Hello, welcome to McDonald's fourth quarter 2016 investor conference call. At the request of McDonald's Corporation, this conference is being recorded. Following today's presentation, there will be a question and answer session for investors. At that time, investors only may ask a question by pressing star one on their touch-tone phone. I would now like to turn the conference over to Mr. Chris Stent, Vice President of Investor Relations for McDonald's Corporation. Mr. Stent, you may begin.
Hello, everyone, thank you for joining us. With me on the call are President and Chief Executive Officer, Steve Easterbrook, and Chief Financial Officer, Kevin Ozan. Today's conference call is being webcast live and recorded for replay by Webcast. Before I turn it over to Steve, I want to remind everyone that the forward-looking statements in our earnings release and 8-K filing also apply to our comments. Both documents are available on www.investor.mcdonalds.com, including reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures. I want to make a comment about our financial outlook for the full year 2017. As you know, each quarter we typically provide details around our expectations for several key components influencing annual earnings per share.
In light of our March 1st, 2017 investor meeting, where we will provide an update on our long-term strategy, it was not appropriate to update our outlook in today's 8-K filing or on today's call. An update on our outlook will be provided in conjunction with our investor meeting in March. Now I'd like to turn it over to Steve.
Thank you, Chris, good morning, everyone. I'm energized by the position we're in today as a result of the progress we've made the past two years. When we launched our turnaround plan in 2015, we said we first need to get the foundation right. We focused on running great restaurants and pushed harder on the basics, including hot, fresh food, convenience, and value. We'll spend today talking about the foundation we shored up last year and upon which we'll build as we transition from the revitalization phase of our turnaround to strengthening the business through sustainable growth. We're now in a position to prioritize initiatives so we can further accelerate our momentum. 2016 was a year of purposeful change. We dedicated ourselves to the actions necessary to be a better, stronger McDonald's. Our objective was to reinforce our foundation, that's what we did. First, we right-sized our structure.
We became leaner, more efficient, more nimble. We flattened the organization so it's easier to quickly share and scale best practices across like markets and get even closer to the customer. At the same time, we're building a better McDonald's, literally. We recently broke ground on a downtown Chicago office, creating a world-class work environment for our staff and for our franchisees and restaurant teams who visit Chicago from around the world for training and development. Second, we put the right talent in place. Our leadership team blends individuals with deep McDonald's experience who are ready to take on more responsibility with new executives who have valuable experience outside of McDonald's and bring fresh energy and innovative thinking. We promoted Chris Kempczinski to President of the U.S. business and Joe Erlinger to President of the High Growth Markets, where they have both hit the ground running.
We expanded Doug Goare's role to focus not only on the international lead markets, but on restaurant execution, blending field and center leadership. We expanded Jim Sappington's role to include oversight of all areas of the customer experience, including digital. We brought in Lucy Brady to lead global corporate strategy. Previously, Lucy was a senior partner at BCG, where she had more than 20 years of experience driving consumer-centered growth strategies. Third, we sharpened our focus. As we previously shared, we're not managing the business quarter by quarter. We're taking a longer-term view. We started leaning in, looking forward, and fundamentally changing McDonald's culture. We're moving faster, pushing harder, and taking smarter risks. For example, the pace at which we're expanding Experience of the Future around the world continues to quicken.
I recently visited Spain, where I was impressed by the way they've started bringing the Experience of the Future to life in restaurants around Madrid. The rapid deployment model we're applying to the city has enabled us to dramatically transform the customer experience in a short period of time. What's happening in Spain is guiding our rollout strategy in other markets around the world, including the U.S. Across the business, we're prioritizing actions that have the most direct impact on customers. That includes implementing All Day Breakfast in Australia, which we pulled from the U.S. playbook. This is a great demonstration of value our new structure brings to business. Introducing dedicated restaurant staff as guest experience leaders in Canada. Taken important steps with our food and how it's prepared in the U.S. For example, removing artificial preservatives from our popular Chicken McNuggets.
We further elevated our commitment to running great restaurants. Customers are noticing. During the course of 2016, we've seen customer satisfaction measures improve in most of our major markets, including the U.S. The purposeful changes we're making also resulted in improved financial results. 2016 was our strongest year of global comparable sales since 2011. Fourth quarter marked six consecutive quarters of positive global comparable sales, which comes after five quarters of global declines. Across the business and around the world, we delivered a solid year. Global comp sales were up 2.7% for the quarter and 3.8% for the year. Operating income increased 7% for the quarter and 11% for the year in constant currencies. Earnings per share increased 12% for the quarter and 16% for the year in constant currencies.
Restaurant cash flows grew worldwide, and we continue to see all-time highs in many of our major markets, including the U.S. We expected some uneven performance in 2016, and fourth quarter comparable sales were positive in all segments except for the U.S., where we anticipated a challenging lap due to our successful All Day Breakfast launch in October 2015. Other markets such as France, Germany, and Russia are also working to overcome challenges of varying degrees. With that context, let's turn to quarterly performance highlights in the markets. Starting in the U.S., where comparable sales were down 1.3%. The launch of All Day Breakfast 2.0 is re-energizing customers around our breakfast offerings and is living up to our expectations. We're also seeing pockets of success in regions that have doubled down on affordability by layering McPick offers alongside beverage value.
In an effort to extend that momentum nationwide, we kicked off the new year with a national McCafé beverage value promotion, which leverages our scale advantages and further complements local McPick offers. Operationally, we're running better restaurants. Our fourth quarter customer satisfaction scores are up 5% compared to Q4 2015 as our lowest-performing quintile of restaurants halve the gap to our top-performing quintile. In addition to creating a better customer experience, the significant emphasis we've placed on these underperforming restaurants speaks to the high level of accountability with which we are managing the business. That said, there's more we need to do to reverse guest count trends in the U.S., and we're prepared to hit harder in 2017. Chris and the team have a solid plan that you'll hear more about during our March 1 investor meeting. Let's now turn to the international lead segments.
We had positive comparable sales of 2.8% for the quarter and 3.4% for the full year, driven primarily by the U.K., Australia, and Canada. The U.K. delivered another quarter of strong performance, driven by new food news, a steady focus on core classics, and value. In particular, the Great Taste of the World food event featured the introduction of sandwiches which rotate through the market two weeks at a time. Australia continued its positive momentum despite intensified competition in the marketplace. McCafé and All Day Breakfast remain big winners there. Canada is another market with consistently strong performance. Its focus on hospitality, including the addition of guest experience leaders in restaurant lobbies earlier in 2016, led to the highest guest satisfaction scores on record for December.
At the same time, restaurants that have converted to Experience of the Future, numbering 800 in 2016 alone, are seeing even stronger financial results than those restaurants that have not yet made the switch. Whilst the U.K., Australia, and Canada remain strong, we see more significant opportunity for improvement in Germany and France. In Germany, our actions to improve food quality, enhance the customer experience, and take a purposeful approach to value in 2016 are all resonating with the price-conscious German consumer. We still have more runway, particularly with regard to affordability, and we'll continue to drive harder on that this year. France is seeing initial signs of recovery as the IEO market is returning to a place of stability. For the first time in over five years, IEO market traffic was positive.
The team in France is capturing some of that traffic growth by continuing to innovate, bringing to light new ways to order, pay, and be served. Web ordering, kiosks, and table service are now available in the vast majority of restaurants. Let's turn to the High Growth segment, where performance was driven by strong results in China. We saw increases in comparable sales in the fourth quarter across all markets, resulting in a positive comp of 4.7% for the segment. For the full year, comparable sales were 2.8%. Notably, China had a strong quarter, with comparable sales of 7.9%. We ended the year with solid momentum, due in part to contributions from the core menu and strong value offerings. At the same time, we found success by continuing to emphasize the convenience we provide to customers through third-party delivery services and dessert kiosks.
In the Foundational Markets, we saw positive comparable sales of 11.1% for the quarter and 10% for the year, with a very strong performance in Japan and certain markets in Latin America throughout 2016, as well as solid results across the segment's remaining geographic regions. As recently as November, I spent time with the team in Japan to experience firsthand how they're executing the turnaround plan and the ways they balance new food news, value, and accessibility, supported by a foundation of running great restaurants. Whilst we've been creating customer noticeable change in restaurants around the world, we've continued to enhance financial value. We said we'd be forensic with our finances, and we have been. First, we're putting more restaurants and even entire markets in the hands of local owners. We devoted significant energy to ownership changes in 2016, and those efforts continue this year.
Specifically, Malaysia and Singapore are locally owned as of December. Our partners in these markets bring experience in running great restaurants, with 20 years as a developmental licensee for nearly 100 restaurants in Saudi Arabia. Both markets will be managed by seasoned McDonald's executives with local experience. This partnership will create brand excitement for customers and new opportunities for people as these markets continue to grow and develop. Early this month, we announced a strategic partnership in China and Hong Kong. This structure blends our global brand with partners who bring deep insight into both markets. CITIC and The Carlyle Group have established records of success in the region and share our principles and values. We expect this will be a powerful driver of growth, unlocking financial value in the region and enabling further expansion of the business.
We have now either completed or reached agreement on almost all of our more significant ownership transactions. Second, we continue to make progress against our G&A target. We've right-sized the organization, enabling our market teams to focus even more of their time and energy on actions that directly benefit customers. Kevin will share more on G&A in his remarks. Finally, we fulfilled the commitment to return $30 billion to shareholders over the three-year period ending 2016. Taken together, these actions to enhance financial value enable us to prioritize critical investments to support our long-term strategy, which we'll discuss along with updated long-term financial targets in greater detail in March. Our focus is on growing guest counts as we recognize these are the ultimate lifeblood of our business. We've done significant work to understand how and where to put energy to continue driving profitable results.
We look forward to sharing that with you in just a few weeks. We're now fit for purpose and better positioned to build on our success. I'm confident we're a stronger, more capable business today than we were two years ago. We've built a strong base, and now is the time to shift our focus to strengthening and growing the business for the long term. That said, we will face challenges, some within our control and others beyond. As I mentioned, we're dealing with varying macroeconomic pressures and general economic volatility in many markets, including Russia and France. In Q1, we'll lap results that included a leap day, favorable weather in many places around the world, and a continued benefit from the launch of All Day Breakfast in the U.S.
At the same time, I remain very optimistic about our steady progress to be a better McDonald's as we work to be recognized by customers as the modern, progressive burger company. As I think about where we were, how far we've come, and our potential, I'm convinced we're on the right path to achieve this ambition. 2017 is the year during which we'll step up and lead as we shift to more of a long-term focus. Thanks, everyone. Now I'll turn it over to Kevin.
Thanks, Steve. Good morning, everyone. By staying sharply focused on our customers, we maintained positive global momentum while continuing to make further progress on our journey towards building a better McDonald's. We're pleased with our financial performance in 2016, which reflects broad-based improvements in our operating performance from the top to the bottom line. At the top line, our global comparable sales performance of 3.8% represented our strongest consolidated result since 2011. Every segment was positive for the second consecutive year. Our bottom-line performance was equally strong, as full-year operating income grew $600 million, or 11% in constant currencies. Earnings per share was up 16% in constant currencies, both of which exceeded our performance goals for the year. Steve talked about some of the structural and cultural changes we're making.
We're also evolving our financial profile, I'll talk about some of the impacts on our P&L, as well as progress on our financial initiatives. Let me start with the performance drivers for the quarter. As we evolve to a more heavily franchised organization, growing sales and the associated franchise revenues is critical, as these continue to become an increasingly significant portion of our overall profitability. For fourth quarter, franchise revenues increased 4% in constant currencies, reflecting positive global comparable sales and the impact of expansion and refranchising. I'm encouraged by these results, particularly considering some of the challenging industry trends in comparison against last year's fourth quarter comparable sales, which were our strongest in more than three years. Franchise margin dollars reached $1.9 billion for the quarter, a 4% increase in constant currencies, and contributed over half of our growth in consolidated operating income.
Our solid margin performance reflects sales-driven improvements led by results in our major markets. The operating results are a demonstration of the benefits of our refranchising strategy, which include creating a stable, predictable royalty stream and reducing G&A and capital levels over time. Our refranchising strategy enables us to reduce our asset exposure and enhance our ability to more quickly grow our restaurant base to the market potential. While company-operated margins continue to represent a smaller component of our global operating income, what's important is that we continue to drive higher restaurant profitability as we optimize our company-operated restaurant portfolio and the ongoing contribution to our bottom line. For the quarter, company-operated margins improved 170 basis points over the prior year, led by China and the U.S. We benefited from a benign commodity environment in 2016, although we continue to experience labor inflation in many markets around the world.
Menu pricing is one way to help mitigate some of these cost pressures. We ended 2016 with a 2.8% price increase in the U.S., relatively in line with food away from home inflation of 2.3%. For comparison, the international lead markets average price increases of about 2%. We're mindful of the disparity between grocery store inflation and food away from home, we'll continue to carefully balance strategic pricing decisions with our focus on growing guest counts. Shifting gears now to an update on our financial targets. While we've been focused on customer noticeable change in the restaurants, over the course of the last year, we've also applied rigor and discipline towards meeting our cash return to shareholders, refranchising, and G&A targets. As Steve mentioned, 2016 marked the completion of our three-year $30 billion cash return to shareholders.
In nearly one-third of our current market capitalization, this achievement, as well as our recent 6% dividend increase, serves as a vote of confidence in our business and the sustainability of our significant cash flows. In addition to the achievement of our cash return target, I want to provide some perspective on the notable progress we've made around refranchising in G&A. Starting with our global refranchising efforts. From the beginning of 2015, through the announcement of our strategic partnership with CITIC and The Carlyle Group earlier this month, we've made significant progress on our refranchising goals. By mid-2017, we expect to have refranchised over 3,500 restaurants towards our goal of refranchising 4,000 by the end of 2018. The China-Hong Kong transaction, which is expected to close mid-year, is the most significant transaction of our refranchising efforts, resulting in the sale of more than 1,750 company-owned stores.
From a strategic standpoint, this transaction puts more of our restaurants under local ownership and blends our global brand with local partners who bring deep knowledge, insight, and resources into both markets. We will retain a 20% ownership stake in the business in order to continue supporting and participating in the growth of both China and Hong Kong. From a financial standpoint, this strategic partnership will enable us to more quickly unlock our growth potential in China as we pursue accelerated expansion and innovation while spending no ongoing capital and limited G&A resources. The new enterprise is slated to open over 1,500 restaurants over the next five years, reflecting a much quicker opening pace than the 1,200 new openings achieved in the previous five years. With more than 2,400 restaurants today, at this pace, China will quickly become the second-largest McDonald's market in the system.
With a total enterprise value of around $2 billion, we currently expect cash proceeds of about $1.5 billion. Following the transaction, our income stream will consist of royalties on 100% of the restaurant sales in China and Hong Kong, as well as our 20% share of the enterprise's earnings. Initially, the net impact of this transaction will be somewhat dilutive to our operating income. However, we expect to return to a similar income level in a few years. For perspective, remember that today, China and Hong Kong represent less than 5% of our consolidated operating income. From an operating margin, financial return, and free cash flow perspective, the transaction will be immediately accretive, as we will not make ongoing capital investments in these markets. We're currently finalizing our plans for the cash proceeds and will provide an update at our investor meeting in March.
In addition to the China-Hong Kong transaction, there are several other smaller transactions which are in various stages of the refranchising process. We'll provide additional information on these and future transactions as appropriate. We're also committed to being more efficient with our G&A spending. From a qualitative standpoint, the objective of our G&A and capital discipline is to focus our resources and talent where it matters most, on customer-facing activities that drive business growth. At the same time, we're evolving to a more efficient, globalized system that better leverages our size and supports rapid testing and scaling of initiatives that address these growth opportunities. We've made meaningful progress towards our goal of reducing our net G&A levels by $500 million by the end of 2018 from our 2015 plan of $2.6 billion.
Our actions over the past two years have resulted in realized savings of more than $200 million, exceeding our original expectation of $150 million in savings by the end of 2016. These actions include redesigning our entire organization to eliminate layers and increase spans of control, resulting in headcount reductions in both the corporate staff and across our business segments, more centralization of non-customer-facing business processes, and executing against our refranchising targets, which will significantly reduce market-level G&A spending. For perspective, our year-end earnings release separates base G&A, which reflects the impact of these actions, from incentive-based compensation. This more detailed disclosure provides visibility into the base G&A savings achieved during 2016. Partially offsetting these savings in 2016 was higher incentive-based compensation, reflecting financial performance that exceeded internal targets, which are primarily based on operating income and earnings per share growth.
The improvements in our sales, restaurant profitability, and G&A spending resulted in a near record-high operating margin of 31.5% for 2016, up from 28.1% in 2015. As we look to the future, we'll leverage our recent success and build upon it. We're financially stronger than we were a year ago. We're making steady progress on our financial initiatives, and we're seeing better operating results. We're confident that we're on the right path. In March, we look forward to providing more detail about our global strategy, the initiatives we're investing in, and how they'll enable us to deliver sustained long-term profitable growth for our system and our shareholders. Thanks. Now I'll turn it over to Chris to begin our Q&A.
Thanks, Kevin. We will now open the call for analyst and investor questions. Please press star one if you have a question and the pound one to remove yourself from the queue. To give as many people as possible the opportunity to ask questions, please limit yourself to one question. We'll come back to you for follow-up questions as time allows. The first question is from David Palmer of RBC.
Thanks. Good morning. Quick question on the traffic per store. It looks like it's been down for a few years now. I think it might be down 10% since 2012 when you eased away from that dollar menu, at least domestically. Cash flow seems like it's strong per restaurant, though, and in this morning's release you said that the company's going to continue to focus on traffic. Could you perhaps elaborate as to why traffic declines can perhaps reverse this year, and what that focus will mean? Thanks.
Yeah. Thanks, David. No, you're actually spot on. It's not a one-year trend. It's been slightly longer, and it's something that dominates our conversations as we plan our business, and certainly, the owner-operators are very mindful of it as well, particularly here in the U.S., actually. This is all about getting the balance right. I mean, the cash flow growth through 2016 was phenomenal for our U.S. owner-operators. Frankly, there never has been a better time to be an owner-operator in a McDonald's system than there is right now.
Part of the discussions we're having, certainly Chris Kempczinski and his leadership team with the owner-operator leadership says, "How and where do we reinvest that strength in the business back on behalf of the customer?" I guess two things that you will see more of through the course of this year that we believe will start to correct the guest count.
One is around the investment in the Experience of the Future. That is something that we've had great success in many of our more mature markets around the world, where we're really investing front of house to put more choice and control in the hands of customers, whether that's around how they order, what they order, how they're served, how they pay. That's something where we have a great track record around the world, and we're looking to deploy that aggressively in the U.S. The other piece where we still want to fight harder is on value. The McPick menu really does work well for customers, whether it's the McPick 5 or the McPick at the more value end, whether it's $2, $2.50. That alone isn't winning us the market share fight at the value end.
You'd have seen at the start of this year that we have had an aggressive McCafé beverage value offer, which is $1 any size coffee or $2 on the small specialty McCafé beverages. You can expect to see us be more competitive at the value end through the year. It's been encouraging in the way that that has resonated with customers as we've entered the new year. Our experience when we've analyzed the regions that have been most successful around the U.S., the three or four top performing regions over the last year or two are those that have managed to combine the national value platform with the more local, aggressive, whether it's beverage or food-led price offers, value and price offers. We're lifting that, learning it, I think all the right people are engaged in the right conversations, and customers will benefit.
Next question is Matt DiFrisco from Guggenheim.
Thank you. My question is with respect to the International Lead Markets and the franchise. I'm just looking at that, and I know you did a pretty good, strong comp there of 2.8% positive. I'm just curious why that wasn't maybe providing a little bit more leverage on the franchise side. It looked like that franchise margin came back a little bit. Can you talk about the dynamic or some of the pushes and pulls that might have resulted in the little bit more modest margin pressure than you saw in the third quarter, where it expanded modestly?
Matt, it's Kevin. Thanks for the question. We generally get pretty good leverage from comps on the franchise margin side as more of those costs obviously are fixed, certainly than on the company-operated side. A couple things on the franchise margin, specifically in the International Lead Markets. A little piece of that is as we do some of our refranchising, we are generally selling lower volume restaurants with potentially lower margins. In the near term, it impacts the franchise margin % a little bit on those International Lead Markets. The other thing that we do see certainly is some of the occupancy costs internationally, specifically some of the lease costs, continue to pressure a little bit margins. The franchise margin, certainly more than McOpCo margin, is driven by comp sales.
They're definitely a top-line game. As long as we can continue to drive positive comp sales, we should be pretty good on those margins being healthy.
Matt, there's one other thing I would add to that, which is we talk about a very unique business model and relationship with the way we have with our owner operators around the 20-year franchise and the mutual benefits of investing together. 2016 was probably a peak year, actually, for some of the co-investment programs that we have been doing hand in hand with our owner operators in those Lead Markets, where we will put up some of the support to enable them to accelerate some of these investments. Now we're seeing it on the top line, we're seeing it on our bottom line, we know it makes sense. As the Lead Markets begin to get towards the end of their cycle on this reinvestment, that gives us a chance then to focus our attention here on the U.S., which you can expect to see as well.
Next question is from Brian Bittner of Oppenheimer.
Thank you. Thanks for taking the question. Just want to follow up on David Palmer's question from earlier. These solid cash flow metrics for store have been really good despite the traffic declines you've seen in the business. I think the obvious reasons are the average check growth has offset the traffic declines for the comp, and then the food commodity deflation has helped boost the margins. You kind of talked about restoring traffic when you responded to David's question. My question is, how exactly do you keep the average check up in 2017 and going forward, given that you like to price more towards food at home, which is in deflation, and the fact that you're focusing more on value and price offers?
Brian, what we've typically seen around the world, and it's a very astute question. It would seem like an obvious trade, but the reality is, what we've seen around the world, the more customers we drive into our restaurants, the greater the top-line growth and the greater the cash flow growth. If that impacts margin % a little, then it may do, but actually the $ amount or the EUR amount or the JPY amount on the bottom line, both for the company and for the owner operator improves. It is a delicate balance. 2016 was a lovely cycle for the cash flow with commodities at an all-time low and probably as aggressive as we'd want to be on pricing. I think you'll see us just carefully bring pricing back more in line with food away from home, which we're beginning to see now.
The reality is, and this is not a new discussion for us in our business. Again, going back to the 20-year franchise agreement, we all know that for the benefit of our owner operators' businesses over the long term You've got to be serving more customers more often. That's where we return to. We know we can grow profitably and cash flow can grow alongside that.
Next question is from David Tarantino of Robert W. Baird.
Hi, good morning. Steve, just continuing on the theme of asking about the U.S. business, it seems like the hallmark of the McDonald's system has been built around speed of service, and it seems like over the past several years, McDonald's may have gotten a bit slower. Can you talk about where you are as a system in terms of speed of service and how you're thinking about that as part of your traffic driving program, especially as you sort of tie in Experience of the Future, which includes some customization elements. Any thoughts there would be helpful.
Yeah. No, thank you. Thanks, David. Speed of service has declined slightly. It's a handful of seconds slower by the end of 2016 than we were by the end of 2015. I guess there is a number of things we're trying to do. You'll hear me talk about, or heard me refer in the past around net simplification, where if we are going to introduce new menu items and new ideas, we've got to reduce the complexity by at least if not more than the same amount. Our operations teams, particularly in the U.S., are deeply focused on that.
Joe, simplification isn't just on the menu, it could be on different operational processes, it could be the use of technologies to take some of the manual work out of the way, simplifying just the merchandising, all the way through to training programs in the restaurants and making them more efficient and more effective. There's a number of different pillars to our simplification efforts. With regard to Experience of the Future, I think this absolutely addresses the speed of service issue in a way that consumers are in control of. If you wanted to, maybe you enter a restaurant, you're with your family, and you want to spend a little more time ordering at the self-order kiosk and you want to custom.
You can dwell for as long as you want, placing your order, getting it right, enjoying the moment together, and then at a point in time, you'll just be able to go and sit at a table and we'll bring it out to you. If you want that front counter speed of service in the traditional way, effectively, I would see that speeding up, because effectively some of the larger orders will not be there at the front counter, and it'll just be the more grab-and-go type customers.
Similarly on the drive-thru, as we develop and continue to invest in technology and we get our order ahead and our order and pay capabilities through the app, better defined through the course of this year, a lot of the elements of the McDonald's experience that can slow it down, not just for you, but maybe the customer behind you in the line, are taken out of it. We believe we can have technology do a lot of that heavy lifting and A, the experience will be better, and B, the service times will improve as a result.
Next question is from Nicole Miller Regan of Piper Jaffray.
Thanks. Good morning. In the U.S., when you think about grocery store deflation, if it were to lessen, do you expect to have more guests that were eating at home return that would account for increases in guest traffic? Would you expect to have more pricing power to use with the current guests you have? Thanks.
Hey, Nicole. Thanks for the question. Yeah. We do expect kind of the food at home, I'll call it deflation to ease or not be as favorable as it was in 2016. The IEO industry is still projected to be relatively muted in 2017. I think what it does is, as you know, we look at various factors when we look at pricing. We'll look at food away from home inflation and food at home inflation and competitors, to determine the right kind of approach to our pricing. I think it gives us an opportunity to potentially gain some customers back that are right now eating at home. Again, as Steve mentioned earlier, we do have to be careful on the pricing side with balancing price increases with continuing to grow guest counts.
We will take a close look to make sure that we don't get too far ahead on our pricing at the expense of guest counts. Certainly if grocery store prices continue to rise or aren't as favorable in 2016, we view that as a positive for some of our traffic.
Nicole, just a different perspective on the same question actually is, typically, clearly, we've always been part of the food away from home market. You may have noticed, we've been curious here as to whether there's an opportunity for us to serve the food at home market as well. We have initiated very early stages, just a small pilot test down in Florida to see whether home delivery could be something that helps to address consumer demand, both at home as well as us meeting their demand when they're away from home. That doesn't necessarily answer your pricing equation, but we're curious as to whether the demand that's there for food at home is something that we could also play a part in.
Next question is from John Glass of Morgan Stanley.
Thanks very much. I had a question about the SG&A. First, just a specific one is your sense of timing of when you're going to get the full 500 changed. I think initially it said most of it in 2017. Maybe the refranchising has changed that a little bit. 2017 versus 2018 quantity. Then secondly
Is it right to think that $2.1 billion is the right number, or is there going to be some reinvestment in the business or growth in SG&A over time? It sounded like, Steve, from your language in the release, that we're redirecting some capital in G&A spending towards strategic initiatives. I'm wondering if you're shifting a little more to putting more money back into the business, and therefore the $2.1 billion is the right anchor point for G&A in 2018.
Thanks, John. A couple pieces of that question. One, I'd say we are on track, certainly with our original plans through 2016, if not potentially a little bit ahead from a timing perspective. We'll give a little more update at the investor meeting in March as far as how we think about G&A through 2018, as well as going forward. The one other piece I would say is when we gave that target, and we have not changed on this, is it's a net savings target, meaning that it contemplates reinvestment within it. We're not going to say that we're saving money and then reinvesting it all so that you don't see a net reduction in G&A. You should expect to see a net reduction in G&A that also incorporates what we need to invest in the business in order to grow.
Yeah, John, just to tag on any comments that you've heard me say previously, I'm firmly of the belief that we do have sufficient resource given the targets that Kevin outlined. A part of the culture that we are embracing here is to create a heightened level of competition for those resources. If you have a limited pool of capital and that limited pool of G&A, only the best and biggest ideas get funded, whether that's at a market level or corporate level. I was on the receiving end of that when I was a managing director back in the U.K., you had to fight for your capital. You had to demonstrate you could deliver better returns than the person in the market next to you, not in an antagonistic way, but it was a performance-based environment.
As we have heightened accountability across our business, that's part of it. I think we don't see those numbers going back up again. I think there's sufficient resource for us to deliver the great growth that we're planning.
Next question is from Andrew Charles of Cowen.
Great. Thank you. It looks like in 4Q, you made some nice strides in the refranchising initiative, but your gains were a little light relative to the average in the first three quarters of 2016. I was wondering, can you speak to the geographic mix of stores you refranchised, whether the proceeds for store in 4Q relative to what you did in the first nine months of the year? Thanks.
Yeah, Andrew. The refranchising is impacted by a couple things. One, it depends on where we're refranchising, obviously, but it also depends on whether we're refranchising individual stores or potentially what I'll call entire markets, kind of the developmental licensee. What you will have seen in 2015 and for a large piece of 2016, is that a lot of the refranchising would be in our markets in the Foundation segment, as well as a little bit in the High-Growth segment, and a couple of the markets in the International Lead segment where we're doing more of our conventional franchising. It does get impacted by the mix of stores within every country, as well as how far along each country is in their franchising journey, if you will.
Some that have more ways to go, let's say, may get higher proceeds at the beginning as they're selling some higher volume stores. As they get near the end of their refranchising, they're now selling generally lower volume restaurants and wouldn't have the same level of proceeds. You can see relative swings from quarter to quarter or from year to year, depending on the mix of which countries are actually selling the restaurants. Next question is from Greg Francfort of Bank of America Merrill Lynch.
Hey, guys. Can you talk a little bit remodeling, particularly in the U.S., where you stand, the kind of return you are seeing on the remodeled stores and I guess how you view it? Do you view part of the investment as maintenance capital, some of it as growth capital? I guess, how do you look at that sort of cost and return framework?
Yeah. Thanks, Greg. Right now, we are a little over halfway through the restaurants that are being modernized in the U.S. As you know, we're certainly much farther along in most of the international countries where we're certainly more modernized and are just now investing in the Experience of the Future aspects of it. In the U.S., a lot of our restaurants need to have both the Experience of the Future elements as well as the remodeling perspective. In general, in the U.S., we have seen kind of 5%-6% sales bumps as we remodel a restaurant or bring it up to modernized standards. That's relatively consistent around the world. It ranges a little bit, but I'd say kind of the 5%-6% sales above market is a pretty good threshold that we use.
The U.S., you'll hear some more plans as we get into our March 1st investor event, but we are planning to continue to modernize the U.S. estate over the next few years.
Greg, just to add to that, Kevin's absolutely right. Maintenance spend is largely the responsibility of the owner operator. We will have maintenance spend in our small pool of McCafé restaurants. Fundamentally, our capital investment and our co-investment is on growth initiatives. That will be customer facing, either it's because it gives us a chance to enhance the menu or enhance the experience. We're very much growth-focused in how we invest directly or co-invest our capital dollars.
Next question is from Jeremy Scott of CLSA.
Hi, good morning. Just want to talk a little bit about the store consolidation in the U.S. First, how many stores would you estimate are expected to come off the system over the next three to five years? Then just in the context of the guest count discussion, and to what extent is McDonald's exposure to weakening retail trade zones impacting traffic? Is there a new equilibrium point for store penetration in the U.S.?
The eating out market, Jeremy, is huge. We see IEO as modest, very modest growth potential, but a gentle growth potential over the next handful of years. That puts you into a market share fight and with us still having a relatively small percentage of that overall informal eating out market, there's plenty of customers out there eating out. We just need to fight harder and make sure that we earn the right for more of them to turn our way. I believe there's guest count growth potential there if we do the right things. With regards to the new restaurants, I don't know if Kevin has any more details other than mine, but we're typically a net growth company.
We've had one or two years over the last decade where we have looked to address the portfolio when we've chosen to take a particular project and just deal with the tide or the locations which are no longer appropriate for us. I don't see there being a contraction, frankly.
Globally, certainly you'd see several, probably net near the 1,000 restaurants that we've been on track, I'll say. In the U.S., you wouldn't see a lot of growth over the next couple of years as we'll probably focus most of our investment dollars on the Experience of the Future and remodeling as we talked about.
Next question is from Brett Levy of Deutsche Bank.
Good morning. Can you provide for us a little bit more updates on the technology front? Specifically, what you're expecting out of the U.S. as you expand out your mobile and your mobile ordering? Also, if there's any reference points you can give us from either Scandinavia, Australia, or France that provide any background for what kind of sales lifts or returns you're expecting, and how are you quantifying what's the success on it? Thank you.
Yeah. Thanks, Brett. Well, the quantification is satisfied customers and growth in sales and transactions. We've got absolute hard measure expectations because we're investing significantly in technology, as are our owner operators. Just to give you some texture here in the U.S., for example, where we've launched the global mobile app launch here in the U.S. We've now had 18 million downloads. We've had over 11 million of those are registered users. The month of December 2016 saw the greatest contribution to sales via the app that we've seen yet, and that has been growing month by month by month. It's noticeable now, but not material. Clearly our ambition is to make that a material number. Elsewhere around the world, we are testing different elements through technology that we can then infiltrate together.
For example, order ahead, order and pay, for example, whether it's through the internet or through the app, we're testing that. We're testing curbside check-in, where if you were to pull onto a parking lot, you can actually pull up into a dedicated bay where you can just scan your order, and we can bring it out to you. Plus also a lot of the in-restaurant technology is maximizing the consumer benefit of the self-order kiosks. Again, you can just check your pre-order and just scan it at the kiosk and sit straight down and get your table service and, also to help support some of that is around the whole area of CRM and loyalty, where we have a huge opportunity. Again, acknowledging there are others who are further ahead than us, but this is one where you got to get it right.
It's better to be right than to be first to market. We're investing a lot of time and effort to best understand what resonates most with customers in terms of appreciating their business and encouraging them more often. Ultimately, at the moment, we are focusing on the experiential side, order, pay, curbside check-in, and just making that experience smoother, easier, more convenient. Then we'll start building reward mechanisms into that over time.
Next question is from Jason West of Credit Suisse.
Yeah, thanks. Just one quick follow-up and then a question. On the G&A targets, Kevin, I just wanted to confirm if that includes or excludes the movement in incentive comp, that we've seen since you originally gave those targets. Then a bigger picture question on the March 1st meeting. If you guys, I know you don't want to give details, but just what's the kind of purpose of the meeting? Is it just to lay out the 2017 guidance, or is there more, in terms of longer term targets and things like that you're going to be discussing at that meeting? Thanks.
Thanks, Jason West. Let me start with the G&A. Just to give perspective, as most companies do, total incentive comp is higher or lower in any given year, depending on the company performance. You'll see in our earnings release, we split out incentive comp so you can see that phenomenon, if you will. You'll see that in 2015, we incurred a little over $300 million of incentive comp. That was at below targeted performance for us. In 2016, you'll see that we have a little over $400 million of incentive comp, and that was significantly above target performance for us. Certainly depending on our performance in a year, and that's generally operating income growth and EPS growth, that line could swing from one year to the next. Having said that, a couple points I want to make.
One is going into 2017, as you would imagine, we reset that number to 100% as we go into plan every year, not knowing where we'll end up, obviously. As we go into 2017, I mentioned that in 2015, we had over $300 million, and that was at below target performance. Going into 2017, our plan at 100% total incentive comp will be less than $300 million. We're saving some incentive comp on our base plan because we have less people, obviously. Second, the other thing I just want to make sure that everyone's focused on is our focus is really on growing operating margin. While we are focused on saving G&A and making sure we're efficient, I'm not 100% certain that everyone in the industry classifies all the costs exactly in the same line item within a P&L.
We're focused on operating margin because that's kind of the bottom line of how efficient are you at bringing your total revenues down to the bottom line. Just wanted to make those few points related to the G&A. The operating margin, as I mentioned, we grew that substantially in 2016 from 28.1%-31.5%. Related to the March 1 investor event, there'll be a few components of it. One, we will talk about 2017 guidance. As Chris mentioned, we normally have an outlook section that gives you 2017 guidance in there. We didn't have that in there this time because we thought we could give you half the story without all the context, it would be easier to do this all at once on March 1st. Part of what it will be 2017 outlook, if you will.
It'll also be talking about our longer term strategies and long-term financial targets and how we expect to get there. That's where a chunk of the time will be spent on March 1st at that investor event.
Jason, just to add to that. We're confident and we're excited about where we've got the business to over the last two years, and we're certainly calm and excited about the plans we've had. Just to be clear, we are planning growth, like-for-like growth in every major market around the world in 2017 and beyond. We want to be able to find the best way that we can share that excitement and build the credibility and the confidence in that you can match our confidence and excitement. Rather than just listen to a plan, we thought it would be fun to have you to actually experience the plan. This will be certainly some content, some meaningful content on the day, but also this will be an experiential day for you as well.
We can take people through some of the components that we believe are customer driven, will drive that guest count growth we talk about, drive business growth, drive profitability. It'll be a varied and fun day and something somewhat unique, I think, in investor days. Looking forward to it a lot.
We are near the top of the hour. I will turn it over to Steve, who has a few closing comments.
Thank you, Chris. Given that this is Chris' last earnings call with McDonald's, I'd like to take a moment to personally acknowledge Chris and the significant role he has played, not only in building and leading a first-class IR team, but also as a trusted advisor to Kevin and me. On behalf of everyone at McDonald's with whom you've worked and coached over the years, Chris, thank you very much. We wish you all the best in your new endeavors. Again, thanks to everyone else for joining us this morning. In closing, I want to reemphasize how encouraged I am by the progress we've made. 2016 was a year of purposeful change. We've built a foundation that's enabling us to transition from turnaround to longer term growth.
We remain focused on the basics of running great restaurants, while at the same time driving operating growth, building brand excitement, and enhancing financial value. As a result, we're now in a position to prioritize initiatives that will further strengthen our business. We look forward to talking more about our plans in March. As we step up and lead in 2017, I'm energized about the opportunities ahead and eager to continue our journey to assert McDonald's as the global leader of the IEO industry. Thanks to all of you, and have a great day.
This concludes McDonald's Corporation Investor Conference Call.