Earnings Call: Q1 2017

Apr 25, 2017

Hello, and welcome to McDonald's April 25, 2017 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 are President and Chief Executive Officer, Steve Easterbrook and Chief Financial Officer, Kevin Hozan. 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. Both documents are available on www.investor.mcdonalds.com. As we as are the reconciliations of any 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. Steve? Thanks, Mike. Good morning, everyone. We delivered a strong first quarter with global comparable sales of 4%, marking our 7th consecutive quarter of positive global comparable sales. Globally, guest counts were up 0.6% as customers visited McDonald's more in the Q1 of 2017 from the same period in 2016. And our bottom line performance was also strong. Diluted earnings per share increased 19% for the quarter in constant currencies. At our Investor Day, we talked about how we fortified our foundation and how we're now fit for purpose. Today, we're running better restaurants. We're keenly focused on operations excellence and on the fundamentals of quality, service, cleanliness and value, and it's making a difference for customers. Our greatest opportunities are at the core of our business, and we're continuing to gain momentum as we build a better McDonald's. 1 that delights customers for the taste and quality of our food, offers the highest level of convenience and provides great value. And as we shift from revitalizing the business to strengthening and growing it, we're going to talk about the moves we're making within the context of our Velocity Growth plan. This will enable us to provide more texture on how the long term plans we shared during our Investor Day in March are driving everything we're doing. So let's start by going deeper on our performance. And as we do that, we're going to change things up a little. Our leadership team has a great rapport and I'm especially grateful for the partnership of our Chief Financial Officer, Kevin Ozan. And with that said, I thought that ServiceNow to partner on this call like we do on a daily basis. So I'm now going to toss it over to him. Thanks, Steve. 2017 is off to a good start. We built upon strong prior year results that benefited from the launch of All Day Breakfast in the U. S. And Leap Day, which created a 1% hurdle for this year's comparable sales across all segments. Our top line performance is also starting to reflect the emphasis that we're placing on growing guest counts, which continues to be our top priority. During the quarter, we saw varying degrees of success with strong sales and guest count contributions from Japan, the U. K. And Canada. Guest traffic is beginning to strengthen in other markets such as the U. S. And Germany, though their guest counts remain negative for the quarter. So before Steve walks through the steps we're taking to continue building momentum, let's take a look at 1st quarter sales highlights in each of our segments, starting in the U. S. We're in a stronger position in the U. S. Today, a cumulative impact of the moves we've made the past couple of years. Comparable sales grew 1.7% for the quarter, fueled by ongoing customer enthusiasm for all day breakfast, the Big Mac promotion featuring the Grand Mac and Mac Jr. And our beverage value offerings. We also delivered a positive comp gap of 2.1% versus QSR sandwich competitors. In the International Lead segment, comparable sales increased 2.8% for the quarter, driven primarily by continued momentum in the UK and Canada's successful launch of All Day Breakfast. In the High Growth segment, comparable sales grew 3.8% with positive results across all markets for the 2nd consecutive quarter. China's continued momentum was the strongest driver of segment performance. And the foundational markets grew comparable sales 10.7% for the quarter, with solid results across the entire segment. Japan was the biggest contributor with double digit comparable sales on top of double digit performance in the Q1 of 2016. So thanks for that, Kevin. Driving those are the drivers of the top line momentum in the quarter. I'd now like to turn to our strategy and the actions we're taking to sustain that momentum for the long term, which we shared at our March Investor Day. Our Velocity Growth plan is designed to grow guest counts by retaining customers who visit us today, regaining lapsed customers and converting casual customers to committed customers, giving each of them more reasons to visit McDonald's more often. At the same time, we are creating the best experience for customers leveraging our size and scale. We are prioritizing 3 velocity accelerators designed to drive growth on top of everything else we are doing. And those 3 are digital, delivery, and experience of the future, or as we call it EOTF. Taken together, these actions enable us to bring the biggest benefit to the most customers in the shortest possible time. So today, I want to talk about the steps we're taking to regain customers by focusing on food quality, convenience and value. 1st, food quality. We know consumers place high value on taste, serving delicious food is imperative. Because taste and quality are so closely interrelated, we also continue to build on the moves we've made with cage free eggs and sustainable beef to improve the quality of our food. Last month, we announced that we will serve fresh quarter pound beef patties prepared when ordered in U. S. Restaurants by mid-twenty 18. I had a chance to taste the burgers and talk with customers and franchisees in Dallas, and Kevin did the same in Tulsa. We both left convinced that customers will appreciate the improvement as we bring fresh beef around the U. S. As we expand our menu to offer premium burgers in markets around the world, we're tapping into our restaurant operations expertise to serve customers quickly and efficiently. We recently launched Gourmet Creations in Australia, and we'll launch the Signature Crafted platform in U. S. Restaurants next week. We're taking significant steps forward on what matters most to customers. I'm confident it will make a difference for our business and our brand. 2nd, convenience. Convenience is about making our customers' lives easier by providing a more accessible and personalized experience a welcoming crew in a modern and inviting environment. In Canada, customers have come to rely on the hospitality provided by our guest experience leaders. We welcome them in the restaurants and offer to guide them through the kiosk ordering process. Customers appreciate ordering at their own pace and customizing their order just the way they like it. And since their introduction in Canada, kiosk usage has more than doubled year on year. In the U. K, we're providing greater convenience with increased access to McDonald's. More than 6.50 restaurants are now open 24 hours a day, 7 days a week. This is such a huge benefit to consumers managing shifting work patterns and lives are getting increasingly hectic and complex. We continue to highlight our extensive hours through the We Are Awake Overnight campaign, showing customers we are available on their schedule. Our leaner operating structure has improved our ability to spread our best ideas from one market to another. In markets around the world, we continue to see a collective lift from all the actions we're taking to make McDonald's more accessible and easier for customers to visit. 3rd, value. When value is customer focused and locally relevant, it drives guest counts. We're committed to providing great value, but the customers have a couple of bucks in their pockets or a few more than that. In the U. S, the predictability of our national beverage value program with dollar any size coffee was well received by customers. In Russia, we've seen increased traffic with our recently launched All For 50 Rubles value platform, which is a great value and highly competitive in that marketplace. And in Germany, our Taste of McDonald's campaign provides an everyday affordable mid tier sandwich that is resonating with price conscious consumers. We continue to tap into our unmatched scale and unparalleled operations to ensure customers feel good about what they get for what they pay. As I mentioned earlier, we're not stopping there. The world in which we and our customers live demands new approaches and an evolved mindset. Our 3 velocity accelerators, digital, delivery and EOTF will drive incremental profitable growth. They create more satisfying and lasting relationships with customers, transforms convenience, expand our dayparts, and collectively help us become a better McDonald's. On digital, we're reshaping our interaction with customers, whether they eat in, take out, or drive through. We'll bring mobile order and pay to 20,000 restaurants around the world by the end of this year. In the U. S. Alone, mobile order and pay will be in 14,000 restaurants by the end of the year. Whilst we're still in the early days in our pilot markets, we're moving aggressively with multiple mobile order and pay tests already underway. We're already in 400 plus restaurants across the U. S, including Chicago, Monterrey, Salinas, Spokane and Washington D. C. Globally, deployment is underway in markets including the UK, Australia and China. Through delivery, we'll bring the McDonald's experience to more customers, whether it's in their homes, their dorm rooms, to their workplace and beyond. We're encouraged by our final results in Florida and are expanding to additional cities in the U. S. This quarter. At the same time, we're accelerating experience of the future in the U. S, building on our learnings from markets around the world. As we mentioned in March, EOTF will be in roughly 2,500 U. S. Restaurants by the end of 2017, with the goal of converting most of the traditional restaurants in the U. S. System by 2020. Markets like the U. K. And Canada have reached a critical mass with Experience the Future by seeing growth in both guest counts and average check size, meaning sales lifts in the mid single digits. And now Kevin will share how our global growth plans are fueling the financial performance we've outlined for 2017. I talked about the strength of our top line results earlier. As Steve mentioned at the beginning of our call, our bottom line performance was also strong. Operating income grew by more than $250,000,000 or 16% in constant currencies and earnings per share was up 19% in constant currencies. Let's dive into the performance drivers for the quarter and their impact on our financials. The increase in 1st quarter operating income reflects broad based strength across all segments, a testament to our ongoing strategic initiatives. Over the last 2 years, we've enhanced the strength and stability of our business as we've evolved to a more heavily franchised organization, with more restaurants now in the hands of our outstanding local owner operators. This shift in our ownership structure also has reduced our capital and G and A needs going forward, And we are very focused on growing top line sales and profitable guest counts that directly support our critical revenue stream as well as owner operator cash flows. For Q1, franchise revenues increased 7% in constant currencies, reflecting strong top line growth as well as the impact of expansion and refranchising. Franchise margin dollars reached $1,800,000,000 for the quarter, a 7% increase in constant currencies and contributed over 40% of the growth in consolidated operating income, led by results in the U. S. And the International Lead segment. Looking next to our company operated margins. As we've said before, margins are a top line game. Positive comparable sales in the Q1 were a key contributor to our global company operated margin growth. These margin results also reflect the benefit of lower depreciation expense of roughly $42,000,000 primarily in China and Hong Kong. As we indicated in our year end report, in accordance with accounting rules, these markets were classified as held for sale effective December 31. Accordingly, we stopped recording depreciation beginning January 1. We expect a similar benefit at least through the Q2. Looking at the business drivers of our company operated margins, we continue to glean insight from analytics to improve the effectiveness of our pricing models. Our intent is to optimize growth in guest counts, revenue and restaurant level cash flows. At the end of the Q1, our U. S. Menu reflected a 2% price increase, which was below food away from home inflation for the period of 2.4%. Menu price increases for our international lead markets averaged about 1.5%. As Steve has said, we've made substantial progress resetting our foundation and rightsizing our structure. In Q1, our G and A was down by more than $55,000,000 9% in constant currencies, reflecting both the impact of our restructuring and refranchising as well as our ongoing spend discipline. We will continue challenging our G and A spend and optimizing our valuable resources to prioritize the funding of initiatives to grow the business. The last item I want to call out for Q1 is foreign currency translation, which negatively impacted earnings per share by $0.02 At current exchange rates, we expect a negative impact of $0.02 to $0.04 in the 2nd quarter and $0.05 to $0.07 for the full year. As usual, please take this as directional guidance only because rates will change as we progress through the year. We ultimately measure our financial efficiency by our operating margin as it serves as the most comprehensive gauge of our overall performance. As we move through 2017 beyond, the execution of our refranchising initiative will yield significant benefits to our operating margin as we transition to a more streamlined and efficient model. At the end of Q1, we successfully completed the refranchising of our Nordic markets. The regulatory processes to complete the previously announced refranchising transactions in Asia are proceeding, with the China Hong Kong transaction expected to close in the second half of the year. And we recently completed a review of our ownership stake in McDonald's Japan and have made the decision to not proceed with the transaction at this time. Given our current ownership, McDonald's Japan restaurants are already classified as franchised. So this decision does not impact our current refranchising target or our intent to evolve to 95% franchised over the longer term. It also does not impact our long term financial targets that we introduced last month. Most importantly, we're confident that we have the right capabilities and customer focused plans to grow our business in Japan, and we believe the market is poised to maintain its strong momentum. While our operating margin grew to nearly 36% for the quarter, items like the completion of the China Hong Kong transaction and the related depreciation benefit that I mentioned earlier will create some choppiness in our operating margin over the next few quarters. So the near term trend line for our operating margin won't be linear. Collectively, our refranchising and G and A efforts, along with diligence in investing our capital to grow sales and income, will deliver increases to our operating margin and contribute to our goal of enhancing long term financial value for our system and our shareholders. Thanks, Kevin. I want to build on what you shared by providing some additional context around why we've never been more sure of our ability to seize the potential that we see. My confidence stems from the success we've already achieved and the world class management team we now have in place to build upon this success. We've talked about our intent to blend individuals with deep McDonald's experience with new executives who have valuable experience outside of McDonald's and bring fresh perspectives and innovative thinking. With that in mind, we've recently brought on Bob Rupzinski as Global VP of Customer Relationship Management. Bob joins us from Mondelez International, where he was Head of Global Media and Digital. He previously led data driven marketing strategies at Kraft. Linda Van Goosen as Head of U. S. Menu. Most recently Linda was at Starbucks where she was responsible for the overall vision and strategic growth plans for Starbucks Evenings. And Morgan Flatley as U. S. Chief Marketing Officer. She comes to us from Mexico where she was CMO of Global Nutrition and previously returned Gatorade to growth as CMO of that brand. We're continuing to see great talent step into important roles, and I know that together we'll be successful in accelerating the growth of the business. The conversations I've had with franchisees, suppliers, and most importantly customers have further bolstered my confidence. I've visited with franchisees in the Middle East who've embraced the powerful potential of Experience in the future and seen the impact it makes on the customer experience and their bottom lines. This is also an existing delivery market, so it's great to experience that firsthand. I've met with suppliers, including an Irish farmer participating in a national sustainability program. He's raising high quality beef with a smaller carbon footprint and at a greater profit. Our leadership team has talked with nearly 4,000 owner operators, company employees, suppliers, agency partners and bankers from around the world who have visited the space in Chicago where we announced our long term growth strategy in March. In fact, Chris Kapschinsky and his team have taken groups from 20 of our 22 U. S. Regions through the space, walking through the series of experiences we set up to bring our future to life. They will take groups in the remaining 2 regions through next week. The feedback from franchisees has been overwhelmingly positive with over 90% approval for the U. S. Plans. And last but certainly not least, I've stood alongside customers recently in the Bay Area as they tried and I tried mobile order and pay for the first time. I'm committed to use it time and again to order more of the delicious McDonald's food and drinks they love. I have no doubt the moves we're making are the right ones to build a better McDonald's, one that serves more customers more often. We're keen to continue strengthening the foundation that drove our strong Q1 results and at the same time pick up velocity and fuel long term growth by focusing on those actions that bring the biggest benefit to the most customers in the shortest possible time. So thanks everyone. And now I'll turn it over to Mike to lead the Q and A. Thanks, Steve. We will now open the call for analysts and investor questions. We'll come back to you for follow-up questions if time allows. Now the first question is from David Palmer with RBC. David? Thanks. Good morning. Quick question on the non U. S. Business, particularly leadership markets. Some of the informal eating out trends in those markets, You mentioned Germany had some down traffic, but how does it look in markets like the UK? Some consumer companies have talked about weakness since Brexit there. And in some of these markets, what is the outlook that you see in terms of your ability to change trajectory like in Germany, where it seems like you've had an on and off again value message? Thanks. Hi, David. That's a good question. I'll do a quick run around all 5 markets in the lead markets just to give you a flavor. Certainly, from what we've seen in the UK, our business has not missed a beat since Brexit. Now, that's not to say that as the process works its way through over a couple of years, that may translate to a consumer confidence. But certainly for now, we've not seen the business miss a beat. And frankly, whilst others are slightly more hesitant, our owner operators in the company are investing very aggressively in Experience of the Future and getting extremely strong performance, I've got to say. So, feel really good about where the U. K. Is at. Haute France, very different situation, a macroeconomic situation that has been challenging for a while. We've struggled to get like for like sales growth. What I would say is green shoots some encouragement and Joe credit to the team there, They have grown guest count the last couple of quarters. So they're in a bit of a market share fight. The consumer is nervous given some unfortunate and terrible terrorist activity. And now we're going through the presidential elections there. So there's a little bit of uncertainty there, but we're fighting hard to stand still at the moment, but I feel really good about where the business is at as the tailwinds return. Australia is a market where we've been very aggressive the last 2 or 3 years with great results. The competition has woken up a little bit, so they're competing a little more, compete a little harder in the near term. So we're having just to adjust a little to that. But we're still getting solid growth. And again, given the great first of all, the alignment between a very aggressive positive minded owner operator group and a strong leadership team versus in good place. But also we've invested really well in our restaurant estate and some of the modern elements of Experience of the Future. So again, we're in good shape to go, but we're into a little bit more street fighting than we have been over the previous couple of years. Canada is doing their momentum just continues. Do a great job up there. And again, very steady consistent planning year in, year out, is driving both strong guest count and strong sales growth. They are further down the Experience the Future rollout. So a little like Australia, Canada and the UK, we got so many valuable earnings from how we built the growth plans there that we can bring back to the US. So the US is very beneficial and is very open to that. And finally, Germany. Germany has always been a real tricky market. I mean, it's it exports things of high value, but the consumer in Germany is very value oriented. And you see that across the grocery sector as well as the broader informal eating out sector. So that whenever you come off value, you feel it immediately. So we've got a much more solid platform that's been developed for everyday value, which I know the team are feeling a lot more confident about. We had a slow start to the year in all honesty in January, February, March certainly got stronger and we feel a lot better entering quarter 2 there in Germany that we're in good shape. So it's a good question. That sector is about 40% of our income. And the dollars we earn there are just as valuable dollars we earn in the U. S, which is a similar type number. So I feel great about the I like to think of them as being our engine room and as well as an innovation hub for us as well. So I'm feeling good about the lead markets and we're in good shape. Our next question comes from Matt DiFrisco with Guggenheim. Thank you. I just have 2 bookkeeping questions and then a question. So the D and A, you said it was going to continue at this level for 2Q. Is that going to be also sort of for the full year? Should we look at this as a proxy? Matt, that depreciation benefit keeps occurring until the transaction closes, until that China Hong Kong transaction closes. So we don't know exactly when it will close. That's why I say at least through the Q2, depending on when it closes, you may see some or all of that benefit in the Q3 also depending on the actual close date of the China Hong Kong transaction. Okay. And then the gap you said within the U. S. With your QSR peers, that was 2.1%. I'm assuming you are outpacing the peers by 2.1 or are you lagging the peers by 2.1? No, we're outpacing the peers by 2. Thanks for clarifying. Sorry, that wasn't clear. Yes, we definitely outpaced in the Q1 the QSR sandwich peers by 2.1%. Thanks, Matt. Next question is from Brian Bittner with Oppenheimer. Thanks. Thanks for the question. With the experience of the future, you've talked about the mid single digit comp lifts based on the markets that you've already implemented this in? And as the store transforms and you install the kiosks, I guess the question is how quickly do these benefits materialize on the sales side? And when you do look at Canada, you actually mentioned that kiosk usage doubled year over year in the Canadian market. Is that like the dynamic at play here with the EOTF that drives the most incrementality? Is it mostly within the kiosk usage? Thanks. Hey, Brian, it's a fantastic question. I'm trying to do a better job of painting the picture of why we feel so confident and excited about Experience of the Future. And I'll give you a comparison. If we have a new menu item launch or something like an all day breakfast, our issue will tell us that you end up with a good search initially the first handful of months and then it settles down to a steady run rate. And we've seen that with all day breakfast and we're happy. With the 3 accelerators that we've identified delivery, the digital and the technology side and Experience the Future, these start well, but have year upon year upon year upon growth. And let me give you an example. If we take kiosks, and that's why I really wanted to call it out in the comments earlier. First of all, it takes time for consumers behaviors to change. So we need to get our hospitality programs very well established in a restaurant and customers have got to see a benefit. So initially, is it easier to order? Can it be easier to pay? Can you move away from the stress of the front counter? But now I think 1 year's time, 2 years' time, when we got mobile order pay, people can go in, they can scan their favorites, we'll have a better developed CRM, customer relationship management program with some form of loyalty and reward that comes with that, you'll be able to call up your personal profile on the kiosk. You can redeem points or redeem offers, for example. So to me, the basic functionality already helps customers. They appreciate it. It's a much more modern and less stressful experience. But actually, there is incremental improvement year upon year upon year. And again, the best reference we have for this is what we've already got out there in the system. Self order kiosks, for example, have been in the French market. I remember going there when I was back in the UK several years ago. They are now seeing way over half of the in restaurant transactions go through the self order kiosk. And at peak hours, it's almost all the transactions because people move away from the hustle bustle front counter. So, I think there's and your point is very, very appropriate. And as we build out this is why all these things are so important collectively. So, as we build out our digital platform, build out the functionality of the mobile app, introduce mobile order and pay, then that interacts with the kiosk, which then interacts with our kitchen. It's actually a pretty complex program that seem we've been working through the last couple of years. But to me, out of the traps, it grows transactions, it grows average check, but actually the beauty of this is it will keep on providing a platform of growth. So thanks for the question. Our next question is from Brett Levy with Deutsche Bank. Good morning. How should we be thinking about the U. S. Menu and the changes and the progression as you look to refine the value messaging? You talked about the rollout of Signature Crafted and you've also recently discussed innovation. What should how should we be thinking about that from a modeling standpoint and from just your implementation as you run through net simplification? Thank you. Yes. Thanks, Brett. I won't try and help you think about it from a modeling perspective. I'll leave that to you guys. But the one thing we know, we have to be competitive on value. So Chris Kaminsky, the owner operator is fully embracing that. It doesn't mean you have to win on it, but be competitive certainly at the entry level. So if you've only got a buck or 2 in your pocket, there's something good for you at McDonald's. So that is always important. Then we want to reinforce and support the core menu. And don't underestimate the value of the core menu to us. We've got half a dozen multibillion dollar brands within just the core menu. And most recently, we've seen the success we can have by supporting Big Mac, having some extensions of that to create some fun. We have some fun with the Big Mac sauce, for example, and that creates familiarity with our traditional menu. Then as we get better as a business, as the brands resonate increasing the customers, can explore more of the premium end and our credibility grows with that. So we feel good about Signature Crafted. This gives a variety of taste, different flavor profiles, more premium ingredients or unusual ingredients, you're introducing guacamole, for example. And customers we know are willing to pay a premium for that at certain times. Then you also want to think about what is the role that the local co op plays versus national. So that's another dynamic in the U. S. That's different to any other market around the world. So we may want to compete with more local flavors and tastes in certain areas of the country. The Southwest will have a different flavor profile for promotional items than the Pacific Northwest, for example, or the Northeast. So that gives us a little bit of opportunity to create variety and just stay interesting to customers at a more local level. So to me, this is all about balance. Yes, we want to have a strong value program. Yes, we want to play strong in the premium end, but also our Heartland is where us and our owner operates earn most of their cash flow. So, I'm feeling good that we will have menu innovation, but it won't be reckless. We cannot have too many items too often. That gets to your final point, which is simplification. And one of the things I have really enjoyed, or hopefully it's contributing to, but just witnessing across the U. S. Team is they're getting increasingly confident about making fewer, bigger decisions. And that really helps the restaurant managers run restaurants better because there is less complexity. Clearly fundamentally is a big part of our future. Our next question comes from Will Slabaugh with Stephens. Yes, thank you. I wonder if you talk about the shift within your U. S. Comp of traffic and average ticket over the past couple of quarters. I know you pushed Dollar Coffee and then the Mac Jr. Seemed to resonate pretty well among the guests here in the U. S. So, I'm curious if you saw that transaction number pick up quite a bit and if you feel like that's something that's sustainable throughout the year? I'll kick off and then maybe Kevin wants to talk about the pricing piece versus food away from home. I mean, the one thing that's been really part of the honest conversations we have around the business, and you would have probably seen that at the Investor Day, was let's acknowledge the level of guest counts or transactions that we've lost because frankly we want those back. And an element of that is on the value side, but also an element of that is on the broader experience. We just make ourselves more inviting. So I would say we have fought harder on the value side the last 3 to 4 months. And I know the US team and our owner operators are bracing some aggressive value programs going forward as well. And that has helped to narrow the gap between sales and guest counts. We didn't quite squeeze a positive guest count in the U. S. In the quarter. That said, we were up against a 1% hurdle. But frankly, ultimately, our measure of success is full percentage points of guest count growth. So I'm not really worried about the 10ths here and the 10ths there, because that will underpin the long term sustaining growth. So we have a very honest appreciation of what it is we're looking to achieve here and competing on value and broadening and enhancing our experience we know will drive customer behavior. Yes. The only thing I'd add is certainly, our intent is to grow both traffic and check. What you would have seen in the Q1 is average check grew partly from price. As I mentioned, we grew price less than food away from home, which is our long term goal to make sure that we're kind of in that range in order to help drive guest counts. But the other benefit we also had in the Q1 was from a mix perspective. Certainly, things like the Big Mac promotion, drove a better product mix than the year before, which helped drive that average check also. Thanks. Our next question comes from Andrew Charles with Cowen. Great, thanks. Steve, you mentioned the franchisees are making the rounds through Chicago to take the Experience of the Future tour after we did in early March and that the overall feedback is very positive with the 90 percent approval around the plan. Just curious though for the franchisees who need further convincing, what reasons are they setting besides the cost of the program? Well, it's a good question, Andrew. This gets to the core dynamics of what makes us different and we believe differentiates us in a positive way. Our owner operator, these are remember, these are 20 year commitment. So the vast majority of owner operators will have a long term perspective. And that gives them the confidence, the encouragement to reinvest 2 to 3 times around that cycle to keep their business contemporary and in line. So I guess, clearly and totally understandably, whenever you build bold, confident plans that require some investment, that comes with an element of nervousness. I get that and we all do. So therefore, we try and demonstrate that we have the business case to support it. And also, given we've got company owned restaurants, we have skin in the game and we see that as well. I guess, to give you an example, there may be someone who is at year 16 or 17 of it, who will be wondering if they put that money in now, will they see that back in the remaining years or will they get that back if they sell on their restaurant. So, each and every individual has a slightly different perspective on it. But I would say, as an overall basis, significant enthusiasm. They love the idea of the US going together on this, because the one thing that makes us powerful is whilst we respect and really cultivate the local owner operator in their local markets and communities and just that resonates strongly. We know the brand McDonald's is strongest when 14,000 restaurants go together. And I think the confidence and the boldness of the plans are being drawn up. Yes, a little bit of nervousness, but that's just a normal human reaction. I think the excitement exceeds the nervousness by quite some way. So, we feel we're in a really interesting and fun place at the moment. Our next question comes from Jeff Bernstein with Barclays. Great. Thank you very much. The question centers around the U. S. Comps and one particular driver. But just on the comp in general, it seems like a lot of investors use the 2 3 year trends as a gauge to try and forecast. And I know there's a lot of concern going into the Q4 and Q1 of lapping the all day breakfast. But with the compares now easing seemingly meaningfully in coming quarters, just wondering what's the is it not reasonable to assume a nice acceleration in the U. S. Comp from that 1.7% level in the Q1? Is that something we're missing maybe to temper that enthusiasm just to try and kind of manage expectations as those compares ease? And just wondering if you can give any color on the delivery as an aside. I know you gave a lot of color on the mobile order and pay with digital and the experience of the future, but I don't think we have much in the way of the timing of the ramp of delivery and the potential contribution on that front? Thank you. Yes. Thanks, Jeff. In all honesty, I'm not going to give any forward looking reassurance. That's not the way we tend to do things. I don't want to break that now. What we have tried to do is give you visibility into our plans and that's what March 1 was all about to demonstrate to you why we are confident in the long term growth of the business. So, we're doing a good job on the fundamentals. Let me give you another piece of texture around the U. S. And what I believe is underlying helping to underpin some of our performance. Along with building exciting plans becomes a greater accountability for all of us who run restaurants, whether it's owner operators or the company. We have been much more mindful, the US team has been much more mindful about addressing a bottom quartile of performance, of operational performance. We are helping support, encourage and expect them to improve performance, But that has meant that some have left the system and those restaurants have moved into the hands of better owner operators. So, as you can imagine, that then helps underpin just core baseline momentum as well. So I just want to get that piece in there about accountability day to day running great restaurants. And whilst we have great relationships, we're not scared of the honest conversation for leaders. That's important to stress. With delivery, we are at an interesting stage. I mean, as you know, we featured it at the Investor Day. So that was very mindfully done because it's one of our accelerators. We've had 200 plus restaurants in Florida now for a while, and we're encouraged about the start we've had. I would say, similar to the experience of the future, it will start slightly lower and grow over time as we get better at it, as awareness grows and we put more marketing muscle behind it and customers begin to respond and change their behaviors. But that said also it would be fair to say, we are not in test mode. We're expanding. And we're going to be expanding to a number of U. S. Cities this quarter. But we're learning as we go. We're learning on delivery radius with on the in store dynamic, on how we can capture the order better and prepare it more fresher, etcetera. So we are continuously learning. But we feel good about the way we're interacting with Uber Eats. They've proven to be a great partner for us and hopefully we are for them. So we'll be expanding into a number of U. S. Cities with Uber Eats this quarter and demonstrating why we believe this is a velocity accelerator. Next question is from David Tarantino with Baird. Hi, good morning. Just one quick clarification on the U. S. Traffic. I know you mentioned it was negative, but I was wondering if it was negative if you adjust for that leap day drag. And then my real question is on the initiative to roll out fresh beef in the quarter pounder in the U. S. And I understand the consumer proposition, but can you talk a bit about the operational complexity or risk that that might add from a service speed or however you think about executing that initiative? And then secondly, do you think this is a precursor for rolling out fresh proteins across the menu longer term? Yes. I'll take the quick U. S. Guest count clarification, and then Steve can talk about the fresh beef. As we mentioned, the U. S. Was negative in the Q1. To your point, if you adjust for the leap day effect from last year, it would be relatively flat. And then on fresh beef, David. So we've been in the market, particularly in Dallas, for a little over a year before we made the decision. We made the decision maybe 3, maybe 4 weeks ago to say yes and to go with this. So, we entered this with a very, I would say, a very open mind. We were excited about the opportunities from a customer perspective, but mindful of complexity, cost, operational impact, etcetera. So I would say that we've been very well supported by the owner operator groups in particularly Tulsa Dallas. We have worked through a lot of the kinks in this. So we believe this is, I mean, very little incremental from a cost perspective. We did initially in the early restaurants see service slow down a little in the drive thru, but we have found ways to get around some of those operational complications and brought that right back down to negligible impacts. From a there's a different food handling required, clearly, when you're dealing with fresh product than with frozen. But again, we've made that with help from our suppliers, we've made the packaging very simple, the storage very simple, the food handling very simple. So there was an overriding call. I was getting letters from the owner operators pleading for us to go with this, that they believe they've overcome any in restaurant issues that them and their teams had, but they were getting such encouraging response from customers because it tastes juicier. It's just hotter and juice. It's a great tasting product. So we feel good that we have vested that time, that 1 year well to overcome any of the potential. I think this is a good indication of the change of mindset we have around McDonald's. There's plenty of yes, but conversations about how you could have nice idea, but but we've gone to yes, that. How can we overcome it? And how can we make a difference. As to whether this signals a future, absolutely no idea. At the moment, we feel good about where we're at with quarter pounder, given the volumes of quarter pounders we handle and the fact that that is our biggest patty, therefore, the biggest benefit transfers to the customers. That's where the juiciness and the heat really comes from. We feel good about that. We're going to roll the quarter pounder out over the next year or so. And we just look forward to seeing the results. Our next question comes from Sara Senatore with Bernstein. Hi, thank you very much. I just wanted to follow-up on the food away from home and pricing topic, which is to say, historically, I think when we've seen inflation, McDonald's has actually done better at this about widening this gap. And I guess trying to anticipate if we look forward and we do see a bit more inflation, could you anticipating anticipate having maybe even relative to the market maybe again a little bit wider gap than even what you've already seen this quarter in a good way? And have you thought a little bit about what the implications might be for traffic versus margin with respect to your franchisees businesses? So that's my first question. And then just quick follow-up. Could you give the comp for China, please? Thank you. Let me start with the pricing. As you mentioned, there are several things we keep an eye on as we think and look at pricing. Food away from home is one of the metrics we look at over the longer term to generally try and be below that metric. But as you know, we also look at food at home and most recently there's been a pretty big gap between food at home, food away from home. I think that gap is starting to narrow a little bit from the highs that we saw in 2016. But our philosophy on pricing really is to help it drive to make sure that we're focused on pricing that will help drive traffic as well as margins and operator cash flow. So the operators certainly are concerned about increasing profitability as are we, but we also want to make sure that we're not taking too much pricing that discourages guests from coming in. We have a lot of models that look at the dynamics of this pricing, both within our menu and against competitors. And I think we're getting better with our analytics at looking at some of those metrics. But historically, as you mentioned, I think we have done fairly well with what I'll call some reasonable inflation, whether that's 1% to 2%. We've certainly shown an ability to adjust our cost base to address inflationary pressures. But I feel pretty good about where we are right now from the pricing standpoint. We were a little bit ahead last year of food away from home, and I think now we've adjusted appropriately. Regarding China, I guess what I would say is, while we're in the midst of this pending transaction with our strategic partners, I think out of respect to them and the process, we won't talk about a specific number. What I would say is, our comparable sales were clearly higher than our near end competitor in China. I'll leave it at that. Our next question comes from John Glass with Morgan Stanley. Steve, my question has to do with just complexity around Experience of the Future. As you walk through elements of it. It seemed like this is a great consumer proposition, but it's a significantly more complex operation for the employees, meaning they've got to do delivery out to the curb, they've got to take orders from multiple points. What has been your experience early on rolling that out? Do you have to add additional labor to the restaurants in order to or training to the restaurants to get people over that hump of sort of dealing with these different aspects? And do you have to think about who you recruit and how you recruit employees? It's a tight labor market, but maybe you need a different employee to interact with the consumer given all complexities? Okay, great question actually, John. So, stripping down the 2 or 3 different areas, I think you kind of hit the areas that are important to us. So, yes, as we deploy Sperms the Future, there's a comprehensive trading program that goes with that. And that's one of the things I think we're typically pretty good at. When we get into rollout mode, we do with the talent we have in the field, the operations experience, we do rollout these programs pretty well. But yes, there's absolutely a training element to this. Additional labor, no, we're not seeing additional labor. What we are seeing is a reallocating of labor positions in the restaurants. I mean, we need less people behind the front counter taking orders. And part of the significant benefit both for us and for the customer on this is, we can repurpose them into the dining area. Now that doesn't necessarily mean the same people can do both roles. So what we're also seeing, and we've learned a whole heap from Canada in particular, Australia, U. K. More recently is there is a new role in McDonald's and that's kind of the hospitality service person. So we have a very we have a dedicated job description for that. We hire specifically for that because it does require different skill set. Those social interactions are different. And clearly, we're going to get they will end up being busy and not just helping customers in and around their kiosk, but actually as we roll out table service as well as additional labor, but repurposed. Is not additional labor, but repurposed. Is there training on rollout? Absolutely, yes, because that gives us the best chance of landing this well and making it smooth. Our next question comes from Jeff Farmer with Wells Fargo. Thanks. I heard your response to Jeff's earlier question and I recognize that mobile order and pay has been in test for only something like 5 to 6 weeks. But what is the plan for sharing performance updates on these test markets in coming quarters, meaning when this is a little bit more on its feet? At least from my perspective, I do think investors are very focused on this. And I'm curious how much information you guys will provide as we move through 2017? Actually, that's a fair question, Jeff. At the moment, we haven't thought about sharing since early stages. But it is an accelerator for us and we want to give you some visibility, both in terms of, say, the number of restaurants and the types of customer behaviors. Whether we give a precise number each and every time, I doubt that's where we're headed. But we want to give you an indication of whether this is enough to get excited about. But we have identified 3 accelerators. We do see them as changing the momentum of our business. So these are fringe things. These are platforms that we believe will grow and then grow year on year. So I think you will be getting more disclosure as we build up some critical mass and we can start to help you interpret the numbers better and project forward. Our next question comes from Matt McGinley with Evercore. Thank you. I have a question. At the March Investor Day, you outlined a plan in the U. S. To regain, retain and convert customers and that was built around quality, value and convenience message that I you already discussed in this call. But as you look at that inflection, the trend that you have and I know it may not be very easy to quantify. I'm curious who you think you're actually bringing back or who you brought back this year in this inflection trend you've seen in the past few months or even few quarters? I think if we went to if we just talk about the U. S. Specific and I'm guessing that maybe where the question is. Yes, yes, U. S. I think the return is the re gain is really largely around value. I mean, we saw that we lost we were losing customers in the value end of our menu for a period of time. I mean, retaining our stronghold is something that's clearly will do through core menu and ongoing value and experience and convenience. We certainly saw some seepage of guest counts, if you like, on the patent value ends. And I think the more competitive position we've taken, our operators have taken embraced has helped us recover some of that as well. Early days, very difficult to diagnose precisely. But as we saw the market share gains that Kevin outlined, the 2.1% outperformance of our QSR peers, we know that a combination of core menu, Big Mac Extensions, Dollar Coffee, and then as we exited the quarter, we come to move to Dollar Any Size Drinks. We know that combination resonated well. We have time for one more question, and that will be John Ivankoe with JPMorgan. I was just hoping we could get just a view of the current labor market in the United States as it stands. Obviously, we're 7 plus years into an economic recovery and thus far in sometimes the restaurant industry begins to see stress in terms of quality and availability and cost of employees, especially as turnover goes up. So how is the system kind of faring with that? Are there any plans specifically in 2017 2018 for you to become even more of an employer of choice for this type of worker than you've been in the past? And just how are you feeling about things overall? Yeah, John. It's a really astute point. I would say compared to 3, 4, 5 years ago, the general labor market is tightening a little bit. And clearly, that is something we are mindful of. It hasn't really taken us by surprise because we've seen economic cycles before. We know what that means to us. What you may have seen, for example, in part of our response to this, as well as as we modernize our restaurants, as we introduce technology, we've become a more appealing place for people to work. We believe that people in the service sector are more tempted to a modern McDonald's today than perhaps they would have done to a tired McDonald's of yesterday. But the other piece you may have seen is we worked hard above the line on employer reputation, on jobs, on training, on skills, on education. So we talk about here in the US in particular being America's best first job. And that's something that we believe we can substantiate through opportunity, flexibility, pay and rewards, but also under the Archways for Opportunity programs you would have heard us talk about where we could help with high school diplomas and get our people into further education where not only are we a job and not only do we help them pay the bills, but actually we help them progress in life and go to the next stage and build careers either within all of Beyond McDonald's. So I think you're going to see the market further tighten. That's an expectation we certainly have. And you will also see us going increasingly hard, even if it's as recently as just this last week when you've seen about the new uniforms we're rolling out. We're looking at every aspect of the employment proposition here because we do see it getting tighter. And we just believe the more attractive we can make ourselves, that puts us in a better chance of being a winner in this market place. All right. We're near the top of the hour. So with that, I will turn it over to Steve, who has a few closing remarks. Thanks very much, Mike. And hopefully, we've got across, we believe today we're fit for purpose and that we're building a ton of McDonald's. The Velocity Growth Plan is guiding our focus and execution on the opportunities that will improve the experience for our customers. I am fully confident in our ability to harness our unmatched competitive advantages to satisfy customers, drive profitable growth, and deliver value to our shareholders. So with that said, thanks to all of you for dialing in and have a great day. This concludes McDonald's Corporation Investor Conference