Earnings Call: Q2 2016

Jul 26, 2016

Hello, and welcome to McDonald's July 26, 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. I would now like to turn the conference over to Mr. Chris Stent, Vice President of Investor Relations for McDonald's Corporation. Mr. Sten, 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. Thank you, Chris, and good morning, everyone. Midway through 2016, I'm encouraged by the progress we've made in turning around our business and the way we've challenged legacy thinking, acted with greater urgency and shared successes more quickly across markets. These actions underlie the positive momentum that continued in 2nd quarter, marking 4 consecutive quarters of positive comparable sales growth across all segments and franchisee cash flows at all time highs in many markets. More specifically, global comparable sales increased 3.1% for the quarter. Operating income was up 3% in constant currencies and earnings per share was up 1% in constant currencies. Excluding the impact of the current and prior year strategic charges, earnings per share for the quarter was up 13% in constant currencies. As we enter 2016, we expected quarterly results to be variable throughout the year. Our top line performance in 2nd quarter, while positive, reflects slower growth, due in part to challenging conditions in several countries. I'm encouraged that we continue to win relative to our QSR competitors in key markets around the world. In the U. S, our comparable sales gap versus the QSR sandwich segment was consistently positive and averaged 130 basis points for the quarter, despite softer industry growth. Our balanced focus on all day breakfast, value and relevant promotions, including MONOPOLY contributed to top line performance. In Australia, Canada and the UK, we are gaining significant market share within the IEO segment and in particular relative to our traditional QSR competitors. Our formula for success in these markets is consistent. Commitment to running great restaurants, coupled with initiatives that create customer excitement across our menu, promotion and value offers, all supported by strong alignment with franchisees. Early last year, we put the customer back at the center of everything we're doing. That mindset ignited our turnaround and continues to guide our decision making, as evidenced by the enhancements we are making to the all day breakfast menu in the U. S, the leadership moves we've made around sustainability, and the significant progress we're making to create a more modern customer experience as part of the experience of the future. Over the past few quarters, we've heard from customers looking for more choice in the all day breakfast menu. Those with muffin sandwiches on the menu ask for biscuits. Those with biscuit sandwich on the menu ask for muffins. We listened, worked through the operational challenges, and this fall, we'll begin offering muffins, biscuits and McGriddles all day in all U. S. Restaurants. Under the broader food quality umbrella, we continue to take a leadership stance on sustainability because it's the right thing to do for our business, society and the world at large. In Canada, we are breaking ground in the beef industry with our recently concluded sustainable beef pilots, part of our work with ranchers and larger producers around the globe to measure and track sustainable beef from farm to fork. Sustainability matters to our customers and it matters to us. At the same time, experience of the future is quickly coming to life in key markets around the world. For example, in Canada, over half of our restaurants are being fully converted. The U. K. Is almost 40% and France is at nearly 25% with table service and about 80% of restaurants. This marks significant progress from where we were just 3 months ago. Customers are noticing the steps we're taking to build a better McDonald's. The most recent customer satisfaction scores reflect improvements in 7 of our 9 largest markets. In the U. S, we are seeing further evidence of improved brand perceptions according to a recent newgov report that measures consumer perceptions across 1400 brands. McDonald's was ranked 4th most improved brand across all brands measured and the most improved within QSR. We're taking smart risks to address what matters most to customers. We're also being smarter about our structure and resources and prioritizing our activities to deliver the greatest impact. This includes putting more restaurants in the hands of dedicated franchisees, getting us closer to the customers and communities we serve, and unleashes more entrepreneurial spirit, risk taking and innovation across the system, ultimately accelerating growth. At the same time, we're further streamlining how we operate. We're in the midst of rightsizing our organization, taking a critical look at how we can reduce layers to be more agile in our decision making. We also recently announced the relocation of our corporate headquarters. Our new location will support greater collaboration and innovation, help us better attract and retain talent, and move us toward a more modern progressive culture with the added benefit of reducing costs. These are all important steps forward in our journey to building a better McDonald's. With that context, let's now turn to performance highlights in our major markets. Beginning with the U. S, comparable sales for the 2nd quarter increased 1.8%. Whilst modestly positive, this growth was not as strong as the last two quarters. This is due in part to the recent softening of the IO industry, which experienced minimal growth for the trailing 12 month period ending in May at only 40 basis points. The All Day Breakfast platform continues to contribute to top line momentum as it draws new customers into our restaurants and creates additional reasons for existing customers to visit more often. It's also delivering bottom line growth with restaurant level cash flows up for the 3rd consecutive quarter. Franchisees are excited about the platform and its future growth potential. And the next phase of All Day Breakfast, which I mentioned earlier, was voted in with an overwhelming approval rating exceeding 99%. With food, we continue to enhance quality perceptions around our core menu, and we've been more vocal about the improvements we've made. Just last week, we launched our new brand campaign called The Simpler, the Better, which highlights the progress we've made in the areas that matter most to our customers, and we'll have even more news to share in the coming weeks. Value remains a top priority in the U. S. Franchisees have embraced the McPig2 value platform at both the national and local levels. We're tapping into the flexibility this platform provides in terms of products and price points to enhance our appeal to a broader population of value seeking customers, which is increasingly important given softer IEO industry trends. Although the progress we've made in the U. S. Is encouraging, our most significant opportunity continues to be bringing customers into our restaurants more often. As such, we're actively exploring new ways to increase Let's now turn to the International Lead segment. 2nd quarter comparable sales increased 2.6% with 4 of the top 5 markets delivering positive comparable sales for the quarter. France was the exception with results that were relatively flat. Whilst the recent Brexit vote has created uncertainty in the U. K. And across Europe, our business remains strong and we are confident in our ability to manage through the change. Having operated in these markets for over 40 years, we're accustomed to dealing with external challenges. I believe we are well positioned to seek out the opportunities it provides to build upon the strength of our UK business. In fact, the U. K. Market's long track record of success continued into Q2. Compelling promotions and limited time offers, such as the relaunch of Big Flavor Wraps and positive performance from Experience of the Future restaurants drove growth in both average check and guest counts, with guest count volume breaking all time monthly highs in April May. In Canada, a continued focus on lunch, along with successful marketing campaigns and positive performance from their experience of the future restaurants, drove solid sales and guest count momentum into the 2nd quarter. Performance of all day breakfast in Australia is mirroring the success in the U. S, driving incremental sales by providing customers with even more reasons to visit McDonald's. In addition, we continue to fuel growth in more established platforms like Experience of the Future and McCafe. We're introducing new customizable flavors ingredients supported by engaging marketing and promotional campaigns to create energy and excitement for our customers. Sales were slightly positive in Germany for the Q2. With a heavy concentration of price conscious customers, value remains a critical priority. The new pricing structure we rolled out in February continues to perform in line with expectations. And McPig 2 for €5 which we launched in May, resonated well with customers. However, these initiatives weren't enough to mitigate ongoing guest count and market share declines. Macroeconomic challenges persist in France. We're enhancing our builder customers by offering more compelling options at lower tiers of our menu. We're also pursuing growth opportunities at the premium end through engaging promotions and limited time offers, including the recent New York Street Food event, which successfully drove sales of premium burgers and wraps. In the high growth segment, 2nd quarter comparable sales were up 1.6%, driven by positive performance in China and Russia. Despite a challenging environment, including aggressive discounting by competitors, China's comparable sales were up 2.1 percent for the quarter. We continue to gain significant market share in IEO and more specifically from Chinese QSRs whilst undertaking meaningful cost savings initiatives to enhance profitability in this important market. In an effort to give customers more reason to choose McDonald's, we've introduced appealing new products like the chicken snack sharing box. In addition, we're expanding our delivery business by tapping into growing digital channels, as well as other vendors to offer added convenience to Chinese customers. In Russia, comparable sales remain positive, driven in promotions that showcase compelling affordable menu options across multiple dayparts and product categories. Results may be volatile moving forward given continuing macroeconomic uncertainties and lower consumer purchasing power. I'm encouraged by our continued progress. We're creating a better McDonald's, ones that customers will recognize as modern and progressive and a true global leader. Whilst we've come a long way, we recognize there is much more to do. That's why we remain committed to executing our turnaround plan through the end of the year. For now, we remain focused on continuing to win within segment as we give customers more reasons to choose McDonald's. At the same time, we are taking steps to build upon the progress we've made as we chart our long term strategic path forward within the broader $1,200,000,000,000 informal eating out market. I am confident Muzan's will generate long term value for both our system and our shareholders. Thanks. I'll now turn it over to Kevin. Thanks, Steve, and good morning, everyone. As follow-up to Steve's remarks, I'd like to cover the key performance drivers for the quarter, provide an update on our outlook for the second half of twenty sixteen and outline the recent progress we've made against our financial initiatives. Starting with the performance drivers for the quarter. For the quarter as a whole, we're pleased with our efforts to effectively manage restaurant profitability, particularly in light of the industry trends and economic factors that we've experienced in certain markets. With more than 80% of our global restaurants franchised, the largest driver of operating income continues to be our franchise margins. For the quarter, growth in global franchise margins was led by the U. S. And the international lead markets. Franchise margins totaled $1,900,000,000 a 6% increase in constant currencies and contributed about $100,000,000 to our global operating income growth for the quarter. Growth in global company operated margins also contributed to quarterly results, as margins rose 150 basis points with China leading the overall improvement. In the U. S, company operated margins increased by 30 basis points for the quarter, as positive comparable sales and favorable commodity costs more than offset the investment we made last July to raise crew wages and enhance benefits for our restaurant employees. Given the magnitude of this investment, the improvement in 2nd quarter margins is a noteworthy achievement for our U. S. Business. Moving on to G and A. Our 2nd quarter expenses increased 2% in constant currencies due to higher incentive based compensation as a result of our year to date performance as well as costs associated with our biennial owner operator convention in April. Excluding these items, G and A would have decreased. Looking ahead, Q3 G and A levels will remain elevated due to our sponsorship of the Summer Olympic Games in Rio next month. Taken together, the cost of our worldwide convention and the Olympics are expected to total about $25,000,000 or roughly 1% of our G and A in 2016. For the full year 2016, we continue to expect G and any impact from changes in timing of certain refranchising transactions. And any impact from changes in timing of certain refranchising transactions. Global operating income for the quarter totaled more than $1,800,000,000 up 3% in constant currencies, reflecting roughly $230,000,000 in strategic charges recorded during the quarter. These charges were comprised of non cash impairment related to our ongoing refranchising in Asia and Europe and G and A initiatives, as well as the decision to relocate our corporate offices. Diluted earnings per share for the quarter declined $0.01 which included $0.20 related to the strategic charges and $0.02 in negative foreign currency impact. As a reminder, in Q2 2015, we had strategic charges of $0.04 per share related to restructuring. Excluding the impact of the current and prior year restructuring charges, earnings per share for Q2 2016 were up 13% in constant currencies. Turning next to menu pricing and commodity costs. In the U. S, commodity costs declined 4.5% during the Q2. Looking to the second half of the year, we expect commodity costs to remain favorable, maintaining our outlook for the segment's full year basket of goods to be down 3.5% to 4.5%. Commodity costs for the International Lead segment were down about 1% for the 2nd quarter and are expected to remain relatively flat during the second half of this year. Where possible, we source products in local currency to minimize cost fluctuations. And our suppliers also hedge a portion of foreign currency exposure. So at least in the near term, we don't expect Brexit to significantly impact U. K. Commodity prices. While we are benefiting from favorable commodity costs around the world, we are facing rising labor costs in many of our markets. As a result, we are carefully balancing price increases with a focus on maintaining our strong value proposition, which remains a key pillar of McDonald's brand to drive guest counts. In the U. S, 2nd quarter pricing year over year was up about 3% compared with food away from home inflation of 2.6%. Given the widening gap between food at home and food away from home inflation in the U. S, We continue to track both of these metrics very closely. As it stands, food at home is projected to increase modestly from relatively flat to up about 1% for the full year, while food away from home inflation is projected to increase between 2.5% and 3.5%. For the International LEAP segment, while price increases vary by market, year over year increases for these markets averaged 1.5% to 2%. Next, I'd like to provide an update on the impact of Brexit and our global foreign currency outlook. As I mentioned, we don't expect Brexit to have a significant impact on our near term commodity prices in the UK. And as Steve noted earlier, we also haven't seen a significant change in consumer demand in the UK since the vote. While the long term impact of Brexit is uncertain, in the near term, the most significant impact on our business will be currency translation. We view our geographic diversification as a key competitive strength. For perspective, the U. K. Represents about 10% of consolidated operating income and the Eurozone collectively represents about 25%. Given recent currency fluctuations, foreign currency translation is now expected to have a more significant impact on our reported results than previously estimated. Based on current exchange rates, we project foreign currency translation to negatively impact our earnings per share by $0.02 to $0.04 in the 3rd quarter and $0.09 to $0.11 for the full year. As always, please take our currency guidance as directional only because rates will change as we move throughout the year. Beyond the currency impact, we continue to expect variability in quarterly results due to increased volatility in the evolving global economic and geopolitical landscape, as well as uneven prior year comparisons. It was just over a year ago, beginning with the announcement of our turnaround plan in May 2015, that we began reshaping our business. From our organizational structure and restaurant ownership mix to our capital structure and the strategic allocation of our resources around the world. We've taken decisive actions to pursue each of these opportunities, and we continue to make meaningful progress. In the past 6 quarters, we refranchised about 8 50 restaurants, including over 160 in the 2nd quarter. The large majority of restaurants refranchised to date were sold to existing conventional franchisees. Overall, our global refranchising efforts are moving along as expected, and we're pleased with the progress we've made to date. It's important to keep in mind that due to the unique nature and scope of the refranchising activity underway, the more complex larger refranchising transactions do take time. We remain committed to our refranchising strategy and the benefits that will be realized by moving to a more heavily franchised system for McDonald's globally. From a G and A standpoint, we remain on track to achieve our net annual savings target of $500,000,000 by 20 18, with the vast majority of the savings expected to be realized by the end of 17. As Steve noted, we are in the midst of transforming our organization. We expect to share more detail on the role that our organizational restructuring is playing in reaching our G and A goal as part of our Q3 earnings update. Relative to our capital structure, 2016 represents the final year of our 3 year $30,000,000,000 cash return to shareholders target. During the Q2, we repurchased $3,400,000,000 of stock, bringing our year to date share repurchases to $7,100,000,000 or 57,000,000 shares. In May, we completed a $2,700,000,000 accelerated share repurchase program and also entered into a new $2,600,000,000 program, which accounted for a significant portion of the share repurchase activity completed during the Q2. Through June 2016, the cumulative cash return under our 3 year target stands at $24,400,000,000 and we are on track to complete the remaining amount during the back half of this year. We've delivered positive results over the last four quarters, not just from improving efficiency and working to reduce costs, but most importantly from top line growth, as we've made strides improving the customer experience. These results reinforce my confidence that we're focused on the right things. We're also making good progress on all of the actions we outlined last year. We're actively refranchising restaurants, building stronger G and A discipline and returning more cash to shareholders. The strategic changes we're making and the actions we've taken over the course of the last year are positioning us to optimize our business operations and deliver sustained profitable growth. 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. The first question is from Brian Bittner of Oppenheimer. Thanks for taking the question. Two questions, 1 on the U. S. Industry and 1 on your guys' own U. S. Business. On the industry, your outperformance against the industry this quarter is very similar to last quarter, which suggests the entire industry saw a huge deceleration around 3.50 basis points. So what do you believe sitting in your seat looking at the United States? What are the 2 largest drivers of the softening in the IEO trend? And do you see it continuing into the rest of the year? And secondly, on your own business, when you look at lapping all day breakfast in the 4th quarter, how are you thinking about the ability to sustain positive trends here as you lap that? Is extending the all day breakfast menu enough or So on the first one, on the industry, well, clearly, I mean, it's been fairly well documented on the consumer slowdown across most consumer segments, to be honest with you, through the Q2. And therefore, we are very mindful of our competitive position and competitive gap. So it was important to us that we maintain that competitive advantage and sense is there's a couple of things at play. I mean, first of all, there is a sense is there's a couple of things at play. I mean, first of all, there is a widening gap between food away from home and food at home where the commodity decreases are being passed through by the grocers. So the food at home is there's value to be had for families there, whereas eating out there is a price inflation environment. So that's a small part of it. I think generally there's just a broader level of uncertainty in consumers' minds at the moment, both trying to gauge their financial security going forward, whether it's through elections or through global events, people are slightly mindful of an unsettled world. And when people are uncertain, when families are uncertain, caution starts to prevail and they start to hold back on spend. And for a business like us, I mean, clearly we generate a lot of our own business directly, but also we do benefit from people moving around, going to the malls, driving around, going on vacations. And if people are reining in their spend across broader categories, that will have a little bit of a flow through to us as well. So we're mindful of it. It just means we've got to be closer to our customers than ever and adapt to make sure that we're building compelling plans in the short term as well as along. In terms of sustaining trends, clearly, we plan to grow our business. But at the same time, we're not trying to do that on a quarter to quarter to quarter basis. We are mindful of the short term, but we have our eye line on the long term. And we believe we've got a number of the right drivers in place to give us sustained long term growth here in the US. Our value platform is we continue to learn. So from McPIC 2 for 5, for example, we had our 2nd national campaign in May and we learned more about it in terms of the items we can have within the bundle and how we position that, all the way through to some of the early markets where we're testing out the Experience the Future in the US, where we're making a significant and exciting rollout program in Florida and certainly within New York as well, which we believe the results there, if they mirror what we're seeing elsewhere in our other major markets, provide a very exciting opportunity across the next few in the U. S. As well. So mindful of the short term, we're going to fight for share, but also we don't want to lose the strategic direction that we believe is right for long term. Next question is from David Palmer of RBC. Thanks. Good morning. Steve, you had some comments about improving consumer perceptions in most of your major markets. Does that include the U. S? And what measures are getting better? Where does the opportunity still remain to improve? And then which of your initiatives do you think are really going to help you get where you want to get with your brand with the results for I would imagine being traffic getting better from here? Thanks. Thanks, David. Yes, so if I was to be U. S. Specific, I mean, I referenced earlier the YouGov, they just hold on brand perception. So we've made really encouraging progress. And I believe that's because as well as trying to drive the business in the immediate term, we've also made the investments and the commitments around food, food quality, sustainability, the employment proposition where not only do we move pay for our hourly paid staff, but also a far broader enhanced range of benefits including training and education opportunities for them. And with a brand like McDonald's, everything you do communicates. So the better you move on every single consumer touch point, then the broader halo on the brand starts to improve. So we're encouraged. We've got plenty of plans to maintain that momentum, but it's nice to see it being recognized by consumers. Part of that is comes down to the basics of running better restaurants. And we've maintained a 6% year on year improvement in overall customer satisfaction. When I look into the detail there, we've made the progress on the areas that the team had intended to make the progress. So we spoke in the past about an attention to order accuracy, particularly in the drive through. Our accuracy has improved. The quality of the food perception improved, friendliness improved, all by the order of about 6%, including speed of service as well. So, I believe the day to day customer experience also enhances the brand and also just drives that immediate satisfaction. In terms of going forward, what's important? I'd say a couple of things. I mean, clearly continuing the journey we are around food and food quality, both investing in the ingredients, the recipes and the items in the restaurants as well as the perception of better explaining what's in our food, where it comes from. And so that's where the simpler the better campaign starts to focus. It chronicles the big meaningful moves we've made and I believe signals the direction of travel for us going forward. And as I say, I'm not going to disclose anything more about it, but there will be more news to come, which we know is going to be powerful on the customer agenda and very, very strong for the brand as well. The other element that I'm excited to introduce that we will be introducing increasingly in the U. S. Because we've seen it work elsewhere in our major and mature markets is rolling out the Experience of the Future was a fundamentally different experience for the customer. And a lot of that does involve technology as well as the service experience as well. So how can we take out the any of the interactions that customers have with the experience McDonald's, whether it's coming into the dining area or going for the drive through, how can we take out the non value added processes and just made a smoother, more enjoyable and easier experience for customers. So the introduction of self order kiosks, the development of our mobile packs, so we could order in ahead and just check-in when you get into a restaurant, It takes out many of those human interactions where complications can arise and it just makes it a smoother experience for customers. We're seeing a good pickup in sales as we roll this out across U. K, Canada, Australia and early days, but also in Germany as well. So we know we're on to something. We know customers respond well. And certainly, it breathes a lot of new life into our restaurants and into the brand. Next question is from Brett Levi of Deutsche Bank. Good morning. If you could give us a little bit more insight into how you're looking at the structural margins, especially in the U. S. As you've regained some of your lost footing, what do you think are realistic margin expansion targets assuming more modest same store sales in the flat to up 2% or if you were able to reaccelerate to 2% or greater? How should we really be thinking about it given the current labor and COGS outlook? Yes. Thanks, Brett. It's Kevin. You saw in the Q2 of this year, we were able to actually grow margins 30 basis points in the U. S. With the 1.8% comp sales, which we were certainly pleased about. As you know, long term margins are a top line game for us. We need to grow comps in order to maintain and improve margins. But what we were able to do this quarter was effectively manage the restaurant profitability as well. So while commodity costs were more favorable this quarter, our management of what we call controllable costs, both on the food side and the labor side was better this quarter than prior quarters. And so we're pleased that we're doing a better job of managing running the restaurant, but also managing the profitability of the restaurants. Going forward, we've always said that we need about a 2% to 3% comp in a normal inflationary environment. That probably hasn't changed much. And there certainly isn't anything structural that would prevent us from getting back to kind of where we were on high margins in the U. S. Next question is from David Tarantino of Baird. I wanted to come back, Steve, to the commentary around speed of service. I think you mentioned that that had improved at least from a perception standpoint. But could you give an update on where you are on that front? And it seems like such an important factor when you think about how much of the business goes through the drive thru? What are the keys to improving that going forward? Yes. Thanks, David. You're absolutely right. I mean, the reality is the customer experience critical in just our underlying business momentum. Speed of service has predominantly improved, largely because we've got the accuracy element of service far better. So we've enhanced the training and some of the operational procedures through the drive thru. And you may have heard me talk about a program we call Ask, Ask, Tell, which is a way of really ensuring we both took and then delivered the right order day in, day out to our customers. Once you get your accuracy right, then the whole drive through lane just operates far smoother. We also made significant changes to the merchandising and the drive thru with more tailored and focused merchandising menu boards, which again just made it easier for customers to order and identify the products they want, but also easier for our teams to take and get right. So I think there's a lot of work that's gone on. The real devil in the detail down to the font size on the order receipts to make sure our teams are collecting the orders and gather the right items. But also, there's a lot of work we're doing in the future where we believe we can also enhance service speed and accuracy and get technology to do some of that heavy lifting for us. So whether it's voice recognition in the drive through speaker post all the way through to ordering ahead via either the Internet or the app. Now we have elements of this going on around the world. I'm not sure we're going to pull them all together here in one market, but we were going to take those learnings and see how the customer responds to some of the capabilities we're introducing. And clearly, if the response is strong, we can bring that in and that will help again further enhance speed of service. But all the way to we have markets where we have curbside collection for our orders. So if you actually order that ahead via the Internet, you can actually just go along to curbside. And therefore, when you think about it, you've got one satisfied customer who is ordering and collecting and paying exactly how they want. That's also one fewer car going to the drive through, so the how they want. That's also one fewer car going to the drive through, so the existing drive through lane runs smoother. So we're looking at this from a number of different directions. I'm definitely not underestimating the day to day operational improvements the teams have done so far, but also we're looking at innovation in the future to try and keep it smoother and easier for customers and just easy for our teams to get right. Next question is from Nicole Miller Ragan of Piper Jaffray. Thanks. Good morning. Wondering how do you benefit or not from the Summer Olympics? And is there anything you want us to be aware of in the Q3 relating to that for modeling purposes? Thanks. I mean, for us, there's a brand association with sports. We've been a long term sponsor the Olympics. So we have some fun and engaging initiatives going on, particularly in and around Rio and working with our partners down there, Arcos Dorados. I wouldn't say there's anything material that's going to impact our business trends. We'll have some fun with it in certain markets where there's promotional activity where there's tie ins and allows consumers to get a little closer to it. And you can expect to see us a little piece of that across the U. S. As well. But I wouldn't see it materially impacting our business one way or the other. It's just a brand reinforcement that we're committed to global sport, to supporting participation at local community levels, just like we are with football or soccer around the world with our FIFA partnership. Next question is from Andrew Charles of Cowen. Great. Thank you. Given the 3% pricing in the U. S. This quarter, which is at the midpoint of the food away from home inflation outlook, how should we think about your willingness to let price roll off? Steve, you called out the differential between food at home and away from home creating pressure from the top line. And if I can sneak one more in there. Steve, you called it out in your prepared remarks, but there's no mention in the release of the Monopoly promotion in April and the Angry Birds promotion in May. So is it fair to categorize June as the strongest month of the quarter for U. S. Same store sales? Well, I'll speak to a couple and Kevin may want to add to that as well. When we look at the average check increases, so kind of the gap between top line sales and our guest count momentum, I mean, clearly price is a differentiator, but so is also the product mix, show the bundling of items within each purchase. And one thing I would want to say is that when we have offers redeemed through the global mobile app, we see an average check increase. When we see breakfast items bought during the main day park, we also see an average check increase. So part of it is not just price driven, it's actually product mix and bundling driven. I don't particularly want to talk to the monthly trends because we've got away from that. So I just don't think honestly that's very valuable. I guess what I would say across the quarter is there wasn't really a deeply meaningful trend one way or the other. We consistently performed and we consistently outperformed the market. And if I look at the competitive gap week to week to week, which clearly we do, we had a pretty consistent outperformance right across the 13 week period. I don't know if Kevin, you want to add anything to that. I'll talk about some of the pricing stuff that you mentioned, Andrew. Related to kind of what rolls off, I guess what I would say is in the Q2, we had some pricing from the prior year that rolled off and we didn't replace all of that. And you can probably expect similar for the rest of this year, again, partly because of that widening gap between food at home and food away from home inflation. So we're certainly keeping a close eye on both of those metrics because it's really important for us to focus on maintaining and growing guest count. Just sorry, I'm just coming back on Monopoly and Angry Birds, for example. I think it's really important for a business like ours and a brand like ours to create energy and engagement amongst our customers on multiple fronts. And clearly, standing for everyday value is important, certainly, but also shows some fun and some engagement. And that's the role that games like Monopoly play or meaningful promotions like their Angry Birds. It just provides some excitement and some buzz around the brand. And we do have a, I would say, competitive advantage that we are able to attract many of the best partners in the world because of our size and scale matching theirs. And like a recent example of the work in Japan, something linking with Pokemon GO is a great example where clearly we're a preferred partner and it's been a fun program. It's doing great things for the business. And customers respond to that both at a day to day level in the restaurants, but actually they recognize that we're a leadership brand and we attract leadership partners. Next question is from John Glass of Morgan Stanley. Thanks. Just back on the U. S. Sales, you're still in an early phase of a turnaround. So one could argue that your gap to the industry should still be widening and it didn't this quarter. I wonder just a couple of questions. One is, do you think the change from a dollar menu to the bundled value had any adverse impact on transactions and way people think about the brand. And clearly, as you're very well aware of the Q4 and early 'seventeen comparisons are more difficult. Do you think just adding to the breakfast all day menu is sufficient to lap those or are there other things you're thinking about that are more profound you just don't want to talk about today? I think you mentioned something about loyalty. Is this the time that a loyalty program would fit into the marketing plan for example? Hi, John. I mean, on value, is there a trade off in transactions having moved away from the dollar menu? I think there is. Yes, absolutely. We recognize that. That doesn't come as a surprise to us. What we wanted to do is work hard to still have a compelling everyday value proposition in our restaurants. And that can form that can take the form of many things. So we've gone with the McPick 2 platform. And again, just to step back and remind why we believe this is strong is because it's grounded in what customers tell us is most important to them, which is choice and flexibility. We're not locking them into a certain price point, nor are we locking them into a certain selection of bundled items. So we believe that choice and flexibility is right for our customers and gives us flexibility in new news as we return to these programs across a year. Sometimes they'll be at a national level. If it's not national, it'll be locally reinforced in the marketing windows in between. So we're continuing to learn. We've only been national with McPIC 2 for 5 twice now. And again, the local co ops have been working on their variations of particularly them have picked 2 for 2 or at a value price point. So we're continuing to learn and evolve that. But is there a transaction trade off? Yes, there is. We knew that. We planned for that. And we still believe we have an everyday value proposition. And again, it's not just MIPIK II. I mean, there is local promotional activity in the co ops on an ongoing basis, whether it's a dollar drink promotion, for example, all the way through to the offers we're now offering through the global mobile app. We've had 12,000,000 downloads of that. We've got 8,000,000 registered users on the app. And clearly, the offers and the frequency card on there are driving a lot of the interaction. In terms of quarter 4, clearly, we know that if you like the quarterly cycles we're on. We believe the enhancements to all day breakfast will help reinforce the baseline momentum, as does running better restaurants, as does reinforcing value. The team is certainly working on other activities. There is nothing in particular to share today. But I would say that we are playing the long game here. So we're not going to manage the business. We're mindful of the quarters, but we're not going to manage it by quarter. We believe we're getting the right fundamental foundations and platforms in place to reinforce the long term success and profitability of McDonald's. And we have consciously expanded our business plans and our activity away from just a product and price led program, which we had been somewhat drawn to in the past. And we believe that the brand enhancing long term perspective, as long as we're winning the short term market share fight is a good combination for us. Next question is from Joe Buckley of Bank of America Merrill Lynch. Thank you. You mentioned Pokemon GO in Japan. Just curious if there are opportunities besides Japan for Pokemon GO? And then I wanted to ask as you lap last summer's wage increases in the U. S, what do you expect to see in wage inflation in the U. S. Kind of in the back half of the year versus what you've seen the first half of the year? Hi, Joe. I'll take the first one because I'm more knowledgeable about Pokemon than I am about the detailed financials. I'll let Kevin deal with that one. So, our relationship with Niantic really has been driven by our Japanese team. It's a global phenomenon clearly. They're working really hard to roll it out across a whole bunch of different markets around and leadership partners around the world. So nothing else to say, no other speculation to add to it, but we're certainly enjoying what it's doing for our business in Japan at the moment. Regarding kind of labor costs, minimum wage, etcetera, you should expect to see kind of not a big bang like you would have seen in 2015 related to one significant effort, if you will, to raise wages at one time. We certainly are mindful of wage increases in various states throughout the country. One of the pluses that we've seen from the efforts that we've taken, as Steve mentioned, both on the wage side as well as the benefit side is that our crude turnover is down year over year. So we've seen some benefits on the labor availability side, if you will, from the actions we've taken. I think it's fair to say labor pressures will likely continue in a lot of countries around the world, including the U. S, but there aren't any specific plans to have a one point in time where we significantly increase. Next question is from Jason West of Credit Suisse. Yes, thanks. Just a technical question and then a bigger picture question. Just on the pricing that you guys quote, the 3% in the U. S, is that net of the discount that you're offering on MYPC2, like say when it's a 2 for 5 for things like Big Macs or is that just the gross pricing? And then just bigger picture, I guess, as you guys step back and look at the impact that MYPC2 has had on the business and all day breakfast, do you get a feeling that there's an initial trial there that's difficult to sustain, which is somewhat the way it sounds on the outside a little bit? Or are you not really seeing that sort of dynamic playing out as much? Thanks. I'll take the second one, Jason. So Mick picked 2 and All Day Breakfast, they have both followed pretty much the curve that we would have ongoing run rate. I want to say we're pretty happy with how both of those have played ongoing run rate. I would say we're pretty happy with how both of those have played out and they have continued into the out quarters if you like. I mean from the All Day Breakfast launch in October of 2015, we're now almost lapping that time. And it's continuing to give us strong incremental sales, strong incremental margin and cash flows and incremental visits as well. So, the same with McPhig two. So I think these are now platforms that are just going to continue to work hard for us at that kind of steady state ongoing level. And Jason, that 3% is a gross price increase. Next question is from Jeff Bernstein of Barclays. Just two follow ups to what was mentioned earlier. 1, Steve, you mentioned the market share gains and it seems like it's stabilized in the U. S. Relative to last quarter. Just wondering whether you could talk a little bit about the largest international markets, whether you'd say based on whether you're looking at food at home or the informal eating out market, just however you look at it, trying to see whether there's any big winners or losers in your largest international markets? And then my other follow-up was just for Kevin, you mentioned the return of cash and I think we're all well versed in the bump in leverage and the big bump in the repo that you've done over the last 12 months. But with this 3 year period being close to done and as we look out over the next presumably 3 year period, is there any reason at least directionally to assume any meaningful change in that $30,000,000,000 whether up or down or maybe what metrics would lead you to make that decision? Thanks. Hi, Jeff. So when we look at market share, certainly across our major markets, we look at both IEO, but also then QSR. And depending on your competitive set, they have different merits depending on which country you're looking at. But if I was to say IEO, we have made really strong gains or strong gains, I'd say, across in UK, Australia, China and Canada. And we feel good about our position within the broader marketplace. Even more encouraging is in the nearing competition, the QSR market share, where we have made some substantial gains in UK, Australia, China and Canada. And I think, as part of the turnaround, we have really focused on making sure that we win in the most immediate competitive set we are. This is part of the modern Progressive Burger Company ambition, which is make sure we're strong and dominant in our immediate sector. And then we start to take IEO share as we broaden experience. I believe the experience of the future will have us fight increasingly into an increasingly strong position in the broader IEO. In the immediate term, it was getting the basics of the business right, so we win QSR market share. And I've shared over a number of these calls and meetings we've had about some of the customer experience is noticeably different than it was 3 to 4 years ago, both from the designs of the restaurant, the introduction of technology, the substantially enhanced front of house hospitality that we now offer, all the way through to providing more options to customize your food by self order kiosks, for example, in the dining areas. And now we're extending that to table service. So this is if a customer was to walk in now versus 2, 3, 4 years ago, it would be a noticeably different experience. And I believe that is both winning QSR share and IDO share. And those are the sorts of ideas that with the new structure we have, we're looking to move and are moving very, very quickly between markets. And then Jeff related to your cash return question, as you indicate, obviously over the last year or so, we've had an adjustment of our capital structure by taking out some more leverage and returning that via share buyback to shareholders. Going forward, we haven't stated any target, but our certainly our overall capital allocation philosophy hasn't changed, which means you should expect that over the long term, we would return all free cash flow to shareholders, that's a combination of dividends and share repurchase, while still maintaining kind of that BBB plus credit rating, which is where we are right now. Next question is from Jeff Farmer of Wells Fargo. Thank you. Just a question on your longer term operating income margin opportunity. So it looks like your guidance points to franchise restaurant ownership moving to I think it's almost 95% by the end of 2018. I think you stand at roughly 83% today. You've seen dramatic margin expansion in the past following some of these aggressive refranchising efforts going back and looking at the model looks like in 'seven and 'eight you did see some really, really impressive margin expansion again I think after you developmentally licensed and refranchised more than a couple of 1,000 restaurants. So with that precedent, what operating income margin level and again, I realize you're not going to give me a specific number or even a tight range, but when you guys move to a 95% franchise mix, how different do you think the operating income margin of McDonald's will look in 2018 as compared to what it looks like today? Yes, Jeff, it's Kevin. Couple of things. 1, I believe we've said to be 93% by the end of '18 with 95% longer term. So just want to make sure everyone gets that. As you know, the way it works when we refranchise will pick up franchise margin dollars. Effectively, we're swapping company operated margin dollars for franchise margin dollars and certainly then spending less G and A and capital to generate those franchise margin dollars. So as you state, that was certainly accretive to operating margin back historically when we've done that. We would expect similar that we would also be able to improve operating margins going forward based on the activity. As you indicate, we're certainly not going to throw a number out there. But generally, one of the main reasons we're doing that is because of the stability of both the cash flows and the operating performance going forward. So we've got a stable revenue stream that will collect and a predictable model that allows us to manage the business pretty effectively. Certainly, on a free cash flow basis, you should expect that it would be accretive because as I said, we're generating more income, more cash flow and not spending as much capital. I would say just as a broader philosophy on the fundamentals of not just the turnaround plan, but our growth strategy beyond, Jeff, is that with the ownership strategy, this is around us being able to focus our time and our attention and our resource on the areas in the markets that make the largest contribution. So and also our talent. So we're going to place our talent in the areas that drive growth. We can place our capital in the markets where the returns are stronger. And at the same time, liberate one of the fundamental DNAs of McDonald's, which is to have 100 plus of our 120 markets owned and operated by franchisees and development licensees because they are close to the customer and closer to their local culture. So we believe we're going to get that balance right, which will certainly enhance our efficiency and effectiveness, not just as an operating business and drive long term growth, but also our financial returns as well. The last question is from John Ivankoe of JPMorgan. Hi, thank you very much. Maybe a little bit of a follow-up or maybe good timing from the previous question. It does look like you guys are choosing developmental licensing, perhaps even over conventional franchising as we kind of read what we read in the press and how you've discussed the business. So with that being said, there were a few different The first The first G and A cut announced, I think, was $300,000,000 and then it was $200,000,000 Is your mindset that there could be another type of G and A tranche to come out, perhaps as significant as the first two that you've discussed? And secondly, and again, as we start to focus on free cash flow, especially as we get into 2018, are you prepared to help us think about what the long term CapEx of kind of a post refranchise McDonald's would look like? Yes, John. Let me talk about the whole DL versus developmental licensee versus conventional. So as we talked about last year, we effectively took a restaurant by restaurant and market by market approach to look at kind of the best way of franchising in our mind. And what you'll see is in generally in our major significant mature markets that the U. S. And the international lead markets, you'll see more of the conventional franchising, which is what we do in the U. S. So you would have seen some more conventional franchising certainly in this quarter, and there will likely be further franchising like that. In countries, certainly in certain parts of Asia and Europe, where either it's a little bit more volatile from an economic and political standpoint and or a partner can help us accelerate growth and grow faster than maybe we're willing to put in capital right now. Those situations you will likely see us using that developmental license model that we've used successfully for many years in a lot of the countries. All of the transactions that we have planned right now were taken into consideration when we came up with that $500,000,000 of G and A reduction. So the $500,000,000 contemplated all of the transactions that we have kind of in our plans at this point. So none of those activities will in and of themselves drive further G and A reductions. That doesn't mean that we're not going to continue to look for efficiencies and run the business in a disciplined manner. But you shouldn't expect that because we completed a franchising transaction or anything along those lines that, that would trigger automatically a further or additional G and A cut in addition to the $500,000,000 We're near the top of the hour, so I'll turn it over to Steve, who has a few closing comments. Thanks, Chris. And again, thanks, everyone, for joining us this morning. I want to reemphasize our focus on putting the customer at the center of everything we're doing, from the food we cook to the conveniences we offer to the service we provide. That mindset ignited our turnaround last year and continues to guide our decision making. We're moving in the right direction with 4 quarters of growth, with growth across all four segments in each quarter. But there is more work to do, and that's precisely why we remain committed to executing our turnaround plan through the end of the year. I'm encouraged by the way we're creating a better McDonald's and excited about the opportunities ahead. And I'm confident we will continue to aggressively take actions to strengthen our business and reassert our leadership position as the modern Progressive Burger Company in the global IEO industry. Thanks to all of you and have a great day.