Earnings Call: Q4 2017

Jan 30, 2018

Welcome to McDonald's January 30, 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. 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, and thank you for joining us. With me on the call today 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. Now before I turn it over to Steve, I want to remind everyone that the forward looking statements in our earnings release and 8 ks filing also apply to our comments today. Both documents are available on investor. Mcdonalds.com, as are any reconciliations of non GAAP financial measures mentioned on today's call with their corresponding GAAP measures. And now, I'd like to turn it over to Steve. Thanks, Mike. Good morning, everyone. 2017 was a very strong year of performance for McDonald's. Our results demonstrate we successfully completed the transition from turnaround to growth. Our momentum is broad based across the McDonald's system. Your strong leadership teams in place, a business that's fit for purpose and growth platforms underpinning a strategy that resonates with customers in markets around the world. Our top priority in 2017 was serving more customers more often, and we did. We grew guest counts by 1.5% in the 4th quarter and 1.9% for the full year, with all business segments positive. This was our 1st full year of positive comparable guest count growth since 2012. Comparable sales for the quarter grew 5.5%, marking our 10th consecutive quarter of growth. Full year comparable sales increased 5.3%, our best performance in 6 years. We made significant advances with our franchising strategy in 2017, culminating with our largest developmental licensee transaction, China, and we reached our target of refranchising 4,000 restaurants a year ahead of schedule. Customers tell us that we are noticeably enhancing their McDonald's experience by being more attentive to their needs hotter and fresher food. Overall customer satisfaction survey scores continued to improve in 2017, with most markets achieving gains across multiple elements of brand perception, particularly friendly service and taste and quality of food. As a result, 6 of our top 8 markets grew market share with the UK, Canada and Japan leading the way. We are pleased with our progress, but certainly not satisfied. There is more potential in the marketplace and in our plan, and we are leveraging our and we are confident in our ability to execute with excellence to drive sustainable long term growth. Kevin will walk you through more details about our financial performance in the Q4 and the full year. Thanks, Steve. By all measures, our strong performance in 2017 shows that we have momentum, enabling us to drive our business, innovate and invest in our growth so we can compete effectively in today's global marketplace. Our comp sales performance is a significant achievement in a soft global IEO market and on top of strong prior year results. Comp sales and guest counts were positive across all of our operating segments, with overall results driven by strong performances in the U. S, the UK, Japan, Canada and China. U. S. Comp sales increased 4.5% for the quarter, compared with the rest of the QSR sandwich competitor set which was relatively flat. Comp sales for the international with positive results throughout the segment. High growth comp sales increased 4% led by China's strong performance along with positive results across the segments European markets, partly offset by some near term challenges in South Korea. In foundational markets, comps were up 8%. In addition to Japan's strong performance, comps were positive in each of the segments geographic regions. I also want to mention that starting with Q4 2017, comparable sales in our foundational segment and on a consolidated basis have been adjusted to exclude the impact of Venezuela, due to its hyperinflationary status and the significant impact it had on the Q4. We recasted comp sales for the 1st three quarters of 2017 to exclude Venezuela and reflected those in the earnings release to provide comparable amounts. As we move into 2018, we will continue to direct our efforts and resources towards driving the convenience and menu innovation that will help maintain this top line momentum. On a reported basis, earnings per share for the quarter declined 40 percent to $0.87 These results include a one time net tax cost of approximately $700,000,000 for the impact of U. S. Tax reform. The $700,000,000 net cost consists of 1,200,000,000 of cost for the deemed repatriation of our undistributed foreign earnings, partly offset by a benefit of $500,000,000 for the revaluation of our deferred tax assets and liabilities to the lower U. S. Tax rate. Excluding the impact of tax reform, diluted earnings per share increased 19% to 1.71 dollars reflecting strong comp sales, G and A savings, a reversal of a tax valuation allowance in Japan and a 27% tax rate. This tax rate was lower than expected because of tax law changes in some countries outside the U. S. In the 4th quarter. We ended 2017 with franchise restaurants representing 92% of our total restaurant base, up from 81% 3 years ago. As a result, franchise margins now comprise more than 80% of our total restaurant margin dollars. For the Q4, franchise margin dollars increased across all segments, reflecting sales driven performance and the shift to a more heavily franchise system. The franchise margin percent in the U. S. Remained flat due to higher depreciation costs related to our rollout of Experience of the Future. Our company operated restaurant base now consists of a little over 3,000 locations spread across the U. S. International Lead and High Growth segments. The U. S. And International Lead Markets account for about 75% of the company operated margin dollars. For Q4, consolidated company operated margins improved 40 basis points, primarily due to our refranchising efforts. Company operated margins in the U. S. Declined 150 basis points due to higher labor costs, which reflected both wage pressures and our continued investments in deployment of our key initiatives along with higher commodity costs. Commodity costs in the U. S. For the 4th quarter were up a little over 1.5% versus last year, while our full year U. S. Grocery basket increased 60 basis points. In terms of menu pricing, our 4th quarter pricing was up 3% year over year, which was above food away from home inflation of 2.5%. The menu price increases we took in the 4th quarter were part of a broader strategic pricing reset of the menu board ahead of the launch of our $1 $2 $3 menu in early January. By the end of the Q1 this year, we expect our pricing to be back below food away from home inflation. For the international lead markets, commodity costs were up about 3% for the 4th quarter and 2% for the year, with menu prices up about 2% year over year. G and A for the year was down 7% in constant currencies, in line with the guidance we provided at the start of the year. I'll put these savings into perspective relative to our G and A savings target in a few minutes when I review our updated outlook for 2018. Finally, other operating income increased nearly $60,000,000 for the quarter, primarily due to the one time reversal of the valuation allowance in Japan that I mentioned earlier. More agile and able to move at the pace needed to address the needs of today's customers. With the introduction of our Velocity Growth plan last March, we aligned and mobilized the McDonald's system. We began acting on it straight away, and by the end of the year, we made substantial progress in the eyes of our customers. We are serving more customers as we retain those most loyal to our brand, regain visits from those who'd be coming less often, and convert a casual to committed customers. We're growing sales across the full breadth of our menu with great tasting value offerings, delicious core selections such as our Big Mac, and exciting premium sandwiches with a wide range of flavor profiles. With relevant menu choices for our most price sensitive customers, we have strengthened consumer perceptions of McDonald's as a place to find a tasty and affordable meal. Across the system, our markets have increased the range and appeal of our food and meal bundles offered every day at compelling price points. Petit Lezire in France offers premium quality in a very affordable portion size. The Saver menu in the UK and Value Picks in Canada provide a range of affordable food for snacking and add ons. In the U. S. McVic 2 for $5 combined with dollar any size fountain beverages provides customers the opportunity to bundle and share, which drove incremental visits and average check-in the quarter. Programs like McPig 2 for $5 and Germany's Taste of McDonald's featuring rotating core selections for €1.99 not only appealed to the price conscious consumer and drive incremental traffic, they reintroduced customers to the great taste and quality of the food at the core of our menu. Across the McDonald's system, we've increased support and excitement for the iconic food customers identify with our brands. The Egg McMuffin, the Quarter Pounder with Cheese, Chicken McNuggets, French fries, and of course, our world famous Big Mac, which is celebrating its 50th anniversary this year. We have reaffirmed that customers still crave this food and the core of our menu still drives growth. Maintaining greater strength in our core menu platform has allowed us to venture further into exciting and compelling new offerings, such as All Day Breakfast, which is satisfying customers and driving growth for McDonald's in the U. S, Australia and Canada. We also recently launched buttermilk Crispy Tenders in the U. S, which contributed in a meaningful way to our sales performance for the quarter. Markets that have already modernized their restaurants now have the capacity and credibility to offer more premium beef and chicken sandwiches, such as the Signature collection in the U. K. And Seriously Chicken in Canada, which are driving brand perception scores higher and profitable top line growth. To make it even easier for our customers to access our great tasting food, we're providing them with greater flexibility and choice in how they order, pay and are served their food. In 2017, we went from piloting delivery with Uber Eats East in 200 restaurants in Miami, Tampa and Orlando to offering our customers the convenience of great McDonald's food delivered from 7,000 more restaurants in 21 different countries around the world. With our markets in Asia and the Middle East where we've offered delivery for many years, we are now delivering meals from over 10,000 restaurants, more than onefour of the system's restaurants. Delivery orders tend to surpass average check size by 1.5 to 2 times, and with high customer satisfaction, we are seeing solid repeat business from those who try it. During the Q4, delivery gained traction and emerged as a meaningful contributor to our comparable sales in several of our largest markets. In many of our markets, we've scaled the experience of the future platform, providing our customers a more seamless, personalized and enjoyable experience with additional menu boards, self order kiosks, greater hospitality and a modernized look. They're telling us they like the new McDonald's better. They're rewarding us with more frequent visits and they're spending more on average when they do. We've deployed Experience of the Future or EOTF in about 1 third of the restaurants in the McDonald's system, including nearly 3,000 restaurants in the U. S. Customers increasingly expect to engage with brands via apps on their mobile phones, and in the U. S. Alone, we now have over 20,000,000 registered users of the McDonald's mobile app. We are well positioned to capitalize on that user base, ending 2017 with 20,000 restaurants around the world offering mobile order and pay. I'm proud of our team's work. We achieved that milestone from a standing start in just over 10 months. While still very early with customer usage, we're encouraged by digital orders as we're seeing higher average check size and greater customer satisfaction among customers. In particular, many customers are appreciating the added convenience of curbside pickup. Now, as we're starting 2018, our focus is on executing our Velocity Growth plan. We will continue to provide customers an improved experience and greater choice in how they order, pay and serve their food. We have opportunities in 2018 to raise consumer awareness of the enhanced convenience available with delivery and mobile order and pay. In the coming months, we'll initiate marketing campaigns that encourage more customers to enjoy these expanded options to engage with McDonald's. As we do, we're optimistic this will contribute to the momentum of our business. With nearly 37,000 restaurants in 120 countries, McDonald's has a distinct scale advantage and significant potential. Over the course of 2017, Kevin and I visited markets throughout the United States and around the world. We could see firsthand how our local teams are leveraging the benefits of being part of the larger McDonald's system and delivering on that in ways that matter most to the customers in their communities. The contemporary decor and world trained crew members we saw in markets such as the UK, Canada and Poland demonstrate how successful we've been in enhancing the overall customer experience in a modernized restaurant. When customers have a better experience, perceptions of our brand improve, sales increase and guest counts grow. In Italy, we saw the results with strong focus on operational excellence. Customers appreciate a quick, friendly service and great tasting food they receive, which has dramatically changed the trajectory of our business in the market. With this accelerated growth, Italy enjoyed its best year of sales since 2006. France has been a system leader in the development and evolution of self order kiosks as a customer convenience and solution for bottlenecks during high volume periods. During our visit last fall, we saw how our French team has layered in hospitality and table service across the market to further elevate the customer experience and open up capacity. Service innovations like these, on top of their menu and value platforms, have helped the market achieve an all time high in market share. Restaurant employees in Sao Paulo and Buenos Aires demonstrated an outstanding commitment to hospitality. While visiting with them last fall, I experienced firsthand the passion and energy of our crew and managers as they embrace Kaltura to Savicio, their innovative program creating a new service focused culture. It's making a real meaningful difference for customers. The confidence we have in the business continues to grow, and I can say that our franchisees share our optimism. Buoyed by this confidence and the benefits that the franchisees and the company will receive as a result of U. S. Tax reform, we are further accelerating our investment and experience of the future in the U. S. We will bring EOTF to nearly 4,000 additional U. S. Restaurants in 2018, resulting in about half of our U. S. Restaurants being completed by the end of this year. This is no small feat. While our franchisees are confident about our plan for the future, they also acknowledge this is a major undertaking that will require significant investment of time, focus and leadership to execute well. And clearly, it will require significant financial investment too. Between the company and our franchisees, over the next 2 years, we will invest approximately $6,000,000,000 to transform the U. S. Business. The impact will extend beyond the new equipment and decor we're bringing to the restaurants. This is an investment on our local communities as the benefit of these projects will extend to construction crews and suppliers. We also will continue demonstrating our commitment to our people as we look at enhancing the training and development opportunities now offered through our Archways to Opportunity program. We're doing all of this in partnership with our owner operators with confidence and a firm commitment that the payoff will be a better, stronger McDonald's delivering a vastly improved customer experience and sustained profitable growth. Now Kevin will share additional details about our outlook for 2018. With the progress we made in 2017, our business is strong heading into 2018. Over the last few quarters, I've been messaging that our 2018 results will be choppy due to the refranchising of several markets in 2017 and the $100,000,000 of depreciation benefit in China and Hong Kong in 2017 associated with the refranchising of those markets. Looking forward, we expect 2018 results to be even a little more choppy with U. S. Tax reform and a new revenue recognition accounting standard that went into effect January 1 this year. On revenue recognition, while the new accounting standard will have no impact on our cash flows, the change will affect the way we recognize revenue for initial franchise fees that we receive for new restaurant openings and new franchise terms. Previously, we recognized initial franchise fees when we received them, upon opening a new restaurant or granting a new franchise term. Beginning in 2018, we'll recognize that income over the life of the franchise term. For this year, we expect this change to have a negative impact of about $50,000,000 on our consolidated franchise revenues and franchise margins. I talked about the impact of U. S. Tax reform on our 2017 results and I'll spend a couple of minutes walking through how we expect this will impact the business going forward. All of this is based on available information and our current estimates, which we know could change expect our effective tax rate for 2018 to be 25% to 27%, down from our historical range of 31% to 33%. Our global blended rate will be higher than the new U. S. Rate due to taxes that we pay outside of the U. S, which currently average close to 30%. From a cash flow standpoint, we expect an incremental benefit of $400,000,000 to $500,000,000 annually prior to any reinvestment. A few points to put this into perspective. First, we historically have not had a large amount cash held overseas, so the new law will not result in us suddenly bringing back a lot of cash. 2nd, this incremental cash flow represents less than 10% of our historical annual operating cash flow of roughly $6,000,000,000 Finally, we have not been capital constrained in the past. So we expect our capital allocation priorities to remain consistent with what they have been. 1st, to reinvest in existing restaurants and invest in opportunities to grow the business. 2nd, to pay dividends and 3rd, to repurchase our stock. Having said that, we now expect to return about $24,000,000,000 to shareholders for the 3 year period ending 2019, which is at the high end of our previously stated target. From a business operations standpoint, we expect our U. S. Franchisees in general to also benefit from tax reform. Given the ongoing strength of our franchisees existing cash flow, this benefit should enhance their ability to invest in and execute on the Velocity Growth plan. Next, I want to take a moment to review the progress we've made on our financial targets around refranchising in G and A. During 2017, we completed transactions in the Nordics, Taiwan, China and Hong Kong, which enabled us to reach our target to refranchise 4,000 restaurants. We begin 2018 ready to operate under the streamlined and more heavily franchised business model that we set out to create under our turnaround plan. While we do expect to continue to refranchise some of our company owned restaurants in our major markets like the U. S. And international lead markets, We anticipate the gains on sales of restaurants in 2018 will be down roughly $30,000,000 to $40,000,000 from 2017 as our refranchising activity begins to slow down. Regarding G and A, we developed a target savings of $500,000,000 from our base of $2,600,000,000 at the beginning of 2015. Through 2017, we've realized about $300,000,000 of net savings. In order to achieve those net savings, we saved significantly more than $300,000,000 on a gross basis related to maintenance spending and then reinvested some of those savings primarily in technology and digital. So at the same time we've saved costs overall, we've also shifted more of our remaining spend from maintenance spending to investing in activities that drive growth. For 2018, we expect G and A to decline about 1% in constant currencies. This reflects savings from our refranchising transactions and a reset of our incentive compensation, offset by one time costs associated with our biennial worldwide operator convention, the final year of our Olympic sponsorship and our upcoming headquarters office move, as well as continued spending in technology. We expect to fully realize our targeted $500,000,000 of net savings in 2019. As we have become more efficient with the G and A required to run the business, we will continue to invest in activities that we believe can accelerate growth. At the same time, we will continue to exercise strong financial discipline in the use of our valuable resources. Moving on to capital, we expect to end 2017 with capital expenditures of nearly $1,900,000,000 This was slightly higher than we anticipated at the beginning of the year because of currency exchange rates and because we were able to complete more EOTF projects in the U. S. Than planned, ending the year with 3,000 EOTF restaurants as Steve mentioned. In 2018, we expect to spend about $2,400,000,000 of capital. Approximately $1,500,000,000 or 2 thirds of our capital will be dedicated to our U. S. Business, primarily focused on further acceleration of experience of the future. Of the remaining capital budget, about half is earmarked for new restaurant openings and half is allocated to reinvestment as we continue to expand experience of the future in markets outside the U. S. Our capital will contribute to about 250 new store openings, while capital from developmental licenses and affiliates will contribute to another 7.50 openings for a total of 1,000 planned new restaurants. Finally, for 20 18, we anticipate some currency tailwind, primarily in the first half of the year. At current exchange rates, we expect a positive impact of $0.07 to $0.09 in the Q1 and $0.23 to $0.25 for the full year. As you know, over the last month, exchange rates have fluctuated more significantly than we've typically seen and we don't know what will happen the rest of the year. So please take this as directional guidance only. We've made significant progress in our business. The path that we're on with the Velocity Growth Plan along with the investments we're making in our future position the company for sustainable long term growth. We remain confident in our ability to achieve our long term financial targets beginning in 2019. And now I'll turn it back to Steve. As you can see, our business is growing. It is fundamentally sound, and we are confident about our future. We have returned the business to growth and have achieved momentum with comparable sales. 2017 was our best performance in 6 years. Customers are rewarding us with more visits because the actions we are taking to serve them great tasting meals offer friendly hospitality and provide more choice in how they order, pay and observe their food. The 3 legged store in the McDonald's system is continuing to make bold and aggressive investments in our most promising growth platforms, a strong signal of the confidence we have in our future. We're also looking forward to 2018 because of the many opportunities it will bring for building brand excitement with our customers and our people. This spring, we will gather at our worldwide convention in Orlando with nearly 14 1,000 owner operators, suppliers and employees from the McDonald's system. This will be a tremendous opportunity to build on our enthusiasm as we celebrate our progress and then rally together to pursue our even greater ambitions in the years ahead. As I mentioned, this is the 50th anniversary of the Big Mac, a one of a kind sandwich invented by Jim Delagatti, one of our earliest McDonald's franchisees. We have exciting plans to celebrate the many fans who remain so passionate all these years later about this iconic burger. Our flagship Chicago restaurant is receiving a dramatic makeover, and it will offer greater convenience and hospitality to our customers when it reopens later this year. The modern design will blend our latest technology and decor inside with green space, plazas with outdoor seating and a park for the community to enjoy. And I can't wait to take another big step in advancing the evolution of our culture when we open our new headquarters in Chicago's West Loop. Moving into the heart of such a dynamic city will put us closer to our customers and energize the McDonald's team. We are becoming a better McDonald's, and as we do, it's driving better results. Whilst pleased with the progress we made in 2017, we have far greater ambitions. We have the right organization and the right plan. The platforms we put in place are delivering growth today. We are confident they will serve as a springboard accelerating our future success. So thanks everyone. And now I'll turn it over to Mike to lead the Q and A. Thanks, Steve. We will now open up the call for analysts and investor questions. Now the first question is from David Palmer with RBC. David? Thanks. Good morning. This is regarding the U. S. It wasn't that long ago that surveys that we've done or seen elsewhere had McDonald's U. S. Towards the bottom of the pack and if you're in the peer set in things like quality and even towards the middle of the pack and things like value and convenience where you think McDonald's should obviously be winning. Those surveys are probably pretty stale now. You're probably seeing some improvements, but perhaps leads to where you have made the most progress? And then it may be it makes sense to tie into a market like Canada where you're further along with reimaging and other initiatives, how you think the brand perception can improve from here? Thanks. Yes. Thanks, David. You're absolutely right. I mean, clearly, we stay at a market by market level very close to all the consumer research and feedback we can get. And I mean, very simply, I guess, you could categorize it into brand perceptions, but also operational metrics as well. So and the 2 kind of go hand in hand. What we've seen around the world and what we're beginning to see in the U. S. Is when you look at a brand like Madaza, actually everything that you do communicates. So the look and feel of the restaurants, the quality and engaging element of our marketing programs, the friendliness of our people and their enthusiasm. Technology innovation starts to talk about you being a business for the future as well. So what we're beginning to see is, as we continue to the broad based investment, both in our people, in our restaurants, in the menu improvements such as through the poultry supply chain with the antibiotics, whether it's for the clean label McNuggets and so on. All of these things communicate a business that's on the move and a business that's heading in the direction that our customers want us to. So we're certainly encouraged. We're seeing some improvement in operational metrics in terms of friendliness, speed of service, in terms of the customers' perceptions. And then you look at the broader brand metrics like is a brand for this is a company for customer like me, for example, so broader brand metrics and we're beginning to see that lift. In the markets that are more advanced and you can look in our more developed markets, markets like Canada, as you mentioned, UK, Australia, but we also see it into number of our high growth markets where we really have modernized the estate and really repurposed the whole employment proposition, countries like Netherlands and Poland, Spain and Italy, we begin to see as each part of progress we make, it just lets all grab perceptions and also just the taste and quality of the food perceptions go up if you're able to satisfy customers in a modern environment. So we're encouraged. It's early days. We finished the year in the U. S. With around 3,000 of our restaurants, really representing the look and feel that we are proud of going forward. And with the further acceleration that we've announced today for 2018, we're going to have probably just north of half of our estate converted into really a great expression of the forward looking brand McDonald's by the end of 2018. So we're encouraged, but a lot of work to do. Our next question is from Brian Bittner with Oppenheimer. Hi, thanks guys. Can you just give us any insights into any sales benefits, if any, that you're seeing so far from your National Value platform, whether you're seeing a change in the industry gap or just incrementality in your business would be helpful? And could you also second to that help us understand if this platform has changed the sales mix from value in any meaningful way in your sales pie versus recent history? Thanks. Yes. Brian, it's I mean, it's really too early for us to give any meaningful feedback on the dollar menu 1, 2, 3. I mean, it's only been 20 plus days that's been in the market place. And when you introduce a platform that's strong and that's been built upon for the medium to long term, it's going to take 3 to 6 months for it to fully embed in the minds of consumers. That said, in terms of the gap we're beginning to see in the marketplace broadly, we ended the year in a competitively strong position. We announced in the U. S. A sales number of 4.5%. I think the overall competitive set was pretty much flat. I think it was plus 0.2%. So we have but it was very encouraging for us that the more holistic the plans that we execute across the market, we are making a dent in the competition, which clearly gives us further encouragement. On a weekly basis, I think we outperformed the peer group in 48 out of the 52 weeks across 2017. So again, really consistent, strong competitive performance from our team here in the U. S. We feel good about the dollar menu 1, 2, 3. I mean, just as an overall guide, we are not seeing a significant or material shift in product mix. We're still seeing average check growth across the overall business. So we feel that it's settling and bedding in well. We brought in some of the elements which were successful for us in 2017, such as the dollar any size fountain drinks, which we know is very powerful and very strong. We really augmented it with some breakfast products and both beef and chicken menu as well, including then also the $3 Happy Meal. So we're off to a good start. It's very early days to comment on anything meaningful for it, but it's certainly encouraging enough. Next question is from Andrew Charles with Cowen. Great, thanks. Kevin, can you speak to the long term CapEx targets you laid out at the Analyst Day back in March? And how should expect you to bridge from $2,400,000,000 in CapEx in 2018 to $1,200,000,000 ultimately? And just kind of frame it in the reference to just the original expectations for about 1 point $7,000,000,000 per year through 2020. And just one clarification as well, you talked about investing tax savings into Experience of the Future. Just want to clarify, are you investing greater than a 55% stake that you originally did in 2017 into the modernized restaurants in 2018? Okay, Andrew. I'll try and hit all of them if I forget something, you'll remind me. But let me start with the capital. So you're right, when we talked about it at the Investor Day back on March 1, we expected that it would take several years to complete the Experience of the Future rollout in the U. S. We've now taken the opportunity with the momentum we have and with the operators on board to effectively just pull that forward some. So what you'll see is a total capital envelope of around $2,400,000,000 in 2018, you should expect a relatively similar amount in 2019. My guess is there will be a little left over in 2020. I hesitate to say it will be completely done in 2019, but it should be significantly completed by the end of 2019. And then probably beginning in 2021 would be the ongoing normal run rate, which right now absent anything new that we know about would be in that $1,200,000,000 to $1,300,000,000 range. So that's how I think kind of the evolution of the capital. It isn't spending more than we originally anticipated. It's just moving forward the spend so that we're able to complete these OTF projects quicker. Same with that investment as you referred to, our 55% hasn't changed. It's just accelerating the timing of some of those projects, but our contribution rate, the partnering program we have is consistent with what we've talked about. So that hasn't changed. Again, it's just a timing aspect of being able to get the projects done quicker than we originally anticipated. Just to add to that, and Kevin is absolutely right. I just want to put into context the significance of the acceleration that we are describing here. We exited 2017 with around 3,000 restaurants fully converted. We started the year with around 700. So 2017, therefore, we completed around 2,300 projects. So this is the best part of doubling that rate. And again, just to put it into context, that's something similar to doing the U. K, France and Germany all together in 1 year. I mean, this is a massive undertaking, a massive signal of confidence from our owner operators and ourselves. But the other piece, the devil is always in detail and our aim isn't just to get 4,000 done, it's to get 4,000 done very, very well because each owner operator is committing their money into this and every customer would like to see the kind of gold standard execution. So for us, this is a really significant undertaking, demonstrates our confidence in the future of the business and the confidence that we have for an infrastructure investment such as this as a result of tax reform, I think is worth pointing out. Next question is from Sara Senatore with Bernstein. Great, thank you. I have one question and then a follow-up if I could. The first is actually considering such a strong year, I was surprised to hear Steve say that you think you can accelerate the momentum next year. So I guess I'm just trying to figure out what that means. Is that sort of talking about brand perception or could you see traffic and comps accelerate? And so just trying to understand maybe quantitatively what that commentary means. And then the second question I had was sort of broader and it was a follow-up on the value discussion. I think some of your smaller competitors have tried to be aggressive on value and have seen kind of a worst case scenario where they maybe get better traffic, but there's pressure on check and profit dollars. Could you maybe talk a little bit about how your marketing messaging allows you to drive value traffic, but still see higher check averages? Is it just sheer volume of marketing? Is it the nature of the messaging? Just trying to understand how you're able to do this distinct from what some of your other competitors are seeing? Thanks. Yes. Thanks, Sarah. I'll have a stab at both of those and Kevin can join me on things I missed. I mean, we don't want to get into any habit of sort of forward projecting, if you like. But as we enter this year and we're constantly reviewing our plan, areas of strength, areas of opportunity, the plan is delivering and through 2017 delivers we exceeded what we expected out of our pad in 2017. So that gives us encouragement that we have a number of facets of our business that are working, whether it's the core nuts and bolts focus in the markets on the day to day operations, your friendly service, hot fresh food, staffing additional accelerators and the other platforms of growth, whether through delivery, the emergence of some of our digital and technology and the growth opportunity that has and what we continue to see out of Experience the Future. So you've heard me talk probably a number of times now around how we try to lay out these platforms of growth upon each other. They don't all outperform, but if there's anything that's underperforming, we go back and take a look and review and look to enhance and wanted to outperform our expectations. And as we enter the year, we feel confident that the plans we've built and the programs we have in place are going to continue to deliver strong growth. As we continue to invest, you're absolutely right, the brand perceptions will undoubtedly improve if we continue to execute to the standard that we set ourselves. So once we have about a third of our global estates now fully modernized in the truest sense of that. As we continue that pace, we know that the brand perceptions improve in restaurants that are much more modernized. So that we find we're confident that the key metrics, both the, you like, the lagging indicators and the leading indicators, both the financial metrics as well as the brand metrics, will continue to improve. With regards to value, it is a market share fight, we don't see really any significant broader market growth this year. We're certainly not planning on that. So therefore, we know we're in a market share fight and values is where it really does get the street fighting really hits. What we feel good about on the marketing side here, and particularly if talk to the U. S, is 2 things. 1, we have great quality and great value items in the $1.1 $2 $3 If you look at that lineup, these are iconic products that customers are familiar with, are confident with and really, I think, exude much of the values and the ethics around what we stand for as a business and also as we develop our menu. So as well as offering great value, we think it reinforces the quality perceptions and taste perceptions that we're looking to move. In terms of just the muscle we have, I mean, one of the changes that the operators in the company signed up to last year was we were going to divert more money from the local agencies, the local cost international into the national marketing part. And that is a more efficient in spend, but secondly, gives us much more universal clout. So I think that makes us somewhat incomparable, but it really gives us a differentiating muscle as opposed to any of our competitors. So, I think with the quality of the lineup and the financial muscle we have through our national marketing program in general, we think we're going to remain very competitive on the value end. Next question is from Chris O'Cull with Stifel. Thanks. Good morning, guys. It looks like the average U. S. Company operated store experienced a decline year over year in the margin profit dollars. I'm curious if franchisees experienced similar performance and given the level of promotional activity and labor pressure, what comp you really need in the U. S. To increase that margin dollar profits? Yes, Chris, it's a fair comment, because historically we have always we'd always said kind of in a normal inflationary environment that a 2% to 3% comp would maintain margins. I think clearly today, the 2% to 3% isn't enough, mainly because of labor pressures. For us, it's both on the cost side as well as we're investing in labor to make sure that we deploy all these initiatives in the right way. On the operator side, they certainly would have the wage pressures. Having said all that, their cash flow is still doing pretty well right now. So they're in the U. S, they're near all time high cash flow. So they're able to still invest in the business and move forward with all these EOTF projects that we need them to do. So while there is additional pressure because of labor, the fact that we're growing guest counts and growing comp sales is affording the operators with the cash flow that they need to be able to appropriately invest in the business. And just actually to hook on to the previous point as well from Sarah's question, if I was to continue the comment on our marketing shift to national from local, because of the efficiency and the effect that this we can gain, we've been able to slightly marketing contribution that goes through the P and Ls of both our operators and our company stores. So again, this is using our size and scale, not just an advantage to get us a share of voice and drive the effectiveness of our programs. But actually, we can do so more cost effectively and pass on that benefit through the P and L. So I think that it turns out to be a win win for all of us. The only other thing I'd reiterate is, we had talked about our conscious effort to invest in some of this labor in the near term. So some of that investment in our labor as far as to make sure we deploy all these initiatives is a near term phenomenon that we would expect for another couple of quarters, but shouldn't be ongoing then forever, if you will. The next question is from David Tarantino with Baird. Hi, good morning. My question is on delivery in the U. S. Steve, I think you mentioned that that is becoming a more meaningful contributor to comp. So I was wondering if you would be willing to share some metrics around that. What type of sales lift are you seeing overall? And comment on what you've seen in the markets that have been offering delivery for the longest period of time? And then lastly, if you could also talk about what the franchisees are seeing from a margin perspective on those delivery transactions? Thanks. Yes. Hi, David. Yes, I'll speak a little more to delivery. I'm not going to give any precise commercial information on it. That wouldn't be sensible. But as I talk about platforms of growth, we believe we have 5, 6, 7 platforms of growth all working at the same time. Delivery is one of those. So it's now featuring as a meaningful contributor to the overall sales build we have in the market. We did a really good job at rapidly rolling out delivery across well, globally, but also across the U. S. So we ended with around 5,000 restaurants with Uber Eats here in the U. S. So we've got a 2 pronged approach through 2018. 1 is to continue to expand that. It won't be at the same rate because we're looking at major cities in urban areas and we've hit a good number of those early. And clearly, we can only expand at the rate of the Uber Eats coverage we'll offer as well. But I mean, also we have a great opportunity to actually just raise the awareness and the usage from a customer perspective. The U. S. Is a little behind in terms of guest counts per day than a number of other established markets. So again, what we're doing is kind of the stuff you'd expect us to do, some great best practice sharing. What is it that's driving such high take up in markets like the UK, Australia, increasingly so Canada? We're getting some great results also out of Netherlands, out of growing businesses in Spain and Italy as well. So we believe we can get the adoption and frequency to increase in the restaurants that are already offering delivery, and we will just gently expand that number across the U. S. As the U. Greece coverage expands. In terms of the franchisee, I mean, the clearly, it's a different margin dynamic because there's a fee element to that we pay to the provider through Uber Eats, which is compensated the fact that we don't have to hire drivers, run cars, have all the insurance costs, all the complexity and the complication of that. So that's kind of a clearly the consideration balance we have to make. But the reality is, this is increment we're seeing the vast proportion of this is incremental business. And as long as that business stays incremental, then we're getting incremental dollar profit as well. It will be a lower margin percent, but it's incremental dollars, which is ultimately what we're into. And frankly, we believe we've had a bit of a jump on the market here as well. With us, by leveraging the size and scale, we will find ourselves very high up. If you were to go on to Uber Eats in many of the markets now, we'll be one of the early recommended restaurants just because the operation that we run now, we can actually get from order to delivery in under 30 minutes pretty much everywhere we are, which puts us right ahead of the pack in terms of the convenience that we offer customers. Next question is from Jeff Bernstein with Barclays. Great. Thank you very much. So question on the I guess broadly on franchisee sentiment. I mean, you talk about a massive signal of confidence from the franchisees. Obviously, they're pleased with the sales on that. I'm just wondering if you could talk a little bit about is there any pushback? We often hear about the overload from so many initiatives going on simultaneously. Steve, as you mentioned, you've got 5, 6, 7 platforms going. So just wondering whether from an ops or a cost standpoint, you're getting any focused pushback. And one of those initiatives, I'm assuming, is fresh beef, which you didn't give much color to today. I was just wondering whether as an aside, you can offer anything incremental in terms of feedback from test or the timing and pace of the rollout that you're expecting, which I believe was in the middle of 'eighteen? Yes. Sure, Jeff. Yes, so franchisees, as you said, I mean, clearly, that's something we work so closely hand in hand with the owner operators. And I mean, our owner operators knew, as our leadership team in the U. S, they were building a very aggressive and confident plan, and they call it in the U. S, the bigger, bolder vision 2020. So they collectively built this plan knowing that there was a lot tied up into it. As we enter the 2018, I mean, there's a totally expected combination of excitement and confidence and also just the anxiety that comes with the workload and the commitments that have to be made. So, I wouldn't say so much there's pushback, but just the reality is now hitting home, we've got a lot of work to do, both at a local level priorities. So but it's nothing that our teams don't talk about. And really, we're looking to alleviate the anxiety just with some great execution. If we can execute great Dollar Menu 1, 2, 3 from the start of the year, we've got a couple of other promotional campaigns coming up soon that we believe will be exciting and drive the business. And then if we can get the continue to build on the reliability through the technology, whether it's through the global the mobile app our customers have and also improve on the user experience, for example, on the self order kiosks. There's loads of areas we're looking to continuously improve. And as we do so, our collective confidence grows. But I wouldn't say the sentiment is any different from any normal human reaction to when you enter a year and you've got to work really hard and also write some big checks, it always makes you think twice. And I understand that and we're very empathetic to that. With regards to fresh beef, yes, I haven't spoken so much about it because we're in rollout stage. We're converting a lot of our facilities around the country in order to be able to meet the demand when we go to national launch, which will be around May, June time. So we've really completed the first full wave. We probably have now 2000 to 3000 restaurants, which now have the fresh beef for our Quarter Pounders and our signature range. And clearly, we have a phased rollout across the next 2 to 3 months. The feedback we're getting is, clearly, you need diligence in the operational training in order to get our grill teams familiar with the new procedures. But once they're embedded, their crew members are very adaptable and alert very quickly. I mean, the other most encouraging feedback we're getting is from customers who just love the taste of the fresh beef in a quarter pounder. So we're getting unsolicited feedback from customers on a noticeable improvement. So again, that just gives us further encouragement as we roll this out in the next 2 or 3 months. Our next question is from Brett Levy with Deutsche Bank. Good morning. Thank you. If I may, two questions. One is a clarification. On G and A, did you intentionally or was it accidentally that you removed the 5% to 10% additional savings beyond 2019? And then just as a follow-up to some of the questions on the franchise profitability, how are they thinking based on your conversations, how are they thinking about their spread between not just the investments in EOTF and the value, but also what they're seeing on a labor front as companies like Starbucks and Walmart have once again taken it upon themselves to pass along savings and raise wages? Any color you could provide on that would be helpful. Thank you. I'll start with the G and A. So yes, it was conscious that we took out the 5% to 10%. I guess just to reiterate some of the things I said, we've been focused on both saving G and A and shifting some of our spend from maintenance to kind of areas that grow the business. The way our overall philosophy is to achieve savings as far away as possible from the areas of the business that directly impact our customer. So that's where we've been focused. We've realized that we're going to need to continue to invest in technology and digital in order to keep up with where the world is going and our customers' expectations. So we're going to commit to the $500,000,000 but not commit to anything past that. We do look at a variety of G and A measures both internally and externally to compare with our peers. So we look at G and A as a percent of sales, we look at G and A as a percent of operating income, because effectively the G and A is incurred to grow sales and operating income. And I'm not 100% sure that everyone in the industry classifies all the costs exactly the same way. So to me the ultimate measure is looking at operating margin, kind of how efficient are you at bringing revenues down to the bottom line. So we look at all those measures to ensure that we're spending our costs efficiently. We're going to continue our financial discipline. I think over the long term, we would expect that our G and A would be at or below 2% of sales, But for now, we're going to commit to the $500,000,000 and just keep reevaluating and keep our discipline. Related to the labor costs. Yes, I mean, it's very early days since each of us are working on the programs that we're building for the benefit of our people. So it's no immediate impact that we can see. But overall, I would say that the fight for talent continues. It's going to get increasingly challenging to attract the talent that you want into your business and then you got to work really hard through training and development to retain them. So, yes, at a local level, I know our owner operators on our company restaurants are fairly want to stay competitive on pay, but we also want to differentiate ourselves through programs such as Archways to Opportunities, which we're looking to significantly enhance the benefits to our employees from that and also broaden the accessibility beyond the U. S. Into a global program as well because we want to make sure that all of our people around the world stand to benefit. So we remain very close to it and that's actually one of the advantages of a franchising organization such as ours is that when we've got our owner operators close to the market as they are, they are very swift to adapt to the changing marketplace. So we've reached Tapia, but we will take one more question and that will be from John Glass with Morgan Stanley. Thanks very much. Just questions around return on capital goals. First of all, just the lower tax rate, does that necessarily imply higher dividend even if you keep your payout ratio the same or do you attempt to sort of smooth that over time? Same thing with leverage ratios, does tax reform sort of change the way you think about leverage? And then finally, you think about sort of overall return on capital goals. I know you're still within that 2019 goal, but is it given you've got line of sight in CapEx spending over the couple of years, when is the appropriate time to talk about new goals for return of capital for investors to think about under this new all franchise business model? Okay. So let me talk about, I guess, the various pieces of return of capital that you mentioned since you hit them all. Dividends, that's a Board decision. We'll review with them kind of ongoing. We haven't had we didn't have a new discussion right now related to changing dividend, kind of as a quick reaction to tax reform, but we certainly will have those discussions as the year progresses in our normal course. I don't know that tax reform in and of itself changes dramatically the way we think overall about dividends. We've been committed to dividends for over 40 years. We're still committed strongly to dividends. We do look at things like payout ratio and so we'll continue to look at just as a guide, we don't have a set target, but we'll continue to look at payout ratio to help inform that decision. We did, as you indicated, even with our acceleration of CapEx for 2018 2019, We're still comfortable in indicating that we'll return about $24,000,000,000 to shareholders through 2019, which was at the top end of our range. Leverage ratios, I think the rating agencies are still working through some of to look at tax reform and how to think about their models. For us right now, we continue to believe that we're at the appropriate credit rating, so we don't have plans to change our credit rating. That gives us a little bit of room plus or minus in any given year. And so as we think about returning, it does imply a potentially a little bit flexibility in adding some debt. And as I indicated, our priorities still are the same. The first priority is clearly to invest in the business for growth and then we'll consider dividends and share buyback. Well, thank you. And now I'll turn it back over to Steve. Yes. Just before I close, just to add to Kevin's last comment. But just not to lose sight of the fact that our operating business is still the massive generator of cash. And there's no doubt tax reform provides encouraging help both for our owner operators and ourselves, but growing the business is going to be the primary source of cash growth going forward, and that's where we remain focused. So just to close-up, I just want to reiterate our velocity strategy is working, We really do have high expectations for McDonald's in 2018. We've got strong leadership team and a great commitment and alignment with the franchisees, supplier partners and employees who make up the 3 legged stall in the McDonald's system. So we've got great confidence about where we're going to take up business this year and look forward to sharing that with you as we progress. Thanks very much.