Earnings Call: Q3 2016

Oct 21, 2016

Hello, and welcome to McDonald's October 21, 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 touchtone 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, and 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 ks filing also apply to our comments. Both documents are available on www.investor.mcdonalds.com. As are reconciliations of any non GAAP financial measures mentioned on today's call with their corresponding GAAP measures. And now, I'd like to turn it over to Steve. Thanks, Chris, and good morning, everyone. I'm encouraged by the actions we've taken and the progress we've made as we execute our turnaround plan. Customer perceptions at McDonald's have steadily improved over the past 18 months, And the Q3 marks 5 consecutive quarters of comparable sales growth across all business segments, with many markets gaining share. For the Q3, global comparable sales increased 3.5% and operating income was up 7% in constant currencies. Earnings per share rose 9% in constant currencies. Excluding the impact of previously announced current and prior year strategic charges, earnings per share for the quarter increased 17% in constant currencies. Profitability has increased both for McDonald's and franchisees. At the restaurant level, franchisee cash flows reached all time highs in many markets, including the U. S. These results are a testament to our diligent execution of the turnaround plan as we put customers at the center of everything we do. We are at a point where we've begun to transition from a focus on revitalization to a mindset that's concentrated on strengthening the business to drive sustainable growth over the long term. We expected performance through 2016 to be uneven, and it has been. Markets such as the UK, Australia and Canada continue to grow sales and guest counts. Most markets including the U. S, France and Germany work to overcome challenges of varying degrees. We are mindful of the near term headwinds we face, most notably in the U. S. As we lap the very successful introduction of all day breakfast, which was immediately popular to customers. However, we're not managing the business quarter by quarter. In fact, our commitment to investing in the business is stronger now than ever. We're taking action in the areas that matter most to customers. In particular, we're placing significant emphasis on food quality, the customer experience, and value to give people more reasons to visit McDonald's. We believe the long term investments we are making in these areas provide the foundation on which we'll build as we work to be recognized as a modern progressive burger company by customers. In the area of food, we're taking important steps in how food is prepared and the ingredients we use. In the U. S, we completed our transition to chicken not treated antibiotics important to human medicine, a year ahead of schedule. We introduced new buttons that do not contain high fructose corn syrup. And we removed artificial preservatives from our popular Chicken McNuggets, and customers have responded favorably to this news, and we've seen sales accelerate as a result. Following the announcements, sales of McNuggets increased nearly 10% and they're sustaining above previous levels. We're also modernizing the customer experience in markets around the world as we evolve to the experience of the future. In Canada, we're engaging with customers in simpler, less stressful ways by offering them more choices in how they order and pay. We now have dual point service and self order kiosks in almost 90% of our traditional restaurants. In addition, we're taking steps to redefine hospitality on both sides of the counter with dedicated guest experience leaders in all of Canada's traditional restaurants. Finally, value, a critical priority in all markets. In Germany, for example, we've deployed a 2 pronged approach. 1st, we successfully added new layer to our value platform at mid tier price points. At the same time, we're celebrating the quality and taste of our core products through strong marketing and promotional campaigns. These steps build on the new pricing structure we introduced earlier this year to strengthen our value platform, and that's resonating well with the price conscious German consumer. The actions we are taking specific to our food, the customer experience and value, and telling customers about the changes are making a difference. Customer satisfaction has improved significantly, up more than 6% year to date in both the U. S. And Canada with most major markets seeing improvements. This is a testament to the progress we've made since we refocused on running better restaurants as part of our turnaround plan in May of last year. With that context, let's turn to performance highlights in the markets. Beginning with the U. S, comparable sales remained positive for the Q3 at 1.3%. Customers love All Day Breakfast and the way we continue to build on its success. Since its introduction last year, customers asked for even more choices, so we recently launched the 2nd phase of All Day Breakfast. The expanded menu now includes muffins and biscuits as well as our beloved McGriddles all day in all U. S. Restaurants. At the same time, we're enhancing the experience to adapt alongside customers' expectations. 1 of the most notable ways we're doing this in restaurants is by better integrating technology in visible, tangible ways. For example, more than 90% of U. S. Restaurants now use digital menu boards. These new menu boards enable us to showcase the quality of our food with fresh photography. Because they're less congested and better organized, the menus now do a better job highlighting the broad range of choices available. The menu boards are also smart. They're built with a robust content management system that we haven't even begun tapping into yet. When fully enabled, we'll be able to adjust what's featured on the menu based on time of day or even weather conditions. We'll be more relevant to customers as we remind them about our ice cream cones and McFlurry's on a hot summer day or our handcrafted Hot McCafe beverages if it's chilly outside and may feel the need to warm up. We also continue to emphasize value because we know how much budget oriented customers count to McDonald's. Franchisees and customers alike have embraced the McPick 2 platform. They appreciate the choice and flexibility it provides. In September, we promoted McPick 2 for $5 nationally, whilst other variations of McPick 2 were offered at a local level. Some of our best performing regions offered beverage value to complement the MCPC2 platform. We'll continue to tap into these learnings both nationally and locally as we design future MYPIC offers. Underpinning these efforts is a continued focus on running better restaurants. Our commitment to raising the bar with an emphasis on underperforming restaurants is making a difference. Customer satisfaction scores have improved the most for our bottom quintile restaurants. And we've cut the customer satisfaction score gap between the top and bottom quintile performance nearly in half for our efforts to provide a better, more consistent experience for customers in every restaurant, every time they visit. Turning to the International Lead Market segment. 3rd quarter comparable sales were up 3.3%, driven by positive performance across 4 of the 5 major markets with France being the exception. The U. K, Australia and Canada delivered yet another quarter of comparable sales and guest count growth. These markets share similar elements that underlie their strong track records of success. Contemporary restaurant designs with over 90% of restaurants re imaged. Compelling menu strategies tailored to local customer tastes, such as the Spice It Up event in Canada, featuring spicy Sriracha sauce on a country chicken or Angus beef sandwich. And a modern service experience that incorporates the elements of the experience of the future to provide customers with more choice and flexibility in how they order, what they order, and how they're served. These elements amplify each other to create a noticeable difference for customers who then reward us by visiting more often. I'm encouraged by the progress we've made in Germany, which I had a chance to experience firsthand when I visited the team there last quarter. Comparable sales were positive in the market for the Q3. Earlier, I mentioned the steps we've taken to strengthen our value platform. Combined with strong promotions featuring customer favorites like the hamburger royal with cheese, these actions are making a difference and getting us back on track to grow top line results once again. That said, I want to stress that growing guest counts remains a top priority. That's the key to winning back the share we've lost in recent years. In France, 3rd quarter comparable sales were negative. This was driven in large part by ongoing macroeconomic challenges, including a declining GDP, high unemployment and the continuing concerns for personal safety, which is impacting both inbound tourism as well as the French consumer. The customers appreciate the actions we've taken to strengthen our value offer, including further extensions of the well regarded and successful Petit Leger value platform. We're also satisfying French consumers' growing appetite for premium burgers through strong promotional campaigns featuring customer favorites like the 280 Burger and the Big Tasty. In addition, we're introducing a new signature line of sandwiches in our Experience of the Future restaurants to customers even more great tasting burger choices at the convenience and value they come to appreciate at McDonald's. In the high growth segment, 3rd quarter comparable sales were up 1.5%, driven by positive performance in Russia and most other markets, partially offset by negative comparable sales in China. Whilst 3rd quarter comparable sales in China were down 1.8%, results improved as the quarter progressed. Excluding the impact of temporary protests surrounding recent events related to the South China Sea, China's comparable sales would have been positive for the quarter. A strong focus on enhancing convenience through with 3rd party delivery providers, combined with aggressive core menu sampling events designed to offset the impact of the protests, contributed to market share gains amidst the still challenging macroeconomic environment. In Russia, the economy remains difficult and consumer purchasing power continues to decline. Despite these challenges, we're growing comparable sales and guest count and gaining market share. Specifically, our performance is a result of a heightened focus on value as well as the successful marketing campaigns to grow the breakfast daypart. And I'd be remiss if I didn't mention your Pat, where comparable sales increased 17.7% in the 3rd quarter. Diligent execution of the market's comprehensive turnaround plans, which include strong promotions, exciting menu variety, compelling value and a more modern restaurant experience, is enhancing McDonald's relevance to customers and contributing to sustained momentum in this market. As we look to the future, we recognize DeForest having the right structure, the right people, a common focus, and lastly, greater accountability across the entire McDonald's system. We've taken steps forward in all four areas to set a proper foundation for long term growth. 1st, the right structure. Building on last year's shift to segments of similar markets, we took further steps in the 3rd quarter to transition to a leaner, more efficient and more nimble organization. This will enable us to better share expertise, improve efficiencies and drive down costs, taking greater advantage of our size and scale. Kevin will provide further details in a moment. 2nd, the right talent. An important component of our turnaround plan has always been to ensure we have the right people in the most critical positions. Management changes have been and continue to be an anticipated part of the process. That's why we're focused on a blend of promoting individuals who are ready to take on additional responsibilities, continuing to develop leaders that have the right skills necessary to grow the business, and attracting new executives into the business to provide fresh energy and innovative thinking. I'm confident in the recent selections we have made. This includes Chris Kamczynski succeeding Mike Andres as President of McDonald's USA, effective the 1st January. As part of a thoughtful transition, Chris is already spending significant time with Mike and our franchisees in the field. In the High Growth segment, Joe Erlanger has made an immediate impact upon stepping into the role of President in these markets. He knows these markets well, having been CFO of the segment and the former Managing Director of Korea. 3rd, a common focus. In addition to making forward progress on running great restaurants, we are putting greater emphasis on accelerating initiatives that will bring more customers into our restaurants more often. This includes the experience of the future, which we're looking to roll out at greater speed in the U. S. And we look forward to sharing more details of those plans as they're finalized. And lastly, accountability. We've made great progress executing our turnaround plan. Now we're starting to balance those efforts with a greater focus on longer term growth. We'll take all of our franchisees, employees and suppliers working together and holding each other accountable to achieve our ultimate goal of becoming the modern progressive burger company. We have a long term view on our potential and the opportunity that exists. I'm confident in the actions we're taking to run better restaurants and the investments we're making. We're getting the right people, foundations and platforms in place to properly grow the business and reassert McDonald's global brand leadership. Thanks very much. And now I'll turn it over to Kevin. Thanks, Steve, and good morning, everyone. We're pleased with our Q3 results. By staying keenly focused on our customers, we maintain positive momentum while continuing to make meaningful strides toward building a better McDonald's. Since Steve talked about sales and earnings per share, I'll focus on margins and G and A. I'll also provide an update on the key outlook items and the recent progress we've made against our financial targets. Starting with the performance drivers for the quarter. Franchise revenues continue to become an increasingly 3rd quarter, franchise revenues increased 6% in constant currencies, reflecting strong comparable sales and the impact of refranchising. For the quarter, franchise margin dollars exceeded $2,000,000,000 a 6% increase in constant currencies and contributed over $100,000,000 to our growth in global operating income. This solid performance reflects sales driven improvement across all segments, led by results in the international lead markets. In addition, we maintained strong global franchise margins of over 82%. These results are a testament to the benefits of transitioning toward a more predictable and stable revenue stream. Growth in company operated margins also contributed about $75,000,000 to our growth in global operating income as company operated margins rose to more than $730,000,000 an 11% increase in constant currencies. Company operated margins climbed 260 basis points with the U. S. And China leading the overall improvement. Our emphasis on running better restaurants from enhanced conveniences to tighter operating controls is yielding a better experience for our customers as well as improved restaurant profitability. In the U. S, the company operated margin percent increased 4.50 basis points for the quarter, reflecting positive comparable sales and a favorable commodity environment. These results also reflect a benefit from bottom line. Moving on to G and A. At the end of last year, we noted that we expected to realize about $150,000,000 in savings during 2015 2016, with about half of the savings to be achieved in each year. For 3rd quarter, our G and A expenses increased 1% in constant currencies due to higher incentive based compensation as a result of our year to date performance. For the full year, we now expect G and A to be relatively flat in constant currencies. However, excluding incentive based compensation, G and A for the year is expected to be down about 3% in constant currencies, which equates to roughly $75,000,000 in savings due to lower employee related costs resulting from our restructuring initiatives. This will bring our total G and A savings at the end of 2016 to at least $150,000,000 Let me switch gears now for an update on menu pricing and commodity costs. In the U. S, commodity costs declined by more than 6% during the Q3. Given the strength of our 3rd quarter savings, combined with our outlook for 4th quarter, we now expect the segment's full year basket of goods to be down 4.5% to 5%. Commodity costs for the International Lead segment were down about 1% for the 3rd quarter and are expected to remain relatively flat for the remainder of this year. While we continue to benefit from favorable commodity costs around the world, we continue to experience rising labor costs in many of our markets. These pressures are considered as we make pricing decisions over the course of a year. Our objective is to manage pricing in a way that maintains our strong value proposition, contributes to guest traffic growth and supports restaurant profitability. In the U. S, 3rd quarter pricing year over year was up about 3.5% compared with food away from home inflation of about 2.5%. For U. S. Company operated restaurant pricing, our goal is to approximate food away from home inflation over time. So we may be a little higher or lower in any given quarter. We are also mindful that the current 450 basis point gap between the cost of eating at home versus dining out is the largest spread in more than 30 years and may be impacting consumer behavior. We continue to track these metrics and expect our overall menu price increase at year end to be more in line with food away from home inflation. For the International Lead segment, while price increases vary by market, year over year increases for these markets averaged about 2%. Next, I'd like to provide an update on our foreign currency outlook. Based on current exchange rates, we project foreign currency translation to negatively impact our earnings per share by $0.01 to $0.02 in the 4th quarter, which would bring the full year impact to $0.09 to $0.10 As always, please take our currency guidance as directional only because rates will change as we move throughout the year. Last quarter, I committed to providing more detail on today's call regarding the role that our organizational restructuring is playing in reaching our previously announced G and A savings target. For the last several months, we have been working with outside advisors to thoroughly analyze our G and A spending and organizational structure from our corporate functions to the individual markets and the critical role they play in the field. Our overall goal was to focus our resources and talent and customer facing activities that drive business growth, while creating a more globalized system that more effectively leverages our size and scale to spread learnings better and drive cost improvements and efficiencies. As we move toward becoming a leaner and more agile organization, we're positioned to make quicker and better decisions and to execute on our strategic intent to create a better customer experience. The pace at which All Day Breakfast moved from the U. S. To Australia is a great example of how we're accelerating knowledge transfer across the system to benefit customers globally. I'm confident that our redesigned organization is now better equipped to adapt to today's rapidly changing environment. As a result of our reorganization, we incurred roughly $80,000,000 in restructuring charges for the Q3. While this component of our restructuring is nearing completion, we do expect to incur some additional but less significant charges in the 4th quarter. We remain on track to achieve our net annual G and A savings target of $500,000,000 by 2018, with the vast majority of the savings expected to be realized by the end of next year. We also continue to make changes to the business through our global refranchising efforts. Since the beginning of 2015, we refranchised nearly 1,000 restaurants, including 140 in the 3rd quarter. The large majority of restaurants refranchised to date have been sold to existing conventional franchisees. As previously indicated, we're also actively pursuing a transaction in China, where we are currently in the process of vetting a select number of qualified bidders. In addition, we've made meaningful progress in our search for long term strategic partners in Malaysia and Singapore. These markets collectively operate almost 4 100 We are in the We are in the final stages of the process and expect to complete these transactions by the end of this year. Given where the transaction stand, we recorded a non cash charge of approximately $40,000,000 in the quarter to account for historical currency losses. As we moved into the month of October, we also completed the sale of 75 company operated restaurants in the Ural region of Russia to an existing developmental licensee. The results of this transaction will be reflected in 4th quarter. So we remain on to refranchise about 4,000 restaurants by the end of 2018, and we'll continue to keep you apprised of our progress. Last November, we increased our 3 year cash return to shareholders target to $30,000,000,000 by the end of 2016. During the quarter, we returned $3,400,000,000 to shareholders through a combination of share repurchases and dividends. Share repurchases for the quarter totaled $2,700,000,000 the vast majority of which was completed under our second accelerated share repurchase program of the year. Further, in September, our Board of Directors approved a 6% dividend increase effective in the Q4, the equivalent of $3.76 annually. This increase marked the company's 40th consecutive year of delivering a dividend increase for our shareholders. As a result of these activities, the cumulative cash return under our 3 year target stands at nearly $28,000,000,000 and we are on track to complete the remaining amount by the end of this year. To summarize, over the course of the last year, we've demonstrated our commitment to meeting our financial targets. By the end of 2016, we will have met our $30,000,000,000 cash return to shareholders target, achieved nearly 1 third of our G and A savings target and completed more than 1 third of our restaurant refranchising with some significant transactions on track for completion in 2017. We continue to measure our progress and hold ourselves accountable in each phase of the turnaround to ensure that we're appropriately allocating our resources to strategic operating plans that will grow our business. As we move into the final quarter of 2016, we are mindful of the hurdles we face in the near term, but we're keeping our line of sight clearly focused on the long term. Through our actions, we're unlocking financial value and using it to fuel the innovation and investments that will create a better customer experience and deliver sustained profitable growth for the long term for our system and our shareholders. Thanks. Now I'll turn it over to Chris to begin our Q and A. Thanks, Kevin. We will now open the call for analysts and investor questions. As time allows. The first question is from David Palmer of RBC. Thanks. A question on the U. S. A common perception of McDonald's U. S. Is that all day breakfast and McPick 2, the value message, these are the real this is the big 2 and they're running out of gas as sales drivers. There's not a lot else going on, at least this is a common perception. Perhaps you can comment on these two initiatives and relatedly, can you comment on the inventory of tested marketing, renovation, innovation value? As you look into 'seventeen, are you getting better visibility on U. S. Growth? Thanks. Hi, David. It's Steve. I'll take this one. So, first of all, on the All Day Breakfast and the McPhee 2, so that was the they are 2 of the foundational elements of what's helped maintain and establish and then maintain momentum in the business. So as you know, we launched All Day Breakfast around this time last year. It served us well. As you know, the initial peak was higher than we expected and it settled down to a level that we were very happy with. In the meantime, we worked on how can we extend that platform both operationally and making sure the consumer demand was there and extended it just a couple of weeks ago as well, 3 or 4 weeks ago. So that is here to stay, is doing well for us and is a foundational element of our business momentum. MiCK2 similarly, it really is well embraced by both our operators and by our customers. So as you know, we've tried both MiPIC 2 for 5, which is typically the platform we use at a national level. And we'll be bringing that back, I don't know, 3, 4 times a year and hitting that at a national level and still using the flexibility of that platform to rotate different items through that menu. But what you don't see perhaps so, so visibly is across the regions is how the MiPIC II is always on. And typically, the regions will use a greater value element like a MEPIC2 for 250, MEPIC2 for 2, MEPIC2 for 3. And again, depending on seasonality and local customer preference, we'll rotate products through there. So, both those platforms are good contributors to us and are important part of our business going forward. In terms of what we've got to be excited about going forward, there's plenty. And part of what we're enjoying about the new structure in this business is the greater visibility we have to what works around the world and what's creating some of that success internationally for us, but also the way that they've simplified the structure in the U. S, what's working at regional level. So there's a lot of product innovation, local product innovation at regional level that we're looking to learn from and lift where appropriate. There's some earlier this quarter, I spent some time in Phoenix and Scottsdale in Arizona, then went up to Portland in Oregon. And one common success factor in both regions, both of them are the strongest sales regions we have in the U. S. Currently. And what was also particularly successful there was they were complementing local beverage value alongside the platform alongside the fundamentals of running better restaurants. So there are these pockets of great success that we're looking to lift and localize and then launch rapidly. So, but the other piece that I always come back to and I won't hesitate to be coming back to is probably the most important element of what has established momentum in the U. S. Is the operational improvements around running better restaurants. And that is something that is so, so fundamental and it may not be a headline grabber. But if you think about the 27,000,000,000, 28,000,000,000 customers that come in every single day, if we can offer a more consistent, friendlier, more convenient service to them, that is where our greatest reward is. And the customer satisfaction scores are going significantly in the right direction. And again, we have a number of ways we're looking to improve the operational experience, including using technology to make it more easy and more convenient for customers. So we have multiple future growth drivers. And internationally, again, we're scanning the horizon. Clearly, I mean, you've seen the success of the very consistent sort of success across the international lead markets. And there are certain common success stories across those, most notably how they're embracing what we're calling and describing the experience of the future, which is how use modern facilities are totally redefined front of house hospitality experience, use of technology with self order kiosks, for example, integrating that with mobile apps, and again offering a degree, an appropriate degree of customization for customers, so they can really variety across our menu. So again, you can expect us to incorporate some of those successes into the U. S. Business as we move forward. Next question is from Andrew Charles of Cowen. Great. Thank you. Two questions for me. I don't think you shared the gap versus NPD QSR sandwich and you commented in the past consistency of that gap. So can you disclose the number and also the cadence to the 3Q? And then Steve, with the departure of several key leaders in the senior team combined with the focus on becoming more nimble to reach faster decisions, can you talk about the bench of talent that remains following these changes? I know obviously you mentioned new executives coming in for fresh perspectives, but anything more just give assurance around the changes would be helpful. Yes, sure. First of all, on the GAAP, competitive GAAP, we had a positive GAAP for the quarter. It was a positive GAAP of 0.6 market share fight out there, really is a scramble. There is certainly a softening top line across the sector with consumer confidence. I think all of us in the sector would prefer some tailwinds. If you look, there aren't any tailwinds at the moment. There's not great economic growth to help provide a lift. Consumer confidence is muted. We're at a rather unusual stage of the election cycle. So none of that's really providing a tailwind for us. That said, there's a significant market out there and we're going to keep battling for market share. That said, seeing the softening of the gap was not a great surprise to us because it was a particular this time last year and heading into the 4th quarter was a period of really strong performance for us. So, the reality is the trends we're seeing are of no surprise to us and certainly are shakiness from our longer term objectives. From a leadership perspective, I'd love to talk about it. I'm excited about where we're at. We're heading into 2017 now with really a world class team that one would expect for a world class business. We have made changes. And as you go through the various phases of a turnaround into growth, there are times when the skill sets required as we transition also need to change. So it's a delicate balance between leveraging the experience, the knowledge, the tenure, the understanding of the system with our more tenured leaders also bringing innovative thinking. But I could just draw some examples to this. I mean, there's giving Chris Kamchinsky the opportunity to lead the U. S. Business, I'm really excited about because the reality is whilst he has somewhat limited McDonald's experience, A, he brings some phenomenal external leadership experience from global brands, consumer brands, which will be valuable to us. But also, let's not forget that if you were to take the 5 or 6 key direct reports that he has and there's more than 120 years of McDonald's U. S. Experience in Alta. So I think we got the McDonald's experience piece covered. And with his fresh thinking, I'm sure that's going to be a very, very combination. If you look at the role that we've created for Doug Goll now, I mean Doug's been around the best part of 40 years. And there are very few roles in this business that Doug hasn't filled yet. He's had functional leadership in supply chain, functional leadership in franchising, real estate, as well as field leadership both here in the U. S, previously ran Europe and now he's proven to be a great leader of our international lead markets. Leveraging Doug's experience to help blend in with the new experience. But Chris, we are one team and that's a good balance. Joe Erling has taken a high growth. I mean, Joe started off in the U. S. Business 15 years ago, became a regional manager very successfully here in the U. S, transitioned to become a market leader, a Managing Director of the Korea Market, has financial experience and became the CFO in the newly formed high growth market, And it's perfectly placed to step in and add his energy and insight into leadership position. And then if you would just talk about Chris' transition, we'd already prepared for that. We'd already had Lucy Brady come and join our business. She's a Senior Vice President at BCG, 20 years experience in helping global businesses develop growth strategies. So ideally placed to seamlessly fit into that. So it's an important balance. It's something that I enjoyed leading when I was in the UK when we were transitioning from probably a McDonald's only management team to one that I felt had the right combination. And getting that balance right now is critical. I'm really excited to be into next year with a team that's shot and ready to go. Next question is from Brett Levy of Deutsche Bank. Good morning. Sorry about that. If you could just share a little bit more on the macro thoughts with what you're seeing, not just in China and the Asian region and the U. S, but also Europe, just a little bit more on where you're seeing the strength in your in these 4 core markets? Yes, sure, absolutely. I mean, really, it's a fascinating time to be running an international business. It really is. Because if you speak to the team in France, for example, who have led so much to our strategic thinking and the innovation across our business, they are now facing really not just unforeseen, but previously not experienced the challenges. And given not just their macroeconomic environment, we know that GDP is down in France, but there's different dynamics. And given some of the situation and the security terror situations they face there, it really is creating some very significant dynamic changes in that market. Tourism, which has always been a substantial part of this fuel of the economy in France, has really softened. And we're seeing you see it in the hotel bookings and you can see it impacted in certainly the more tourist areas, whether it's the Southern France or Paris within our business, but we do have a heavy concentration of restaurants. But you also see it affect the way the consumers live their lives, French consumers. So, there's a slight reticence to go into high density tourist areas because they're slightly concerned at the moment. Now, I think some of those things are temporary and some of them things may be slightly more permanent. But it certainly means our management teams in France having to be much more agile and responsive to act in accordance with consumer sentiment. When you go to a market like Spain, where they have probably suffered more through the economic crisis than any other market that we do business in, youth unemployment up at 25%, for example. So, we have just generally slowed down the new store opening there in order to focus our efforts and our investment on the existing store portfolio. I'm delighted with the progress that market has made as it's built its momentum and is returning to growth through the second half of this year and the outlook looks very confident. UK is probably a well and often spoken story. I think it's 42 consecutive quarters of growth now. And that momentum really does look very solid and well baked in. So, I won't say too much more about that. But then you can go internationally across to Asia. China is a challenging market and the manner in which the team are adapting to the variations that they have to experience, both again in consumer sentiment and the broader economy is admirable. And as they are seeing, just as one example, they now have a substantial part of their business is the delivery business. And not just originally we set up and established our own McDonald's delivery service and that proved to be very successful. We're now integrating it into 3rd party delivery providers and that has way further accelerated the fundamental business and customer satisfaction as more people are getting used to ordering and eating at home. So, we're seeing different trends around the world. And the one thing that is particularly beneficial to us now is, as we remove some of the layers in our business, the visibility we have into what's going on and how we can transfer that knowledge and use it to our advantage in other markets. And part of the advantage of having Chris in his position now, he spent his 1st year traveling around the world, both with myself, with other senior leaders and on his own, visiting these markets, seeing what's going on, understanding the big levers of our business, and he's now perfectly placed to help take that into the U. S. Business. Next question is Matt DiFrisco of Guggenheim. Thank you. Just had a question with respect to the context of pricing of 3.5 and obviously that gap that you noted is a historic level between food at home. I wonder can you talk about how does that translate into the promotional environment that you're seeing now and perhaps going forward? I think this time last year, everyone was sort of getting into the $4.99 meal offerings and trying to promote heavily. But obviously, your margins are strong and you're taking price. Should this be a read that the promotional environment, though still existing, is not as heavy maybe or going forward? Yes, Matt, thanks for the question. I'd say you can see out there, there's still some promotional offerings certainly around the industry. I think all of us, certainly including us, would like to see kind of just a stable platform where you can that's why we put MiPIC II in. The idea is to have an ongoing value platform that customers can count on and not have to come up with some discounted promotion, if you will, every now and then. On the pricing side, to your point, right now, we're a little bit ahead of food away from home, and we certainly experienced very favorable margins here in the U. S. In the Q3. Some of that is the timing of when we take pricing. So if you look at last year, we actually took some pricing in October, whereas this year, we took it in pricing that would be in last year's 4th quarter. Pricing that would be in last year's Q4 that we may not replace some or all of that in the Q4 this year, which would bring some of our pricing down and maybe more in line with food away from home. But we still do keep an eye on both food away from home and food at home, which you mentioned is the food at home is extremely low right now. Thanks. Just to add to that, what I would say is we're trying to get the right balance that as we build our plans that we don't want to have a price led strategy. We want it to be an experience led strategy of which value is a critical component. And our teams, as we look over the immediate term and through 2017 through the 3 year plan, that is the fundamental basis of how we're building our plans. Yes, value, we don't want to be price led. And we can see some in the sector have been drawn that way. That's not a place we really want to go. Next question is from David Tarantino of Robert W. Baird. Steve, my question is on the U. S. Business. I think you mentioned several times about the short term headwind associated with cycling, the launch of All Day Breakfast. And while I understand you want us all focused on the long term, I think investors are very focused on how you might lap that initiative this quarter and next quarter. So I was wondering if you'd be willing to share how the business is trending currently or how you think Q4 and Q1 might play out given that very unusual comparison? Yes. As you say, David, it is an unusual comparison. So we enter this period with our eyes wide open. And as we say, look, we are mindful of where the performance spiked last year. And I can assure you, we're not building tactical plans to try and hit a comp in a given month or a given quarter. We are building for the long term and not getting shaken up our strategy. So, we will still fight for market share at local level. We're going to leverage all day breakfast through quarter 4 into quarter 1. We've got some exciting promotional activity in quarter 1 that we're looking forward to. So, we're not sitting on our hands here, but at the same time, nor are we going to get drawn into a year on year comp strategy at all. So, that's the visibility that I'm happy and open to share with you, but not getting into predicting comps. Next question is from John Glass with Morgan Stanley. Thanks very much. Steve, I know you said in the U. S. You're going to update us later on your progress on the experience of the future. But do you think it's going to be a meaningful or could be a meaningful driver to the U. S. Business in 2017? And what are the things that need to happen in order to implement that? I know remodels, for example, is a key part of that. So, sort of where are you now on remodels? Have you been sort of remodeling quietly behind the scenes? And maybe some update on what needs to happen in order for Experience the Future to be rolled out fully? Yes. Thanks, John. I'm still starting to make a contribution in 2017. I mean, the reality is we would see this as something like a 3 year program, which is exactly what we're seeing through the markets like UK, Canada, Australia. These are rolling programs and actually give us growth upon growth upon growth. For the U. K, for example, they're already almost 40% converted to the entire Experience the Future, which is introducing the technology along certainly In the U. S, we're certainly earlier in that cycle. In terms of modernized restaurants, just over 50% of the U. S. Estate is modernized. We've got some work to do to complete that. And then, of course, within that, we want to layer on top the other elements of the far broader elements, consumer facing elements of the Experience of Future, integrating the app into the Silverado kiosk, offering different ways that customers can be served, they can place their orders, they can customize their food. So we expect to start seeing that ramp up through 'seventeen and literally the minute you convert a restaurant, we see a sales lift. So yes, it will be a contributor, but we'll probably be getting that full run rate through 2018 2019 as well, which I think it is a very strong program. One of the things we have benefited from is we've learned a lot of what works, but also among 2 things that don't work in the markets that have been nearly adopted Australia, Canada, for example. So, we can bring that best practice into the U. S, make sure it's locally relevant and then go hard at it. So we're really excited. The barrier to it is really is just a collective will to invest. I mean, there is an investment element to it over an operator level for the company. And certainly from a company perspective, we're allocating our capital to provide significant support alongside the operators to co invest with them. And we're really happy in the moment that the U. S. Cash flows are all time high. That means their ability to invest can never have been greater. So I think we're in a good place. Next question is from Sara Senatore of Bernstein. Hi, thank you. I have a follow-up and then a separate question. One just on the pricing, the follow-up is, it's starting you're talking about rolling off. To the extent that you know kind of what elasticity looks like in your business, Is there any sense that maybe by allowing it to roll off your traffic could accelerate in the sense of traffic has been negative and maybe the higher prices is a contributor to that, so that we could see that composition change a little based on what you know about your customers? And then, my second point is second question is about the unit growth taking it down. Is that because you're intentionally steering more capital to existing units or remodel? Or is there something in the markets that you're seeing that would suggest that kind of a slower pace of unit growth is appropriate? Thank you. Thanks, Sarah. Let me hit both of those. The pricing, it's a fair point. As I mentioned, there's a lot of elements of pricing. What we try and balance is certainly restaurant profitability with continuing to grow guest counts. And so we've talked about our main focus being growing guest counts certainly in the U. S. And again, as I mentioned, the pricing is a little bit of a timing issue. So it wouldn't be a surprise to see that come down a little bit, which could help then accelerate some of the guest count growth. Regarding unit growth, we brought it down by around 100. I think we had 1,000 about 1,000 last quarter and we now have said about 900. It's a little bit in various markets, a few in China, a few in Spain, nothing of significance, I would say. The reallocation is really to some of these investment areas that Steve was just talking about, Certainly in places like Australia and the U. K. Where we're implementing Experience of the Future, seeing good sales ellips from those investments, we continue to reinvest in those types of investments. So you saw the capital didn't come down. It was really a reallocation of a little bit of the new store openings to some of that reinvestment to continue to grow sales. Next question is from Nicole Miller Ragan of Piper Jaffray. Good morning. One of your larger QSR, I guess, slash coffee peers reiterated guidance the other day and it really kind of implied stable or positive 4th quarter comp trends. So I'm wondering if this is the case for the QSR industry overall. What does it seem like to your team? It seems relatively better and if so, why? And then Part B, if I may, how do you want us to think about Nicole, sorry to interrupt. Could you just repeat that? The line is muffled. You're about a competitor with a guidance. I'm so sorry. Let me take a moment. If you could repeat, that would be great. Apologize. So one of your largest larger QSR kind of slash copy peers reiterated guidance earlier this week implying positive or just stable 4th quarter comp trends. And I'm wondering if you and your team feel like this is case for the QSR industry overall and if things do seem relatively better for the entire industry, why now? And then Part B, as analysts, how do you want to think about us to think about and model that in comparison to your very difficult U. S. Comp comparison in the prior year? Thank you. I'll take the first one. So we plan our business to grow on a global basis. So growth is fundamental both clearly at the global level, also at a local level with our other operators. And our rich history of continuing to grow this business over 60 odd years through changes in societal changes as well as competitive environments as well as different economic backgrounds. We've proven to be a pretty resilient business. So certainly, as we go through quarter 4 and into quarter 1, we're planning to grow our business. Now there's going to be ebbs and flows within the global business on where those pockets of success happen. And that's why our geographic diversification is one of our great advantages. But we're planning to grow our like for like sales and we see that as being the lifeblood of our business as we look out over the medium to long term as well. Next question is from Jeff Farmer of Wells Fargo. Thanks. Just shifting to the capital structure, where was your rent adjusted leverage ratio at the end of the Q3? And theoretically, where could you guys take it and still maintain that investment grade credit rating? Hey, Jeff, this is Chris. I'll be happy to get that back to you offline. We don't have those numbers in front of us. Yes, I guess what I would say is, we're kind of we're certainly in the middle of BBB plus right now, have a little bit of room, but not a lot of room. And we're committed to remaining at that BBB plus rating. And so as we look at any further debt additions, we keep in mind kind of wanting to stay at that existing credit rating. So that's our intent certainly. Next question is from Joe Buckley of Bank of America Merrill Lynch. Thank you. Two questions, both kind of follow ups on previous discussions. I'm curious if in your point of view that gap in the food at home inflation versus food away from home inflation is part of the reason why restaurant sales, and I'm talking industry wide, not McDonald's, are relatively soft? And then secondly, going back to the questions on the U. S. Future of the experience, do you have a sense here to what elements you would plan to include in that? And is the U. S. A particular challenge because the drive thru percentage is so high in absolute terms and relative to other markets? Okay. Two good questions, Joe. Thank The GAAP clearly plays a role, but it's not the reason for the broader softening. It's not the sole reason. So, I think it is an element. But when you're a lower average check business like we are, I don't think that magnifies out the same as if we were a mid scale dining or fine end dining. So, yes, it's probably in the mix, but it certainly doesn't explain. I think there are broader macroeconomic issues of consumer confidence and just uncertainty over wage increases. There's a slight squeeze on discretionary spend with gas prices edging back up and healthcare costs going back up. So I think those are the sorts of things that we see affecting customers and basically the spare cash they have in their pocket. But with our experience of the future, I mean, one of the great learns we've had and particularly with launching so aggressively in Australia over a year and a half ago, which the main food element was something we described as Crayt Chaw Taste. And that was an in store only premium food offering. Now, it worked great, but we wanted to find a way that we could take that to our entire customer base. So, with the Aussie team, we've worked on solutions now that we can now bring. So we believe there will be food elements customizing premium quality food that we can deliver through both the drive thru and in store. And I think that's one of the benefits we have of getting those early adopter markets, going aggressive, learn, bring it back over and localize it and launch it. And so we believe we have a good solution for that. Last question is from John Ivankoe of JPMorgan. Hi, great. Just a couple of follow ups, if I may. Firstly, on G and A, I think that Kevin made the comment regarding that you guys had recently, you brought in some 3rd party consultants that were helping you to thoroughly evaluate the organizational structure. I wondered, do you think there might be some opportunity beyond the previously announced $500,000,000 with some of that work that's recently coming in? And then secondly, if I may, there's been kind of a lot of conversations on and off regarding your capital budget. What is the direction of CapEx for the business, new units and existing units over 2017 and 18, if there's an initial direction we can get? Yes. Thanks, John. Let's start with the G and A. As you mentioned, we've been spending some time certainly as an organization looking through, I'll say, everything, our organization structure, our layers, the way we design structures, etcetera. And for now, what we've agreed to is that we're going and reducing our G and A by this $500,000,000 net. That still allows us to continue investing where we believe we need to, to continue to grow the business. So we're very conscious of making sure that we've got the right investment levels to be able to strategically still invest in the business. Might there be some opportunity beyond the 500? I guess I'd say, it doesn't we're not going to stop looking or stop having the discipline in the organization to continue managing the business appropriately. But there's been a lot of change in the organization in the near term. And our belief is that for us right now, this is the right level for us to focus on in the near term. I wouldn't say that, that means we stop and then never kind of manage the business effectively going forward. But for us, right now, the commitment is to the $500,000,000 Regarding capital, right now, as you know, we're right around $2,000,000,000 What you may see in the near term is as we convert some of these countries to developmental licensees where we free up some of that capital, Some of that may be redeployed to the U. S. To spend on this Experience of the Future investment that Steve was talking about. So you could see some reallocation of that capital in the next few years that would effectively keep our capital envelope relatively similar to what it is today. And then once that's complete, it's likely to go down after that. But in the near term, we may reallocate some of the capital that we freed up to spending to accelerate that U. S. Experience of the future investment. We're at the top of the hour, so I'll turn it over to Steve, who has a few closing comments. Thanks, Chris. And again, thanks for everyone for joining us this morning. In closing, I want to reemphasize our focus on giving people more reasons to visit McDonald's. We're committed to creating customer noticeable change across our business, especially in the areas of food, experience and value. And it's making a difference. Customer perceptions of McDonald's are improving and so is our performance. We're moving in the right direction. We know there's much more work to do as we begin to transition from our turnaround plan to a mindset focused on strengthening the business to drive sustainable growth over the long term. I am encouraged by the progress we've made, I'm excited about the opportunities ahead as we begin to reinsert 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.