Just following up on the first question, what was the diagnosis behind the soft morning sales, and did the two for $4 breakfast sandwich promo meet your expectations given the backdrop of softening morning day part? I know you're not prepared to discuss the lift you experienced from Hot Off the Grill, the fresh beef initiative in the test markets. From a timing perspective, did this initiative lead to a faster lift in sales in test markets relative to what you saw with the 1, 2, 3 rollout earlier this year? Thanks.
The two for four breakfast deal, firstly I want to do is highlight something that really encourages me, which is how nimble the U.S. system now is. We have sometimes been a little bit slow to be able to effect change. The guys could see where the market was going. Breakfast was competitive. With the owner-operators, they created and devised the two for $4 deal. Now, we're satisfied. We think that makes us much more competitive in the breakfast day part. I can see continued enthusiasm for that. For fresh beef, we really have not put any advertising weight behind it yet. In the test markets, what we were getting more of is the understanding the operational consequences so we could best train our people. Certainly the customer feedback at a restaurant level was absolutely fantastic.
We haven't attempted to drive sales with it yet because we haven't put the marketing dollars behind it. That's going to change soon now that we've rolled this out across the entire estate. We're ready to go. If you haven't tried it, you've got to try it. It just tastes great. Honestly, it's hotter and juicier Quarter Pounder. Customers are really enthused about the noticeable differences it makes.
Hey, Andrew, the only other thing I'd say is, just as perspective, that two for four breakfast that you talked about didn't go in until mid-March. It really didn't have a meaningful impact on first quarter results. It'll really have more of an impact related to second quarter.
Our next question is from John Ivankoe with JPMorgan.
Hi, great. Thank you. First, a housekeeping question, which ties into my main question. First, how much was the calendar shift a benefit, I think particularly to international lead, which is where I would suspect it would be the highest? Secondly, for the main question, what can we learn from international lead in terms of various initiatives that collection of markets may be ahead of U.S. that could be a leading indicator to future U.S. sales and comp performance? If you could just highlight those couple and where we are in terms of rollout for international lead versus U.S.
I'll start with the calendar shift. Steve can talk about learnings from the ILM. It's actually different by market. Certainly, Europe has a bigger impact than places like the U.S. Germany, for example, has one of the bigger impacts, more related to school holidays, actually, than the Easter timing, but they obviously are correlated. It was certainly a benefit in the first quarter, we'll see that benefit, if you will, reverse in the second quarter.
John, I'll take the second one. You're absolutely right. I think what's really created the confidence to put such a bold plan together for our U.S. business has been what they have seen and what we've all seen with the international lead market. One of the benefits we do have here now is as we're rolling out 1,000 projects per quarter, it really is a phenomenal project management exercise and change management exercise. We have so much learning now from Australia, Canada, and U.K. in particular, they're most advanced. The sort of details that we can get into and share now, which helps the U.S. from a learning perspective, things like the real nitty-gritty stuff. With the self-order kiosks, what's really important about the self-order kiosks is not just the customer-facing user interface, but actually physically where you position them in the restaurant, for example.
You can better understand customer flow. It provides another ordering option for a customer as apart from the front counter. The devil's in the detail as you expand as rapidly as we do, and we're investing as much as we are. Things like training programs, understanding the best way we can train both kitchen crew and also front of house and the hospitality. Part of what we have committed to our U.S. business is that we will literally just pick up and share the best practice, and we still think there's more the International Lead Markets can get out of some of the initiatives of Experience of the Future. We're going to continue to just really squeeze it hard and get as much out of it as we can.
I think what gives us confidence is that the U.S. don't need to make any of the mistakes that we made in some of the early days as we're learning some of these initiatives. We have a proven model now, and we can just get into that groove of 1,000 projects a quarter and excited about what it's going to do for the business.
Next is David Palmer, RBC.
Thanks. Good morning, congratulations on that phenomenal momentum in your leadership markets. Perhaps you can make a highlight on the U.K. market, why that one is so particularly strong. We heard about such tough weather conditions there. I would imagine that you're outperforming the eating-out market there, particularly by a wide margin. A separate question on the One, Two, Three. I'm just trying to understand where you're coming from on this one. You said it's performing in line with expectations, but the traffic was negative in the quarter. Are you going to probably keep the architecture the same on the One, Two, Three going forward, confident that it will build in momentum and acceptance with the help of some of the premium innovation that you have coming? Do you think that this is something that you'll continue to tweak along the way? Thanks.
Thanks, David. The U.K., they're on a real roll, and we do call them out from time to time because they've really gathered some fantastic momentum. I think ultimately what they're benefiting from is not just the motivated owner-operators and the investments we're putting into the restaurants, but actually, for many years, they have really been very good at paying attention to building the brand as well. It's a competitive marketplace. It's facing many of the societal challenges and business challenges that we face elsewhere in the world. They really are beginning to reap the benefits of long-term sustained investment in the brand as well as just in the core business. Yes, they're taking plenty of market share. They're a very dominant position, and I think it'd be tough to be a competitor of McDonald's in the U.K.
They really are working on firing all cylinders, which is great. For the Dollar One, Two, Three, I think the architecture, you can expect to see it pretty much the same. Yes. As I say, we're understanding more about how customers are buying from it and what they see. Could we rotate one or two items on and off it? Yeah, absolutely. That was always part of the plan, so we can always keep it fresh and got something new to talk about. Fundamentally, we're satisfied with where it is. Overall, we're not satisfied with guest counts being down. The role that the Dollar Menu plays and the influence it has on our overall product mix is where we'd want a value platform to be.
Next is Brian Bittner, Oppenheimer.
Thanks. Good morning, guys. Just with fresh beef in the U.S., surely it must provide a tremendous perception lift in the quality of your Quarter Pounders. The question I have is: Is there any risk that it puts a shadow on the rest of your beef menu at all, or are you just simply not seeing this anywhere where you've tested it?
Brian, it's a good question. It was actually one of the things we were very mindful of when we actually established the test in the first place, and we wanted to make sure that there wasn't any other sort of, as you say, shadow or reflection on the rest of the menu. Customers really did not create any concern for us whatsoever in the way that they interpreted what we were doing. They're just saying, "If you can help make the Quarter Pounder taste even better, good for you. You got our backs." We didn't see anything that caused us any concern because that's why we did have a robust test. We've been testing this for about 12 to 18 months, so we've got a really good read from a customer basis now. No, they're just saying, "Good on you.
If you can just make this taste better, bring it on.
What we actually saw in our test markets was sales of Quarter Pound burgers went up, but also sales of our overall burger lineup increased. Even the burgers that weren't using fresh beef in our test markets of Tulsa and Dallas saw an increase during the pilot test phase.
Next up is David Tarantino with Baird.
Hi, good morning. Just one clarification on the U.S. comp for Q1 and then a question on mobile ordering. First, the clarification. I know you don't like calling out weather issues, the winter was pretty tough in the U.S. Did weather impact the Q1 comp? If so, do you have an estimate for that? Secondly, on mobile ordering, I was just wondering, Steve, if you could give us an update on the adoption rate you're seeing in the U.S. Seems fairly modest from my view so far.
I guess, where are you on that, and what's the plan to drive better adoption, given that could be a pretty big unlock for throughput? Thanks.
Yeah, I'll start with weather and then Steve can take the digital stuff. You're right, we generally don't like to call out specifically weather. It did negatively impact first quarter. I guess I'd say maybe a little over half a point would be approximate quantitatively, but we're generally not big fans of calling plus or minus of weather. You know it. It certainly impacted us here. Surprisingly, it actually had an impact in Europe too, because Europe, for those of you who follow, had some rough weather during the first quarter also. That's quantitatively about how much it impacted us.
We've had a couple of relatively gentle winters prior to this as well.
Yeah.
I think this was just a little bit more of a typical weather pattern across it. We've just got to get on with it. It's just the way it is. For mobile ordering, current adoption's pretty low, actually, David. The platform's getting more reliable. We've still got things we're trying to improve at our end from the user experience perspective and training our teams in the restaurants and just getting the technology more reliable. The adoption is still relatively low. We're certainly seeing the curbside pickup being the most favored benefit that customers are seeing from it. We'll continue to work away on it. It's not anything that we're going to put a massive emphasis behind in terms of anything promotional, for example.
However, I think it's pretty inevitable that our customers will increasingly engage with us as a brand and as a business through their phones. The fact that we've got a product out there that's decent at the moment, I think there's a lot of upside. We're excited about the potential, but at the moment, we're not seeing it drive significant business for us.
Next question is from Matthew DiFrisco with Guggenheim.
Thank you. Just a bookkeeping question and then a question. Delivery, did you guys specify how much that is in the U.S.? Just looking at the U.S. store margins from the company side, I wonder, is that a good trend to follow as far as if you wanted to look at what the franchisees are experiencing as far as the margin falloff in the U.S. stores, or is that just more of a difference in mix? Because it sounds like the value menu that you're launching would be favorable, given when it's done to the check and other methods through the income statement, if that would be favorable to the franchise margins.
Yes, I'll take this. We won't quantify exactly what delivery. I'd say delivery certainly contributed to the U.S. comp in the first quarter as it did at the end of the year last year. We would hope and expect that to continue to grow as sales grow on the delivery side. It's a meaningful contributor to the comp. On margins, couple of things relate to the U.S. margins. One, you just mentioned this, most of the comp or effectively all the comp was really driven by check, which by definition brings with it then positive impact on the margin side because you get a bigger flow through certainly from price than on the guest counts, although that's not the way we'd want it to work long term. The fact that check is driving comps is helping margins. That would also be helping the franchisees' margins.
The lower advertising contribution rate that we mentioned, that would be helping both us and the franchisees also. One of the things that helped us specifically was some refranchising that we've done really over the last year in the U.S., where we sold some underperforming restaurants as the franchisees can generally run those better than we can. Obviously, that piece wouldn't add to the franchisees' margin. The other piece certainly is labor wages that are impacting both of us. In general, most of the benefits that we saw in margins would also be helping them, again, other than the refranchising benefit, which to us was a significant benefit that they wouldn't realize.
The next question is from John Glass with Morgan Stanley.
Thanks very much. My question's on the Experience of the Future, Steve, you mentioned you're accelerating the rollout of it in the U.S. First of all, is there a risk or did it impact at all same-store sales in the first quarter as either restaurants were closed or maybe crews were somehow distracted? Can you maybe talk about how you frame that potential impact to the business in the short term? In the long term, it seems like if you're doing about 4,000 units this year and maybe therefore another 4,000 next year, you may be able to get this done faster than you thought. Is this an acceleration, I guess is the question, versus a prior pace, or is this just about where you thought it would be?
No, we have upped the pace a little bit, John. I think we spoke about it actually on the last earnings call as well. I think with some of the benefit that we're going to see from tax reform, it enabled us to, if you like front-load the projects and we've got our owner operators lined up. We expect to make significant headway in basically the next two years, 2018 and 2019, and we will have a substantial amount of the estate complete by then. In terms of the impact, yeah, it does hold back the like-for-like sales a little bit because we've got 1,000 projects. Depending on how the restaurant currently looks, it does dictate how long the project lasts.
It's one of those, I should really have mentioned that earlier, one of the benefits we're seeing from the international lead markets is we're getting pretty good at scheduling these restaurants so you can minimize the downtime, to minimize the downside. It can be that restaurants could be shut for 10 to 14 days through some of its more significant investments. Yeah, that does hold us a little bit on the like for like. It'll be fine once we start to get into the routine year on year, because again, we'll be doing another 1,000 next quarter, another 1,000 first quarter of 2019. This current year, it will hold us back on the comp side a little bit. Yeah. As I say, we're playing the long game.
We know what the upside can be, and it's a small price to pay for the benefit that we believe the business will have.
Next question is from Will Slabaugh with Stephens.
Yeah, thank you. I want to ask on average check, globally and in the U.S. as well, just your comfort level with what looked like globally, I think a 4.7% increase. I realize there are a lot of moving pieces across the globe in that number, considering the pricing rebasing that you've done. Could you generally just talk about your comfort level with running an increase in check of that size? Is there any sort of longer-term check growth goal that we could think about for the business, either in the U.S. or globally?
Yeah. I'll take that. Some of that's U.S., obviously, some of that's outside the U.S. Our general goal is to optimize menu prices across all our price tiers within a market. We look at various factors within each market, including things like food inflation or food away from home, other cost pressures, whether that's labor or any other costs. The biggest thing is what customers will accept based on that market, based on competition. It's really an attempt to balance guest count growth and average check growth. Like I talked about in the U.S. right now, we're a little bit more skewed on the average check size versus guest count than we would want. We'd like to make sure that we get the guest count growth.
In general, we generally try and stay a little bit below food inflation as kind of an overall guide.
Just to add another perspective to what Kevin's just said. What we're seeing, particularly once we've made the investments in the Experience of the Future, clearly a number of those are customer facing, but what we're also doing is adding some firepower to the kitchen as well, which means we can offer a different range, and particularly at the signature end of the business. Part of what we're seeing is with a better invested restaurant, great hospitality, we're launching premium ranges more consistently across our lead markets, and that's also driving average check as well. There's a product mix piece, but it's the permissibility we get on price is, if you run a great restaurant and it looks great and it's welcoming, great hospitality and table service, then people are willing to pay a little more as well.
The one other newer aspect I'll say over the last year or so would be delivery. Delivery check size is generally one and a half to two times our regular in-store check. That's also helping drive average check up on a global basis.
The next question is from Peter Saleh with BTIG.
Great. Thank you. I just wanted to come back to the conversation around the Experience of the Future. I think historically, you had discussed a mid-single-digit sales lift in the first year. Now that you have a critical mass of restaurants both domestically and internationally, can you talk about the comp performance and the margin performance and maybe in year two and beyond?
Yeah. I can start on that. Certainly in the U.S., we wouldn't have year two and beyond, but internationally, what we've seen historically that we've talked about is generally mid-single-digit sales lifts for restaurants that convert to the Experience of the Future when you compare it to the rest of the market that maybe hadn't put it in yet. Most of those markets also see continued comp growth in year two after that. It's not a one-time benefit, but kind of builds on itself. In the U.S., it's obviously much earlier days right now, so we don't certainly have year two.
Even in the early days, right now what we're seeing is consistent with what we've seen internationally, which is that mid-single-digit sales lift for the projects where we have full modernization, where we do a full remodel and add in all the EOTF components, if you will. The projects that have already been modernized and only add in the EOTF components, that's a smaller lift, more like around 1%. The ones where we have full modernization and EOTF, it's similar to what we've seen internationally, which is that mid-single-digit lift.
Next question is from Jeffrey Bernstein with Barclays.
Great. Thank you very much. Just maybe a two-part question on the refranchising and the ultimate worldwide operating margin that you referred to in your prepared remarks. On the refranchising side, looks like you had close to $100 million in gains in the first quarter, and it hasn't been that far off from that number most of the quarters of 2017. I'm just wondering whether we should assume these type of gains continue, or are we now in the very late innings of the refranchising, and therefore the gains should moderate? The related part is just as that impacts the broader operating margin, I think you mentioned your operating margin is right now at 42%, which was up 600 basis points, and that was in the first quarter.
I'm just wondering what presumably that's led by the refranchising. I'm just wondering where you think that ultimately settles as you wrap up refranchising and what type of growth rate we'd assume once the refranchising is done off of that. Thank you.
Yeah. Thanks, Jeff. I think I mentioned in my remarks that more of our refranchising in 2018 will be the conventional type versus a lot of the developmental license that we had certainly last year. I also mentioned that most of that activity will happen in the first half of the year. To your point, we had about $100 million of gains in the first quarter. I would expect relatively similar, maybe a little bit less in the second quarter, and then it'll start easing off a little bit in the third and fourth because most of the activity this year is in that first half of the year. By the time we get to the full year, we expect to be a little bit lower than what we would've seen last year. I think earlier in last quarter, we said about $30 million-$40 million less.
We're actually seeing gains on each transaction a little bit higher. It may turn out to only be $20 million-ish less than last year, it should be a little bit less than last year, and then it will kind of ratchet down more than that next year then. Oh, sorry. The operating margin. What you are seeing in operating margin, a couple things. You're seeing the benefits of refranchising as we certainly converted China, Hong Kong last year in the big transactions. When we refranchise, that's certainly a benefit to operating margin. You're also starting to see the benefits of G&A management and the rest of our P&L. We've talked about our long-term goal beginning in 2019, being in the mid-40s on operating margin, in our mind, we're still on track for that.
I think the only thing I would add to Kevin's comments was, given the way that we've restructured ourselves as a business now, with our international lead markets and the high growth, those are typically the markets that are company-owned still. We actually have, literally restaurant by restaurant, we have a very clear understanding of our franchising plans, who we'd be selling to, and which restaurants we want to keep and operate ourselves as well, because that's an important piece for us. We really have got a very granular look now that we can drill down country by country to have a very clear and, I guess, strategic franchising plan looking forward now.
Next question is from Gregory Francfort with Bank of America Merrill Lynch.
Hey, guys. Two questions. Just one is on the macro backdrop in the European markets. Can you talk about what's going on there and then maybe how sustainable you think that is? My second question is on the U.S. marketing side. Can you talk about your marketing weight during the quarter, whether or not you pulled forward any spending around the Dollar One, Two, Three, and whether or not we're hearing, I think, that the industry marketing rates are up pretty substantially. How sustainable do you think that is? I know there's a lot there.
There is a lot there. What are we seeing in Europe? Typically, if we do want to look on mainland Europe where we've got clearly France, Germany, two very important markets for us. We're getting some really good momentum out of some of the mid-size markets now, kind of the 500 restaurant-style markets like Italy and Spain. Netherlands is growing strong. Typically, we're not seeing any particular headwinds. Nor are we getting any great tailwinds. There seems to be a little bit of calm has entered the markets after the kind of the shock from the Brexit decision, maybe a couple of years back, and it doesn't appear to be quite as disruptive as perhaps people feared. We are seeing differences in labor movements. There's less migration going on across Europe and we see that here in the U.S. as well.
There are some dynamics we've got to face into. As a business environment, I'd say it's fairly calm and our success is really just because of what we're choosing to do and we're being aggressive in each of those markets. In terms of larger spend, yeah, we did ship some of the media weight. The quarter was a lot more than just Dollar One, Two, Three here in the U.S. Yeah, we wanted to make sure that we wanted to get the awareness of the items. The awareness of the menu hit really good levels quickly. Customer awareness of what the items actually on the dollar menu wasn't quite what we wanted. We did shift the emphasis a little bit on that. I think there was a lot of competitive spend in the quarter as well.
I think we feel pretty good that we battled through a tough quarter. We have certainly got plenty of gunpowder we have kept dry as well. If the others have front-loaded their spend, I guess that will be something they will deal with.
Next is Alton Stump with Longbow.
Thank you. Good morning, or I should say good afternoon. Congrats on the results. I guess just a question. It is not difficult of course to get higher ticket when you roll out added value platforms. Can you just walk through what is driving that? Obviously, I presume that means that the $3 bucket items are selling well or is there anything else going on there that is driving the higher ticket off One, Two, Three?
I can start talking about that. A couple things. We are seeing people use the One, Two, Three menu in a variety of ways. Some people will create a meal using some items from the $1, $2, $3 menu. Some people will buy a combo meal that is not on One, Two, Three. Then add an item from the $1, $2, $3 menu as an add-on. We are seeing people use the $1, $2, $3 menu in various ways, and one of the things we are seeing is that when people use $1, $2, $3 menu, the items per transaction in those transactions is higher than kind of our average when people do not use that $1, $2, $3 menus. That is helping drive average check for those transactions. That is in general what we are seeing.
As Steve talked about earlier, we like the construct of that menu. It allows people to use it in various ways. Again, we need to make sure people are aware of all the specific items in the menu, but general awareness of the menu is pretty good.
Clearly, we're staying pretty close to customers when you launch something like this. We're getting high satisfaction and value perception scores as well from the dollar menu, which is obviously important to us. Yes, the fact the average check's gone a little higher is clearly us helping support the business, but from a value perception point of view, customers are feeling good about it and are playing that back to us.
Our next question is from Nicole Miller Regan with Piper Jaffray.
Thank you. Good morning. My question is around commodities. What pieces are in the U.S. inflating that COGS basket up closer to 2%-3%? If that persists, will you adjust value differently? Was that any contributing factor to removing some of those local value or deals that you talked about earlier? Thanks.
Yeah. Most of the increases for 2018 that we expect are in the main categories that you would expect, beef, chicken, primarily. Right now, those increases aren't enough that it would change any of our marketing plans or product plans or anything along those lines. Like I mentioned, right now it looks like the first quarter increase would be the highest increase in the U.S. that we'd see for the year. We anticipate that increase kind of dissipating as the year goes on, but it isn't to a level where it's driving any change in marketing or product plans for the year.
That's very nice.
Our next question is from Jeff Farmer with Wells Fargo.
Thanks. Just following up on the U.S. restaurant level margin. Does that one Q margin fully reflect the cost headwinds from, I guess, both the wage rate inflation and your investments in labor? Or will those headwinds further build out into two Q in the back half of the year?
Thanks for the question, Jeff. It does reflect certainly the wage rate, the cost, I'll say. What we have started seeing, to be fair, is that some of that labor initiative investment is starting to dissipate a little bit. Some of that related to training as we got ready for the fresh beef rollout. Now that we're kind of coming upon that, we're seeing some of that labor training investment starting to dissipate. It's fair to expect that that piece will continue to dissipate as the year goes on.
I think the other piece to add as well, this is kind of a shout-out to the operations guys out there, is working really hard to try and minimize just crew turnover as well. We've brought the 90-day turnover down to a really good level at the moment because that's where hidden costs can sometimes come in, is if turnover gets out of hand a little bit. So the guys in the field, while there's a lot of change in the restaurants, we're working really hard with the investments we're making, both on the pay side, but also the training and the education side for our crew and managers. And we're beginning to see that with turnover being well managed as well.
We've got time for one last question, and that will be Brett Levy of Deutsche Bank.
Great. Thank you. If we could revisit Greg's question on the competitive landscape in Europe, and if you could share a little bit more detail on what you're seeing in terms of IEO growth and competitors' rational or irrational behavior. In other words, how much of what we're seeing from McDonald's successes are coming solely from what you're doing, and how much of it might also be a little bit of a tailwind? Thank you.
I'll start and Steve can chime in. What we're actually seeing in most of the international markets is that we're gaining market share in just about all of our big major markets, I'll say. Competitive landscape certainly varies by market. Some of the markets are a little bit more competitive than others. I'd say overall, IEO market in most of those countries is relatively muted. You're not seeing gang-busting growth in any of those countries. It's relatively muted, which makes it competitive to have to gain market share. In most of those, we are seeing improvements in our market share.
I think the only thing I would add is if there is any growth in the sector at all, it's typically on new units. We have been a little more modest on our new restaurant additions because we prioritize the reinvestment in the existing estate. I think really it's a zero-sum game. It is literally a market share buy, I think, in all of our major markets. There is no one market, whether it's Australia, Canada, U.K., Italy, Spain, none of those markets have macro tailwinds that's helping us lift. We're just literally scrapping hard, working hard, and taking share. I think our gain is typically someone else's pain.
We've reached the top of the hour, that concludes our call. I want to thank everyone for your great questions, we'll sign off.
Thank you.
Thank you.
This concludes McDonald's Corporation investor conference call. You may now disconnect.