Earnings Call: Q3 2015

Oct 22, 2015

Hello, and welcome to McDonald's October 22nd, 2015 investors' 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 questions by pressing star one on their touch-tone phones. I would now like to turn the conference over to Mr. Chris Kempczinski, Vice President, Investor Relations for McDonald's Corporation. Mr. Kempczinski, 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-K 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. Last month, we provided unaudited summary financial information in historical segment data consistent with the company's new structure. The updated annual information was provided for 2010 through 2014. Quarterly details were also provided for 2014 through June 2015. Specific questions related to this summary financial information in historical segment data will be addressed by the Investor Relations team through a frequently asked questions document that will be distributed on October 30th. Given the very limited number of questions received, we are no longer planning to host a separate conference call to discuss this information. Now I'd like to turn it over to Steve. Thank you, Chris. Good morning, everyone. It's been eight months since I stepped into the position of CEO, and since then, we've made meaningful progress to fuel our turnaround and begin repositioning McDonald's as a modern progressive burger company. Our turnaround is operationally led, is grounded in running great restaurants, which is the first step to enhancing the customer experience. People have more choices than ever about where to dine. We want to give them more reasons to dine at McDonald's by recommitting to hot, fresh food, fast, friendly service, a contemporary restaurant experience, all at the value of McDonald's. Our number one priority is to return critical markets to sustainable revenue and income growth. To do so, we must be customer-centric in our planning and our decision-making. We must have the best talent in the most critical positions, Our system must be aligned around the actions we're taking to consistently run great restaurants. We must execute initiatives that ultimately enhance our appeal in the areas that matter most to consumers. To great-tasting, high-quality food, convenience, and value. While we're still in the early phases, our turnaround plan is working. Customers are beginning to respond to the actions we're taking, and this progress is reflected in our third quarter results. As we've discussed previously, the U.S. and international lead market segments generate over 80% of global operating income. For third quarter, five of our six most significant markets drove positive comparable sales growth, with France's comparable sales being marginally negative. We also grew consolidated margins, operating income, and earnings per share on a constant currency basis. These results do in part reflect the benefits from comparisons to the 2014 China supplier issue and the prior year's increase in tax reserves. However, operating results for the quarter were still up modestly when you exclude these items and take into consideration the significant currency headwinds. Looking ahead, as we begin fourth quarter, global comparable sales are expected to be positive in all segments. Every market plays a significant role in our global turnaround. Some markets like Canada, Australia, and the U.K. are further along. They continue to deliver strong, sustained growth. That said, all markets have adjusted how they think and how they operate to ensure their actions and decisions are grounded in satisfying customers in their local markets today and for the long term. The U.S. business remains front and center, given its fundamental importance to overall consolidated results. Its shift to positive comparable sales in the third quarter, the first quarterly comparable sales increase in the U.S. in two years, is a tangible sign of progress and reflects the initial steps we've taken in areas that matter most to our customers: great-tasting, high-quality food, convenience, and value. In the area of food, we've made progress toward enhancing the taste of our products and improving consumer perceptions of quality. Our core classics define the McDonald's brand. That's why we've enhanced operational procedures. We're toasting buns longer, changing how we sear and grill burger patties to bring out the best in our menu and serve hotter, juicier sandwiches to our customers. We transitioned back to the original recipe for our Egg McMuffin, using butter instead of margarine to deliver an even tastier sandwich. Customers appreciated the change, We saw a double-digit increase in the number of Egg McMuffins sold immediately following the rollout. In August, we introduced the Buttermilk Chicken Sandwich made with 100% chicken breast meat and real buttermilk. This new product complements our ongoing core menu emphasis, Customers have responded favorably. Initial results have exceeded the high end of our expectations. At the start of the fourth quarter, we rolled out all-day breakfast across the U.S. Customers have been asking for this for years, We challenged ourselves to move past legacy barriers to deliver, We did. Our ability to move from one market in May to all 14,000 restaurants speaks to the commitment and alignment of franchisees and our entire system of being customer-led in our decisions and our actions. We've also taken action to enhance our convenience and the overall customer experience. Early this year, we implemented operational procedures designed to improve order accuracy, remove some items from the menu, and simplified the drive-thru menu boards. Our goal is net simplification. We've established screens to evaluate operational complexity versus the expected impact on the customer and the business. Ultimately, we want to focus our efforts on fewer, bigger decisions that generate bigger rewards. We also took a first step toward enhancing the customer experience digitally with the deployment of the mobile application. To date, there have been over 2 million downloads of the app and 1.5 million offers redeemed. We'll begin national advertising later this month. From a value standpoint, we're aligning with franchisees on the need for national value. The summer $2.50 double cheeseburger and small fry promotion was a first step, and we remain committed with operators in working towards restoring a more permanent national value platform in the future. Customers are noticing the differences. Our customer feedback system, which now tracks approximately 10 million customer touchpoints each year, reflects consistent improvement in customer feedback scores. We're seeing this across all key categories measured, with the most significant improvements seen in the areas we focused on, namely food quality, friendly and fast service, and order accuracy. Let's now turn to the international lead market segment, starting with Australia. Third quarter marks four consecutive quarters of comparable sales and guest counts in Australia. The market's turnaround began last year as customers responded to the combined initiatives that collectively improved their overall experience. This included a renewed focus on improving operations, the added convenience of offering barista crafted McCafé beverages through the drive-thru, and a stronger value platform with the relaunch of the Loose Change Menu. This year, we've been giving customers even more reasons to visit our restaurants with the rollout of a new value menu at breakfast and through effective marketing and promotion efforts, including Monopoly. National advertising of the Experience of the Future, which includes self-order kiosks, digital menu boards, table service, and burger customization through Create Your Taste began July 1. While early, we're encouraged with the initial results and the positive buzz we've created in the market. We're fueling that energy as we add chicken and salad offerings to the Create Your Taste platform later this month. Let's now turn to Germany, a market showing early signs of a turnaround. Customers are responding to the steps we've taken to enhance the appeal of premium products by emphasizing the provenance and sustainability of ingredients. The new Veggie Clubhouse sandwich in August, along with a re-hit of a proven customer favorite, Grillküche, contributed to positive comparable sales in the third quarter. This month's launch of the McB, a premium burger that's made with 100% organic beef from farms in Germany and Austria, reinforces food quality messages to our customers. In France, we continue to maintain share despite the challenging macro environment and an informal eating out market experiencing its fourth consecutive year of decline. Customers appreciate the actions we've taken to strengthen value at every price tier. This includes introducing McFirst earlier this year, a three-item meal combination for under €5, and extending P'tits Plaisirs across more product categories and day parts. In addition, strong marketing campaigns, including the Grand Premium and the American Summer Food events, have successfully driven premium sandwich sales. We're also elevating the service experience by providing customers with new ways to order and be served in our restaurants. Self-order kiosks are now in more than 90% of French restaurants, and we're now offering table service in more than half. A strong performance continues in the U.K. and Canada. These two markets' ability to sustain prolonged growth is a direct result of their robust planning process, which directly links actions to specific consumer needs. Strong quality campaigns in both markets are boosting customer perceptions of core classics and successful promotions. A new menu news, like the Chicken Legend in the U.K. and the new Mighty Angus in Canada, have driven growth in premium products. Since Russia and China are two high-growth markets of particular interest, let's spend a moment on them. Both markets posted positive comparable sales for the quarter as they recover from last year's well-documented issues. The team's execution against strong recovery plans with a comprehensive focus around great tasting, high quality food, convenience, and value, has successfully restored brand trust scores in both markets. We face near term headwinds given an economic slowdown in China and continued volatility in Russia. In addition to the operational elements of the turnaround plan each market is executing around the globe, we continue a regular cadence of meaningful moves consistent with a leadership brand. We believe these moves will ultimately improve consumer perceptions of our brand. In September, we announced our plans in the U.S. to transition to cage-free eggs over the next 10 years. More recently, we collaborated with a number of global brand leaders to raise awareness for the plight of refugees and the need to support the United Nations World Food Programme. Earlier this week, we announced our participation in the White House Climate Pledge. Turning around our business requires a relentless focus on what consumers want and expect from McDonald's. Our responsibility is to give them reasons to feel good about visiting time and again. Our opportunity is to differentiate McDonald's by delivering what consumers want today, while laying the foundation for what they'll expect tomorrow. Our commitment is to deliver on both. I am pleased with the progress we've made and remain confident in the ability of our talented system of franchisees, employees, and suppliers to revitalize our connection with customers as we execute our turnaround plan into 2016. Thank you, and I'll now hand it over to Kevin. Thanks, Steve, and hello, everyone. Today's earnings release marks our first quarterly reporting under the new segment structure. I want to spend a few minutes outlining the new segments as a lead-in to my discussion of the factors that impacted the company's third quarter performance. Effective July 1st, we completed an important first step in the company's global turnaround plan, the reorganization of our business from a geographically focused structure to segments that combine markets with similar characteristics and opportunities for growth. Our reporting segments now include the U.S., our largest individual market, accounting for over 40% of consolidated operating income. The international lead segment, which includes our established markets of Australia, Canada, France, Germany, and the U.K., that collectively account for about 40% of the company's operating income. The high-growth segment, which includes markets with relatively higher restaurant expansion and franchising potential, including China, Italy, Poland, Russia, South Korea, Spain, Switzerland, and the Netherlands. Together, these markets account for about 10% of the company's operating income. The foundational and corporate segment that encompasses the remaining markets, each of which has the potential to operate under a largely franchised model. These markets are combined with corporate activities for reporting purposes. From a business operations standpoint, this new structure brings similar markets together to leverage their collective insights and expertise to deliver a better overall experience for our customers. From a reporting standpoint, the new structure provides greater visibility into the key markets driving the vast majority of the company's underlying financial performance. Let's take a look at the major drivers of our third quarter results. Earnings per share for the quarter increased $0.31 to $1.40. In constant currencies, third quarter earnings per share increased $0.48. These results benefited from the comparison against prior year results, which included an increase in our tax reserves and the China supplier issue. These items negatively impacted third quarter 2014 earnings per share by $0.41. Excluding the impact of the unusual prior year items, third quarter earnings per share would have increased $0.07 or 5% in constant currencies. Looking beyond the unusual prior year items, third quarter global comparable sales were up 4%, reflecting positive comparable sales across all segments and positive guest counts in all segments except the U.S. The international lead market segment was the largest contributor to the company's third quarter comparable sales performance, posting an increase of 4.6%, led by strong comparable sales and guest counts in Australia, the U.K., and Canada. Germany's results were uneven but encouraging as the market posted positive comparable sales for the second consecutive quarter. In France, comparable sales were marginally negative as the market's macroeconomic environment and informal eating out industry remain challenged. The high-growth markets generated strong comparable sales of 8.9% for the quarter, reflecting sales recovery in both China and Russia. For perspective, China's comparable sales were up 26.8% for the quarter. The U.S. reported a comparable sales increase of 0.9% for the quarter, supported by the introduction of the new Buttermilk Crispy Chicken Sandwich and a return to the classic recipe for our Egg McMuffin. Comparable sales performance improved toward the latter part of the quarter. With more than 80% of our global restaurants franchised, the largest driver of operating income continues to be our franchise margins, which totaled $1.9 billion, a 7% increase in constant currencies for the quarter. The franchise margin % increased 20 basis points to 82.2%, driven by the positive comparable sales generated by the international segments. Global company-operated margin dollars increased 9% in constant currencies to $675 million for the quarter, while the company-operated margin % increased 10 basis points to 15.8%. China's sales recovery accounted for the majority of the margin improvement for the quarter, partly offset by ongoing labor costs in the U.S. The incremental labor costs in the U.S. related primarily to our decision to invest in our people by raising wages and providing paid time off for employees at our company-operated restaurants, as well as providing educational assistance to all eligible U.S. restaurant employees effective July 1st. These costs, along with wage increases mandated by several states during the first half of the year, impacted third quarter U.S. margins by about 400 basis points. For the quarter, U.S. commodity costs rose about 1%, primarily due to higher beef prices. Our U.S. third-quarter pricing year-over-year was up about 2%, which remains below food away from home inflation of around 3%. The current projected increase in food away from home inflation for the full year remains at 2%-3%. Commodity costs for the international lead market segment were up about a half a % in the quarter. While price increases varied by market, year-over-year increases for these markets averaged 1%-2%. Moving down the P&L, G&A for the third quarter ended at $584 million, up 9% in constant currencies, due entirely to higher incentive-based compensation accruals versus the prior year. Despite this unfavorable quarterly comparison, we are making progress against our previously announced savings target. Looking beyond the third quarter, currency translation is expected to be a headwind for the final quarter of 2015, as the U.S. dollar remains strong against nearly all of the world's other major currencies. Based on current exchange rates, we expect currency translation to negatively impact fourth quarter earnings per share by $0.08-$0.10. As usual, take this as directional guidance only because rates will change as we move throughout the quarter. Before I conclude my remarks, I want to make a comment about our financial outlook for the full year 2015. As you know, each quarter we typically provide details around our expectations for several key components influencing our financial results in an outlook section. In light of our upcoming November investor meeting, we did not provide an update on our financial outlook in either today's prepared remarks or as part of today's 8-K filing. An update on these components will be provided in conjunction with our investor meeting in a few weeks. In closing, the transition in both our operating and reporting structure represents a new era for McDonald's as we move toward becoming a more focused and efficient organization. While we are less than six months into executing our turnaround plan, our third-quarter results demonstrate early signs of progress with both our top and bottom-line results. We are encouraged by this progress but recognize that there is much more work to be done. Now I'll turn it over to Chris to begin our Q&A. Thanks, Kevin. We will now open the call for analyst and investor questions. Please press star one if you have a question and the pound key to remove yourself from the queue. To give as many people as possible the opportunity to ask questions, please limit yourself to one question. We'll come back to you for follow-up questions as time allows. The first question is from Jill Buckley of Bank of America Merrill Lynch. Good morning. Thank you. I'd like to ask a question about the U.S. All Day Breakfast launch. I don't know if you can talk about the experience so far sales-wise and whether you can talk about the sales or not, maybe talk about some of the operational issues, challenges, and what you've learned, kind of two weeks into the national launch. Yeah. Hi, Jill. Steve here. We launched officially nationwide on October the 6th, I would say the enthusiasm levels from customers and from our teams in the restaurants are high. It's been a successful rollout. The owner-operators have really embraced this. I mean, to go from a test market in May to a nationwide rollout by October is a significant validation of the alignment of the operators behind this. When they approved it, they approved it with a 98%-plus approval rating around the country. There's a lot of unity and alignment behind it. From an operational perspective, having spent a fair bit of time in the markets the last two or three weeks, the operators have been really, again, enthused at the fact that this has been a lot smoother from an operational perspective than perhaps people had feared. The reality is the ingredients, the equipment, the training, the procedures is already very well established in the restaurants. By launching All Day Breakfast, whilst at the same time removing some of the more complex, lower sales items at the same time, we have a net simplification in the restaurants, and we're driving footfall. It's early days to give too much read on sales. We're certainly encouraged, and more importantly, the owner-operators are very encouraged about how we've kicked off. Next question's from Andy Barish of Jefferies. Hey, guys. Just on the U.S. margin side of the story, is that 400 basis points going to kind of continue on the labor line? Just to try to get a sense of that investment over the next year or so. Hey, Andy. As we announced in April, we made this decision to invest in our people and raise wages, provide paid time off. At that time, we indicated that we expected the impact of this, as well as other state-mandated increases, to be about 200 basis points on our margins for the full year this year. Since obviously the large majority of that impact happens in the second half of the year, that implied that the impact on the second half would be substantially more than 200 basis points. The impact's relatively in line with our expectations. The payback from the investment will take a little time in terms of lowering turnover, having stronger employees deliver a better customer experience, ultimately driving top-line sales. Moving forward, it'll obviously continue to impact margin comparisons for the next three quarters until we lap the July 1. As you know, margins are also significantly impacted by our top line. If we're able to generate higher comps, that would certainly mitigate some of that impact. Andy, just to add onto that, clearly there is the cost element, we try to be very transparent about that. Ultimately, the ambition from the move we've made is to just drive the experience in the restaurants. We see this as a meaningful move for us to be able to attract and retain the best talent in the marketplace. If we can drive some efficiencies by reducing turnover, which a motivated, committed workforce tends to reduce the turnover levels, we may be able to get some benefit that comes back from that. I just wanted to broaden out the conversation because, yes, there's a cost, frankly, this is part of the bigger picture of running better restaurants, motivated teams, and committed crew. Next question's from Will Slabaugh of Stephens. Yeah. Thanks, guys. This is actually Billy on for Will. Just wondering if now that we have a new reporting structure, if you could just kind of walk us through some of the cadence and I guess distribution of the refranchising initiatives, and maybe some of the new store openings across each segment. Yeah. You can see the actual new store openings within each segment in the back of the earnings release. As far as moving forward and how kind of capital and refranchising and new openings may happen in the future, we'll talk about that more in the upcoming investor meeting in November. Next question is from David Palmer of RBC. Thanks. Looking back at the Summer Loving value menu, could you give comment as to where that did work, where it didn't, what are some of the lessons of that? Separately, the simplification of the menu in the U.S., that seems to be something that's more to come. Where do you stand on that, and where do you see that going forward? Thanks. Yeah. Hi, David. From the value program across the summer, I think on the call last quarter, acknowledged that it got off to a little bit of a bumpy start. As we launched it was in a way bumping into some of the local value initiatives that each of the regions were driving. Then we reset, and the performance of the $2.50 double cheese and small fry improved across the summer as the focus got clearer and our execution of restaurants got sharper. It filled a gap for us. We do have a desire, along with our owner operators, of a more sustained value platform, which we'll be looking to introduce through 2016. But it certainly played a meaningful role across the summer at helping to drive the footfall. In terms of simplification, again, simplification and the way we're looking at this, and the way the team in the U.S. are looking at it is, menu is part of it, but there's a lot more we can do to help simplify the restaurants on a day-to-day basis, both from a customer perspective, but also from our managers and our crew. There's operational simplification, there's training simplification, there's things we can do with merchandising to make it easier for customers to navigate the restaurant, and also with packaging as well. The team, there are sub-teams that are addressing each of these areas of opportunity. Yes, menu is one piece, but the whole operational complexity, the training and merchandising, packaging is another. It's the sum of those parts is what managers are beginning to recognize that we are working hard to make their life a little easier so they can just focus on what they love doing, which is just running the restaurant and serving customers. Next question's from Matthew DiFrisco of Guggenheim. Thank you. Question is, you guys cite that the Buttermilk Chicken item, which I think most of us perceive to be somewhat premium, was a successful driver and welcomed by the American consumer and a part of the recovery and the comp going positive. A lot of the attention's been mentioned about sort of the value consumer and the value coming down, and there's some votes coming now on the new value menu in the weeks ahead. I'm just curious, has this experience maybe emboldened you to think there is, and the new product innovation might be a little bit more skewing towards the premium side? How should we look at where the easiest opportunity is to recover the consumer that might be, in the near term, lapsed, and you can get back quicker? What would be the thing of the marketing they would respond to the most of? Do you think it'd be premium or value? Yeah. Thanks for the question. Again, the way we look at this is how can we deliver the best value across all tiers on the menu. You're absolutely right, with the Buttermilk Chicken, that was premium product, premium quality, and a premium price that goes with it. Because of the taste, because of the quality, and the execution of restaurants, their customers really did respond well. As I said earlier, it outperformed at the high end of our expectations. I think you'll see as we build our calendars out across any of our markets, but certainly here in the U.S., we want to provide the best value at each level. Great value core products, great value premium. Probably one of the areas where we're still a little weaker is at that more entry level, value level. That's what you've been hearing about and that's what we're working with the operators on, and the operators are aligning behind what they believe will be strong platform as we enter 2016 to help drive the footfall. We know that the top line going into positive territory was encouraging for us. There's no doubt about that. Our ultimate measure of success will be serving more customers more often, and that's getting the guest count moving as well. Next question's from Jake Bartlett of SunTrust. Thanks for taking the question. Just to gauge the core, the turnaround in the U.S., aside from the breakfast all-day, would you think that the fourth quarter in the U.S. would be positive even without the breakfast all-day introduction? It's a difficult one to read, that. What I would say is what has given me the most satisfaction from the way that the team have galvanized themselves in the U.S. is, actually, we're running better restaurants than we were a year ago. That is ultimately what customers will respond to. Then as we innovate around a menu and have promotional activity and have fun with that will increment the sales. Running better restaurants day in, day out, and customers are telling us through this very material feedback loop we have now, that they're noting the changes in the areas that matter most to them, which is speed, friendliness, and accuracy. Through the quarter, it's probably fair to say we ended the quarter just a little stronger than we started. I wouldn't read too much into that. Turnarounds are about momentum. We want to establish momentum over the short, medium, and long term. We've put one marker out there and, as we start to build quarter upon quarter, you'll be able to read the more underlying momentum in the business. Running better restaurants is a great start. Sharpening up our merchandising, simplifying the drive-thru operation, underpins everything else we're doing. I feel good about that. Next question's from Sara Senatore at Bernstein. Thank you. I wanted to ask about some of the high growth markets. Obviously very strong comps out of China and sounds like Russia also. I guess, couple of questions. One is, you did mention that some near-term headwinds from volatility, or slowdown in the economy, certainly that wouldn't have appeared to be the case in the quarter. I just wanted to ask about that comment. Also, the margins there, again, on such high comps, I might have expected even more margin expansion. Can you just talk about, is that your emphasis on value in that market? Clearly, again, with such strong comps, the right trade-off to make, but is that what we're seeing there? I guess, last piece on that segment is, I think you're targeting more of a franchise mix, is it safe to assume that most of the refranchising that you've laid out will come in China and Russia at a disproportionate amount? Thanks. Okay. I think probably both Kevin and I will have a go at that one, Sara. There's a fair bit in there. China clearly took a hit third quarter last year. We expected a return to growth, clearly, and we're pleased that we did. I've got to say, I'm very proud of the team in China because they were in a very difficult situation a year ago, and they set up basically a two-pronged approach to recover the business momentum. One was around trading hard, and particularly trading hard on value. The second one was restoring brand trust. Actually in that market now, our trust metrics are higher than they were prior to the supplier incident a year ago. I think that kind of validates the focus they put on there. As we look forward, there are probably four elements that the team are working on across the next couple of quarters. Continuing on brand trust Consistent everyday value at the entry and mid-tier levels. They've got a big and exciting play around convenience, and particularly around digital activation and delivery. Those are two drivers that aren't unique to China but are very material to the consumer in China. Digital activation, working with some of the main tech partners in China. We've got some great relationships there, and a very strong delivery business. The fourth one is just around consumer excitement, just having fun with products and the experience in the restaurant. I don't want anyone to think that just because we were down last year, you would automatically bounce back. You've got to work hard for it. The team have worked for it. Net-net, if you look at the two-year comp, we were slightly up across the two-year period, across that quarter, which I think is a credit to the team. Let me touch on margins and franchising. Related to margins in that group, couple of things. One, certainly China's margins recovered this quarter versus last year as a result of their sales recovery. Russia has currency pressure. We import a chunk of our food and paper in Russia, both in terms of dollar and euro. There's still pressure on Russia's margins because of those imported food and paper costs. That's still putting pressure on the margins within the high-growth segment. Related to franchising, I think we've said that most of our franchising opportunity certainly is probably within Asia. China certainly would be a part of that. We'll update a little bit more of our detailed franchising plans as we get to the investor meeting in November. I think it's safe to say that that high-growth segment would certainly have franchising activity going forward. Next question's from Karen Holthouse at Goldman Sachs. Hi. Thank you for taking the question. I know when we originally started talking about some of the wage increases at your stores, my understanding was they were going to be phased in towards $10 over a period of years. If that's correct, once we get to sort of the full rollout of the 200 basis points, how to think about quantifying the next leg of that? Also on the franchise side of the system, what sort of pressure might they be seeing on their margins right now from just overall wage pressures in the environment? Is it another way to look at that, just general wage inflation rates? Yeah, Karen. The plan was never to phase in these increases. We did an increase across the board in July, really impacting all the restaurants. Our average rate right now in our company-operated restaurants is nearly $10 right now, I wouldn't see a significant additional phasing in above and beyond where we are right now. Certainly, as states mandate changes, we may have to adjust to some of those, there isn't another wave in our plans to go and hit all restaurants again. Next question's from Nicole Miller Regan at Piper Jaffray. Thank you. I want to understand a little bit more of where you're taking share from, I'm not sure these are the buckets you would define it, but maybe you could adjust accordingly. By an order of magnitude, do you think that you are and can continue to pick up share from C stores, or is it other legacy large QSR players, or is it from consumers eating at home? Thank you. This is a U.S. question, I'm assuming, Nicole? Yes. I'll answer it on that basis. Thank you. I think our immediate term is to win back share from the nearer term competition. That's what we're focused on. As we build out our Experience of the Future, I think that'll make us more attractive to a broader set of customers. At the moment, I'd say nearer term, traditional competition is the market share we're fighting at the moment. Clearly, we're playing to our strengths here. Breakfast has always been a historic strength, and we continue to do very well at breakfast during the breakfast day part, but now into other day parts as well. Just as an additional perspective, for the third quarter, our comp gap was a negative 3.2%, we still have room certainly to increase that. That's substantially down from Q2 and Q1. That's QSR sandwich category that it's against. We certainly have opportunity, and we have been seeing a few recent weeks, kind of the opposite, where we've been out-comping some of that same competition. Next question's from Brian Bittner of Oppenheimer. Thank you. Tom, the U.S. segment operating income was still down a little bit even though comps turned positive, that's obviously because of all the investments you're making. As you look out towards the next 6 to 12 months, given the way you're thinking about costs, what type of same-store sales growth do we need to see some positive operating income growth for that overall segment? How are you thinking about that? Yeah, Brian. I had a little difficulty hearing, but I think you're asking about the U.S. comp and what we would need potentially to maintain or grow margin there. We obviously talked about the labor costs that are impacting the U.S. We've said in a normal inflationary environment, we generally need a 2%-3% comp in the U.S. to maintain margins. With these additional labor costs, certainly the comp needed to maintain margins in the near term would be higher than that. Commodities right now aren't a big pressure on us. Commodities really aren't the concern. It's more of the comp needed to overcome these near-term labor costs. Next question's from Karen Short of Deutsche Bank. Hi. Thanks for taking my question. Congratulations on a good quarter. Just a question on all-day breakfast. I guess on any early read in terms of what your preliminary estimates might be on the comp benefit from the rollout. I guess just maybe any early read on what kind of customer you're getting buying breakfast. Is it a new customer? Is it a cannibalizing sale? Any color there would be great. I really don't want to give too much guidance yet, Karen. Not to be evasive, just when you're first couple of weeks in. We've got a lot of media behind it, I don't want to give a wrong read. We're starting higher, as you would expect out the box, than what we would expect our steady run rate to be when things settle down. We see it being incremental, profitable business that is driving existing customers in more often and attracting new customers. The anecdotals I get as I move around the country and get into the restaurants is, if you're in a student town, you're seeing a lot of activity into the evenings and the overnights around breakfast items that it's cultish amongst the students. You can go into a restaurant mid-afternoon and see a more mature group of people sitting there who can now enjoy the fact they can have their Egg McMuffin mid-afternoon and aren't having to sort of clock-watch and try and make the 10:30 A.M. deadline. It just makes life easier for customers. They don't have to look at the watch and manage too hard their time. Broad appeal, a strong start from an operational perspective, from an execution perspective, and I think the team has done a great job from the marketing launch and just having some fun with it. I mean, more than anything else, it's fun. Customers are enjoying it, and so are teams in our restaurants. Next question's from Keith Siegner of UBS. Thank you. Congratulations. As this momentum in the U.S. hopefully builds off all of this stuff from ops and product value, digital messaging, all this, how do you feel about the status of the U.S. asset base and the opportunity maybe to kind of re-image into this momentum and even further bolster it? Thanks. You said the word, Keith. The most important word, I think, in any consumer-facing business or any retail is momentum. Momentum breeds confidence. Confidence breeds, it becomes a virtual cycle of success, if you like. We're just beginning to feel some early signs of that. You can see the confidence flowing through the restaurants and through the teams. Clearly, for a turnaround, you want sustained growth, and we've so far delivered one quarter. This is one data point. The steps that we've taken to get to here are steps that are going to continue to keep supporting our business going forward. One of the opportunities you mentioned, Keith, certainly is, as you know, we're only about 50% re-imaged in the U.S., and so there's certainly opportunity going forward to more modernize that asset base in the U.S. and make sure that we've got the right facilities to bring in the customers that we want. Drawing attachments. Next question's from David Tarantino of Robert W. Baird. Hi, good morning. Steve, I have a question or maybe a clarification on how you're thinking about the improvement you've seen in the U.S. business so far. I guess specifically on the Q3 improvement, as it seems like it got better as the quarter progressed. Do you think that was more about the new product news that you had or the structural improvements you're making in the restaurants with respect to operations? Maybe as part of your answer to that, if you could touch on what the metrics look like on speed of service now that you've simplified the drive-thru menu. Yeah. I think there are a number of ingredients that are beginning to come together. If you remember from the past, the U.S. undertook a fairly significant structural change itself now about a year ago, where we eliminated a layer, liberated a little more entrepreneurial spirit into the region. That takes time to settle down. You can't just hit your stride straight away. I think as the regions and the teams in the regions begin to find their feet, as it were, that helps. I don't want to underestimate just the investments we're making in food quality. The investments that consumers care about, such as the announcement to go to free-range eggs, for example, such as the quality cues that you deliver with a Buttermilk Chicken, I mean, that is getting strong. Underpinning it, and I'll never, ever move away from this, any market that's successful around the world is because they're focusing on the day-to-day operation and just delivering at that moment of truth for the customer. That is what McDonald's is all about. What we're seeing with speed of service, well, actually, we're seeing a greater improvement in the accuracy. Accuracy is probably the strongest metric improvement we're getting, which on the basis that around 70% of the business goes to the drive-thru, clearly accuracy is particularly important. We're beginning to see a few seconds being shaved off average service times as we've simplified the menu and sharpening up the operations. It's early days, and there's a lot more progress we want to make. I've got to say that. Next question is from John Glass of Morgan Stanley. Thanks very much. My question has to do with the new operating segments, particularly outside the United States. On two items. Can you talk about, is this what the cost savings opportunities you're discovering are? It looks like G&A and many of those segments are lower, but maybe you're just picking it up in the corporate. Are you actually finding real opportunities to consolidate some of those under the new structure? From an operating standpoint, giving your first quarter of operating into these different segments, are there examples of where you're operating the restaurants differently because different leadership is looking at these markets differently, or is that too early to really say? All right. I'll start with the cost side, and then I'll let Steve talk about the kind of the leadership and running the markets differently. A couple things going on here. One, you may have seen, and it may have been a little confusing, but we tried to explain one of the things that's gone on is we're moving a little bit from a very decentralized structure to one that centralizes certain non-customer facing functions and activities. Along with that, some costs that historically were managed at a segment level now are being managed or will be managed at a central corporate level. Some of the costs that were reflected last year in the segments are now in corporate. It's about $30 million of those in total of those costs. That doesn't impact consolidated or total G&A. That's more of just a reallocation. At the same time, we've obviously talked about saving real consolidated G&A, and, as I said, we're making progress on that, and we'll give a further update on those activities at the investor meeting in November. John, I'll just talk about, if you like, the operating segments and just the way the leadership teams are thinking. We'll certainly give more flavor to this in our investor meeting. If I was just to take the lead markets as an example, we've got the five major countries that contribute to the lead markets. They are overseen by a team of just three people. Now, these are three very senior, highly talented individuals. The decision-making and the visibility into those five markets is so much clearer because we've removed the layers that tend to just obscure what's going on. If those three leaders can see something work in Australia, our ability to share that with the Canadians, whether the U.K., German, France team, and vice versa, obviously, is far clearer. Speed of decision making, visibility into what's working, visibility into what's not working, and just sharing that knowledge and getting to market quicker with things that work, we're already seeing the benefits of that. I think that's incredibly encouraging because we've always had pockets of excellence. I want fewer pockets of excellence. I want broader-based excellence. I believe this structure will help deliver that. Next question is from Jeff Farmer of Wells Fargo. Thanks. Sorry if I missed the question. I'm actually multitasking myself. Given the importance of a national price point and value platform, as you guys have discussed in the past, can you walk us through the steps it could take to potentially make that happen? I guess what I mean by that is any potential timeline for formulation of a menu, testing of that menu, and then assuming you're happy with the results, potentially how quickly could we see a broad-based national price point and value platform hit the U.S.? Yeah. The processes, I'm sure you're fairly familiar here in the U.S., is somewhat unique compared to other markets around the world, because it's by nature, a more complex and diverse market here in the U.S. We're at the stage now where, driven by insights, we've created a number of potential concepts. Some of those are in test already, but they're certainly all being discussed and being voted on for approvals and discussed by the operators now. The national teams have had real rigor around it and have challenged it and have come up with something we feel is strong, could be strong and compelling, and the operator's discussing that. They'll make the right decision because the most important piece is alignment. We've got great alignment now as a result of all-day breakfast, and that's part of the magic ingredient at McDonald's here in the U.S., is the alignment with the owner-operators. I know they're doing the right thing, working through it, and certainly into next year, there'll be something that we believe will be compelling from a customer perspective. Next question is from Howard Penney at Hedgeye. Hey, thank you so much for taking my question. Steve, you used the phrase net simplification a couple times, I think in your prepared remarks. I was wondering if you could explain that term. I know you have talked about simplification before, but what does net simplification mean, and how much more is there to go? Thanks. I tell you, Howard, thank you for the question because I have strong conviction around simplifying our restaurant operations because I believe the customer is the ultimate beneficiary. When we do talk about doing something like an all-day breakfast, people will scratch their heads and say, "Well, hold on a minute. You talk about simplification, but now you're adding." When I talk about net, I'm saying we've got to take more complexity out through our decision making than we ever put in. That's where my language of net simplification works. If we're not adding any new SKUs into the restaurant for breakfast because all the ingredients are already there. They're in the chillers. They're in the freezers. The equipment's already in place. Yes, there's the operational shift running. There's an operational complexity, but not an ingredient complexity. In the meantime, around the country, the U.S. team has been very rigorous in their analytics on this, in helping provide each and every co-op with a tool that helps them assess operational complexity versus contribution to product mix and margin. There's a final screen, which is around the brand value. That's helped have actual detailed insight and rigor around supporting the co-ops taking items off. On average, I think you knew at the start of the year, we removed around seven items permanently from the menu. There's probably at least another seven, if not more, on average, across the co-ops around the country now, and I know they're continuing on this path. As we offer more abilities to customize and personalize food going forward, that may give us another opportunity to actually take further items off. I hope that makes sense. The trouble with saying simplification is that means whenever you do add anything to a restaurant, people turn around and say, "Hold on a minute, that's going to make it more complex." We're not going to be static. We are going to be energetic. We will innovate. We will have new products. It's fun, and that's what customers want. We've got to make sure that we take more than that out of the restaurant complexity. I hope that makes a little more sense. Next question is from Andrew Charles at Cowen. Thank you. Just on the improved order accuracy in the U.S., how do you plan to sustain this improvement as customization and personalization will become an increasingly important component of the experience, as is the case in Australia? Obviously, digital initiatives can be a big help. Any other factors that we should be thinking about? Thanks. Yeah. I think two-pronged. Again, just from the day-to-day operation with our teams in the field, it's around training. The training that was rolled out across the U.S., which actually was an operator-led initiative initially, was around something called Ask, Tell. It was a way that we reconfigured our own internal procedures at how we take the orders, confirm the orders, and then present the orders. That has had a positive and noticeable benefit in our accuracy. As we go forward, the more of that heavy lifting that we can get technology to do, then the greater our accuracy will become. Whether it's ordering through apps, whether it's ordering through self-order kiosks that we see elsewhere around the world, technology can certainly help us with putting the customer in charge of the ordering process and allowing technology to do that heavy lifting. We can just prepare the food and serve it in a friendly way. Two-prong. We'll never get away from day-to-day training. Secondly, we are working hard on a technology to help support us. We have time for one more question. Next in the queue is Jeffrey Bernstein from Barclays. Great. Thank you very much. Actually, just two follow-ups. One on the All Day Breakfast. I know there's been lots of questions on the topic. I'm just wondering, being that you had it at least in test for a while, whether there's any color in terms of what type of lift you might have seen in test market or maybe what that mix has gone to in that test market. The other question was just on the mention you had of commodity costs. It sounds like beef isn't that onerous anymore, and I think you said the overall basket was only up 1% this past quarter. I'm just wondering what your thoughts are as we look ahead on whether you think qualitatively that would impact McDonald's or maybe the industry as you think about promotions and discounting and your new value platform potentially. Okay. I'll take the first one, Jeff. I'm a fairly resilient guy. I won't get worn down by the same question coming from a slightly different direction, but I appreciate the interest in it. Of course, we are as well. What I would say is the test markets gave us that curve of initial launch volumes and then the settling down, sustaining, because that then created the business case that then got the buy-in from the broader operator community. We are confident in the kind of the curve we expect to see of the contribution of All Day Breakfast. We're encouraged that it's early days. We're sitting here today, 15 or 16 days in. I can tell you the unity of the system around this and the response from customers, which is the most important piece, is very positive. We will be able to share a bit more in November, obviously. Totally understand the interest in it, but it's just too early. It just wouldn't be fair to give a read on it right now. Related to the commodity costs in the U.S., as we said, it was up about 1%, primarily beef costs. Not a lot of commodity pressure on the other commodities in the third quarter. Going forward, again, with the rest of the outlook stuff, since it's all interconnected, we'll provide an update at our upcoming November investor meeting related to kind of how things look in the future. We're near the top of the hour, I'll turn it over to Steve, who has a few closing comments. Yeah. Thank you, Chris. Again, thanks to everyone for joining us this morning. In closing, I want to reemphasize our commitment across the entire system to consistently running great restaurants to give our customers even more reasons to dine at McDonald's. We're focusing on executing fewer, bigger initiatives that will ultimately deliver a better experience for our guests around the areas that matter most to them. Great tasting food, fast, friendly service, contemporary restaurant experience, all at the value of McDonald's. The progress we've made in a short amount of time gives me confidence that we are making the right moves to turn around our business and reposition McDonald's as a modern, progressive burger company. Thanks to all of you, and have a great day. This concludes McDonald's Corporation Investor Conference Call. You may now disconnect.