Hello, and welcome to McDonald's May 4th, 2015 investor conference call. At the request of McDonald's Corporation, this conference is being recorded. Following today's presentation, there will be a question and answer session for investors. At that time, investors only may ask a question by pressing star 1 on their touch-tone phone. I would now like to turn the conference over to Mr. Chris Stent, Vice President of Investor Relations for McDonald's Corporation. Mr. Stent, you may begin.
Good morning, everyone, thank you for joining us. With me on this morning's call are President and Chief Executive Officer, Steve Easterbrook, and Chief Administrative Officer, Pete Bensen. In addition, Chief Financial Officer, Kevin Ozan, will join us for Q&A. This morning's conference call is being webcast live and recorded for replay by phone, webcast, and podcast. Before I turn it over to Steve, I want to remind everyone that the forward-looking statements in our 8-K filing and the video released this morning also apply to our comments today. Both items are available on www.investor.mcdonalds.com, as are reconciliations of any non-GAAP measures mentioned on today's call with their corresponding GAAP measures. Now I'd like to turn it over to Steve.
Thanks, Chris. Hello, everyone. This morning I shared an internal video that outlined the initial steps we're taking to reset and turn around our business. Pete and I will highlight key elements of the plan on today's call and leave time for some questions at the end. However, if you haven't seen the video yet, I encourage you to watch it as it contains more details and examples around our plan that we won't cover on today's call. You can access the video at www.investor.mcdonalds.com. There is no doubt in my mind that McDonald's has built a powerful and enduring economic advantage over decades. We have scale and reach like no other. More talent across our system of franchisees, employees, and suppliers. More capital, more firepower than any other restaurant business in the world.
While our business model strength is enduring, no business or brand has a divine right to succeed, and the reality is our recent performance has been poor. Which is why we need to urgently reset this business. How we think, how we make decisions, how we organize, how we respond to customers and their changing needs, and how we galvanize against competitive threats. I'm concentrating on turning the business around, and I'm also focusing on modernizing our business model to prepare us for the next chapter of our history. My priorities for McDonald's as a modern, progressive burger company are threefold. One, driving operational growth. Two, returning excitement to our proposition and brand. Three, unlocking financial value. This will be an operational, growth-led turnaround that will be governed and underpinned with stronger financial discipline, faster decision-making, and hard-edged accountability. It'll be grounded in operations excellence and running great restaurants.
Simply speaking, a recommitment to hot, fresh food, fast, friendly service, a contemporary restaurant, all at the value of McDonald's. Our turnaround will be driven by the following elements we must employ to reconnect with our customers. First, restructuring the business for growth, customer-responsive structures, talent in the right place, and focused firepower. The right markets working together on shared challenges and opportunities. Second, returning critical markets to sustainable revenue and income growth, and implementing a turnaround blueprint built on winning actions from around the world. Third, continuous improvement in food quality and perceptions. Sourcing, reformulation, and innovation to improve core quality, serve the best burger possible, and grow our billion-dollar brands. Four, building a differentiated customer experience through reimaging, effective technology deployment, and world-leading digital engagement. Last, building brand trust by making more consistent commitments to investing in brand equity to grow trust systematically across the globe.
Let me start with the restructure of our business. We are restructuring into four segments, the U.S., International Lead Markets, High Growth Markets, and Foundational Markets. The U.S. represents more than 40% of our operating income. The U.S. will continue to be led by Mike Andres, who is implementing a strong plan to move the market forward. The U.S. has recently undergone its own reorganization to remove layers and move decision-making closer to the customer. Our International Lead Markets will be comprised of five markets, Australia, Canada, France, Germany, and the U.K. Together, these markets represent approximately 40% of our operating income. They're all established markets. Each has a well-developed franchising organization. They have modest new store development opportunities, similar competitive sets, stable economies, and are independently well-resourced with deep, talented teams.
This group of markets will be led by Doug Goare, who will work with a team of two senior leaders, as well as the five managing directors reporting to him. Our High Growth Markets will be comprised of eight markets, China, Italy, Poland, Russia, South Korea, Spain, Switzerland, and the Netherlands. This group represents around 10% of our operating income, all with strong growth potential. In fact, around half of our new restaurant openings will occur in these eight markets the next several years. Franchising is fundamental to this growth because these markets have less developed franchising. The opportunity to grow our franchise base is significant. Dave Hoffmann will lead this segment. In addition to the managing directors reporting into him, Dave will have a team of four senior leaders to accommodate a larger development focus and a slightly greater need for centralized support. Finally, our Foundational Markets.
About 100 markets in our system which all contribute significantly and proudly fly the flag for McDonald's. The spirit of entrepreneurship is alive and well throughout these markets, as teams focus on what matters most to their local customs and cultures. This segment will be led by Ian Borden, who's currently at APMEA as chief financial officer. Ian has deep and broad experience leading markets and functions across the globe. Ian will initially have a slightly larger structure to ensure experienced leaders remain close to the markets. This new structure represents a significant step change in our thinking. It sounds simple, but having clusters of similar markets led by one person will create urgency and speed. It will spread insight faster, enable quick decision-making, eliminate mistakes, reduce costs, and unlock growth. In short, it will create the optimal conditions for success in our operational growth-led turnaround.
As part of reorganizing our business, we're also evolving our ownership strategy. Pete will talk more about that in a few minutes. My immediate priority for the restructured business is returning critical markets to growth. This blueprint for turnaround centers around the following critical phases. First, talent focused on the customer, putting the right people in the right places, and leading with teams that are customer-centric in their planning and decision-making. Next, system alignment, aligning company, owner-operator, and supplier interests around strategy, action plans, and a recommitment to consistently running great restaurants. Next, unlock growth, building the base side through stronger, consistent, everyday value propositions to drive growth and guest counts. At the same time, improving marketing execution to drive demand. Finally, optimizing our experience today and shaping the experience of tomorrow.
Bringing McDonald's experience of the future to life and moving more assertively to provide what our customers want most from us, great tasting quality food, personal service on their terms, and better ways to engage both inside and outside the restaurant. While our markets are all at different phases across the system, we are committed to trying new things faster, breaking down the old paradigms, and making a stronger impact with our customers right now. To be a modern progressive burger company, we're also focused on returning excitement to our proposition and brand and unlocking greater financial value. As we turn around critical markets, we will create strategies which leverage our scale and convening power that disrupt and delight and show our brand on the move.
We will also seek to be more progressive around our social purpose in order to deepen our relationships with communities on the issues that matter to them. With regard to unlocking financial value, Pete will provide more detail in a moment. As we restructure to enable greater customer focus, accountability, and speed, we will also strengthen financial discipline and accelerate significantly towards a more heavily franchised model. By end of 2018, McDonald's will be 90% franchised compared to 81% today. Structure and ownership changes will release $300 million net G&A savings per annum by 2017. We will also return cash to shareholders at an accelerated rate. We expect to return $8 billion-$9 billion this year. These are exciting and liberating moves for our system. I'm confident they will help unlock greater energy and action, accelerate our growth, and fuel our turnaround.
I've spoken before about making bold moves to turn around our business, and this is what we're doing. It's how leadership brands evolve and continue to thrive, and how they stay in step with the customers they serve. It's what we'll keep doing at McDonald's, get close to our customers, deliver a better experience today and tomorrow, and realize our commitment to becoming a modern, progressive burger company. Thanks. Now I'll turn over to Pete.
Thanks, Steve. Good morning, everyone. At the heart of McDonald's business model is a fundamental conviction, namely that our brand is often best served by leveraging the entrepreneurial spirit of local businessmen and women. We believe we have the best franchisees anywhere. As we look to turn around our business, we are confident that increasing their collective ownership of our global restaurant portfolio will be a critical step along this journey. Last year, we announced plans to refranchise approximately 1,500 restaurants between 2014 and 2016, representing a 50% increase when compared to the level of refranchising activity over the preceding three-year period. Over the past few months, we have challenged these ownership plans as well as our own internal performance expectations for our company-operated restaurants. Specifically related to company-operated restaurants, we remain committed to operating restaurants in certain markets. Our high average unit volumes generate industry-leading cash flows.
In many of our larger, more established markets, it makes financial sense to continue operating these valuable restaurants. Importantly, this also allows the company to test products and initiatives, develop future leaders, and have operational knowledge and influence. Ultimately, we believe this makes us a more credible franchisor. However, we need to set a higher financial bar for our company-operated restaurants, taking into consideration cash flow per restaurant, margin performance, as well as future reinvestment needs. As we evaluate our current portfolio against these heightened expectations, we recognize the opportunity to refranchise a greater number of restaurants globally. As a result, we will be accelerating our pace of refranchising going forward to increase our global franchise percentage from the current 81% to about 90% by the end of 2018 through refranchising about 3,500 restaurants.
We use a market-by-market approach to determine the optimal ownership mix in each market. We intend to leverage both conventional and developmental licensee ownership structures as we execute our plans. In some markets, this will mean exiting our company-operated presence entirely and moving to a 100% franchise structure. In other markets, primarily our largest markets, it will mean maintaining a mix of both franchise and company-owned units. The end result of these efforts will be a more heavily franchised business model, one that generates a more stable and predictable revenue and cash flow stream, and one that is accretive to company-operated financial metrics, including average free cash flow per restaurant and margins. The structural changes to our organization and to our ownership mix will not only better position us for future growth, they will also deliver savings to our bottom line.
The G&A support structure for our new market segments will be significantly leaner than it is today as we move to a flatter, more nimble organization. In addition, as we move to a more heavily franchised organization in the future, we'll realize additional savings opportunities due to the less resource-intensive support structure inherent in such a business model. As a perspective, on average in the U.S., our company-operated staff individually support about six restaurants, while our franchise staff consult with about 30 restaurants each. Finally, we're building upon the G&A savings opportunities we identified last year by implementing even greater discipline around our spend globally. We'll set specific G&A reduction targets across the markets and within our corporate center to streamline our spending and ensure it is targeted to our highest returning initiatives and growth areas.
We expect the combination of savings we'll achieve through our organization restructure, our ownership strategy, and higher scrutiny of our ongoing G&A will deliver about $300 million in net annual G&A savings, most of which will be realized by the end of 2017. Despite softer financial performance, the McDonald's business model continues to generate significant amounts of cash. Our current three-year cash return target of $18 billion-$20 billion between 2014 and 2016 is a testament to our ongoing commitment to building shareholder value over the long term. We plan to accelerate our cash return to shareholders in 2015 and expect to return about $8 billion-$9 billion this year through a combination of dividends and share repurchases. As a result, we expect to end 2016 at the top end of our three-year target.
As Steve mentioned, our turnaround plans are operationally led and focused on getting closer to our customers, delivering a better experience today and tomorrow, and ultimately realizing our commitment to become a modern, progressive burger company. In addition, our plans offer financial benefits that we intend to capitalize on. This is a new era for McDonald's, and we are energized by the challenges in front of us. There is significant work ahead, and we are convinced that these critical first steps will position the company and the system for long-term profitable growth by operating as a more efficient and focused organization. Thanks. Now I'll turn it over to Chris to begin our Q&A.
We will now open the call for analyst and investor questions. Please press star one if you have a question and star two 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 Brian Bittner of Oppenheimer.
Thank you very much. My question relates to the update that you provided on your refranchising strategy. As you take this business from the 81% franchise mix it is today to the 90% franchise mix, will this process in its entirety be accretive, dilutive, or neutral to operate earnings, operating earnings? Can you just walk us through the economics and math behind that answer? Thanks.
Yeah, Brian, it's Kevin. I'll take that. As you know, the last time we had significant franchising activity, it should work in a similar way. We see benefits to our company-operated margin percentage, benefits to G&A, and higher combined operating margin percentage.
Dollars of McOpCo margin dollars will go down, franchise margin dollars will go up. Net basis, it's very dependent on the mix of what stores we sell, what countries we sell, et cetera. It's a little early to predict exact results on an operating income basis. Combined operating margin percentage for sure should go up.
Next question is from Andrew Charles of Cowen and Company.
Great, thanks. Pete and Kevin, the benefits of the highly franchised model really include the ability to support higher levels of debt as well as lower levels of CapEx. Just wanted to know how we should look out to that in the out years. Is $2 billion of CapEx still an appropriate level, or can we potentially see a lower level going forward as you strive to unlock financial value?
Yeah, Andrew, it's Kevin. Related to CapEx, you saw we updated our outlook now in this related release. We've reiterated our $2 billion of capital for 2015, which is our lowest capital budget in more than five years. It's a little early to comment beyond 2015, what we do know is markets will continue to compete for available capital. They need to earn capital based on returns, based on long-term growth opportunities, and we'll continue to keep our strong financial discipline around capital allocation.
Andrew, it's Pete. Obviously, in light of the magnitude of the planned organizational and ownership changes like this, we'll get the teams in place and get the structures in place, we'll be reviewing all the long-term financial targets and provide updates as we move along.
Next question is from Jeffrey Bernstein of Barclays.
Great. Thank you very much. Just a question, I guess, on the real estate side of things that wasn't mentioned in the video this morning or your prepared remarks. I'm just wondering if you gave any updated thoughts on your current portfolio, which I know you guys often believe is underappreciated. I'm just wondering how you get credit from investors and maybe the rating agencies for your portfolio, whether you consider any alternative structures to that, at this point, we're leaving as is. Thanks.
Yeah, thanks, Jeff. Steve, I'll take that one. Look, as I said from the very outset, we'll continue to evaluate opportunities to further enhance value for all shareholders. New in position, I said this from day one. I think it's incumbent on me to reassess any of the decisions we made previously and kind of own those for myself as well. That said, we have only been in place for two months as a new management team, and I think I've been very clear, both internally and externally, that my number one priority was to address the operational issues because that is the most important, and hence, being able to announce initial steps of the turnaround plan today and really addressing the operational issues and getting the operating growth back on track.
We are aware of the discussion around real estate, around restructure, the various views on it as to whether it makes sense or doesn't for McDonald's. We'll certainly get back to you as soon as we have anything else meaningful to share.
Next question is from Greg Badishkanian of Citigroup.
Great. Thank you. Just based on the initiatives you announced today, combined with new products in the pipeline, when do you think we could start seeing the U.S. business stabilize in terms of market share, where you don't lose share, maybe you don't gain share, but you're kind of maintaining?
I'll take that one, Steve, here again. We look at the broad global turnaround, clearly this new structure allows us to really highlight the major contributors to the overall performance, whether it's segment number one, the U.S., and our international lead markets. The six of those make up 80% of our income, and this gives us a bit of a laser-like focus on those. Clearly, U.S., as I've said, is at the earliest stages of the sort of building blocks that I tend to associate with a turnaround. They've made really meaningful steps. Mike's come into the role and he's restructured the organization. He's already made it a leaner organization where the decision-making is closer to the customer. If we start to look at some of the actions they're taking, in the short term we're beginning to see the entire U.S. system embrace strong value programs.
The commitment to food quality, both the day-to-day running better restaurants as well as the introduction of new products such as the artisan chicken and the sirloin burger. Also they're pushing the boundaries with some of their testing. They're looking to challenge current paradigms around things such as all-day breakfast and delivery and seeing whether we can develop platforms for future growth to fix the business today, get the fundamentals right, get your structure right, and start to build out platforms for growth going forward. It is early days, and it'll be a little bumpy in these early days, but they're on the right track.
Next question is from Keith Sie gner of UBS.
Thank you very much. As we think about this next couple of years with the refranchising program, proceeds from that, and by the way, if you have any thoughts on how we should think about modeling the proceeds, that would be helpful. As we think about the proceeds, the stability of the cash flows of this business as you talked about, and how that'll look different in a few years from how it does now, how do you think about the leverage ability, the proper capital structure? What's the right comparative set, and how should we think about that? Thanks.
Hey, Keith, it's Pete.
What we thought was important today was really to get out the initial components of the plan. We're not prepared today to get into details in terms of which markets and what month we're going to execute those, et cetera. We can't give a lot more specifics around timing other than a commitment to as we, again, get the team in place, get the structures in place, that we'll commit to communicating more specifics as we finalize those. On the order of magnitude, by the simple math, to get to the 3,500, that's 850 to 900 restaurants re-franchised a year. We think that will be fairly ratable. It's not like it's back-end loaded. As you know, we've talked before about average proceeds from a conventional franchise in our more established markets is close to about $1 million.
It's less than that in some of our smaller or emerging markets. This plan tends to be a little more focused on some of those smaller or emerging markets. The proceeds per unit will probably be a little bit lower. We'll do some developmental licensee transactions in there, which are highly variable depending on the market. That one is a little bit more difficult to predict or give you some guidance, at least initially here. As I said earlier, in light of the magnitude of just the organizational and ownership changes that we're looking at, we will continually provide updates and review this for you.
Next question is from David Tarantino of Robert W. Baird.
Hi, good morning. Steve, I have maybe a bigger picture question on the new organizational structure. At surface level, it looks like it's a pretty broad, diverse geographic mix within a couple of these segments. At the surface, that could look more complicated to manage. Could you talk about how this structure is actually more simple and not more complicated from that perspective, and then maybe provide some examples on how you think this will be more nimble as you move forward?
David, thanks very much. Honestly, that's a great question because it really gets to the heart of my fundamental beliefs of why I've been keen to introduce this structure. The world is a broad geography. If you actually look at the segments, if you look at the international lead markets, there's five markets only. By the way, if we're thinking about complication, if it wasn't clear through the video release, that'll be led by Doug with two members of staff. There's not a big area of the world structure, not an unwieldy structure that's being reprioritized. We're talking about Doug and two senior leaders who have oversight of just five markets.
Their ability to spend quality time with the leaders of those five markets, I think is a seismic change from being an area of the world president, where you have 35-40 markets to take care of. Of course, bringing your best talent, focusing on the areas that make the biggest difference to me is just such a strong and clear logic. With the high growth markets, there are two in APMEA and six in Europe. Again, we will build a team that will have clearly feet on the ground, but it's again, a very lean team. Dave will have a team of four senior leaders as well as the eight managing directors. I think it's very lean, very clean. This isn't around charging into each market every one or two weeks.
They will have careful performance management, be able to share the knowledge across the markets clearly, and the leaders can lend their experience to those eight markets. To give you just one example, again, to really sort of bring the visualization to life. The one I like to think of is for a managing director in Australia, for example, who is really working through the early phases and achieving the early phases of a turnaround with a really compelling plan. In the geographic group, there really weren't that many peers that he could work alongside and benefit from. It's not that there weren't clear leaders, but the markets are in such different positions across that geography. If I call out China, call out Japan as the other two large markets in APMEA, they're in different situations, different trading situations, and different phases of growth.
For the managing director of Australia to be able to lend his knowledge and experience to Canada, U.K., France, Germany, and receive knowledge back, it'll be far cleaner, far more relevant because the context is so much more meaningful. I think the speed of decision-making, speed of knowledge transfer, and effectively just the efficiency of time will inject pace and energy into what we're doing to get this business moving.
Next question is from David Palmer of RBC.
Thanks. First, just a clarification regarding G&A. Is that $300 million reduction just related to the McOpCo reductions as you re-franchise? Does this cover all corporate overhead? What is the starting point on the reduction? Does it exclude currency, which is obviously a big drag to G&A this year? Also separately, interest expense implies that you're adding some additional leverage. Any clarity on that would be helpful. Thanks.
David, I'll take the first half of this and Kevin will talk about the interest expense. It is a net $300 million savings that we expect mostly by the end of 2017.
It covers everything that we talked about. Part of it is due to a lower McOpCo ownership. Part of it is due to the organization restructure that Steve Easterbrook described, some of it is going after the elements of our corporate office, in part to reprioritize and restructure here to more closely align with the leaner, more nimble organization that Steve Easterbrook described. It's coming from all of those pieces. Yes, it is X currency, because we can't predict what currency is going to be. Our base is a 2015 projected G&A with the current exchange rates that are built in.
David, related to the interest expense, we will be taking on some additional debt this year. We felt that accelerating the cash return in 2015 was a more aggressive move that we purposefully made. We went through our analysis, we're mindful that it could have some negative implications for our credit rating, we think it's the right thing to do to take advantage of the low interest rates. We remain committed to a solid investment grade credit rating, this will allow us to preserve our financial strength and flexibility.
Next question is from John Glass of Morgan Stanley.
Thanks. First of all, I could just clarify the G&A question. If $300 is a net number, what is the gross? That is to say, what is the reinvestment required based in this plan? On the refranchising itself, how many countries in the world right now does McDonald's operate McOpCo stores roughly? How many would you expect them to roughly afterwards? Is a significant piece of this plan removing corporate ownership altogether from a significant number of markets?
John, it's Pete. In terms of the G&A, we've chosen not to disclose the reinvestment piece. Clearly, as we mentioned, there's still some investment in our digital and IT initiatives to roll that out. As you build restaurants every year, there are certain amounts of support that go along with that. We're not abandoning growth in any regard. Certainly looking at how do we most efficiently allocate our resources to those growth initiatives. We wanted to make sure, as opposed to some of the previous communications where we talked about reinvesting savings, that you understood that this was a net $300 million savings that will fall to the bottom line.
Regarding the ownership, today, we operate about 6,700 McOpCo restaurants across a little more than 30 markets. As we mentioned, we'll be selling about 3,500 of those restaurants in several of those markets. So we'll be left with maybe a similar to half-ish, let's say, of those markets.
Next question is from Jason West of Credit Suisse.
Yeah, thanks. I guess going back to the capital return question again. You guys seem to be pulling forward some of the returns this year with a bit of incremental leverage, but you kept the three-year target the same. I guess it implies, in 2016, you do a little bit less on the buyback side. Just want to understand why that number needs to come down for 2016 as well, or do you think you'll kind of push the limits this year on the credit rating, so leave you less room to add maybe leverage next year, if that's the way you're thinking about it? Thanks.
Yeah. Related to the cash return, we're sharing the initial details of the plan today. We have the most visibility, obviously, into the impacts in 2015, so that's why we've given the $8 billion-$9 billion for 2015. We'll continue to update as we make progress against the plans and as we have more certainty around the phasing of the activity. That could change going forward.
Next question is from Joe Buckley of Bank of America Merrill Lynch.
Thank you. Somewhat of a question along the same lines. We've seen a lot of examples of the debt supporting capability of higher franchising mixes out in the marketplace. You're using sort of different timelines it seems, talking about the three-year target ended 2016 for returning cash to shareholders. In 2018, you being the target to do your refranchising. Is it fair to say that you remain open on the capital structure? When the two timelines converge, is it likely or possible that the balance sheet will end up more leveraged than you're currently implying?
Joe, it's Pete. Kind of playing off Kevin's answer to that last question. We were attempting with this initial announcement to give you visibility into the near end. 2015 is the period we have the most visibility into. Again, with the magnitude of this change with both the restructure and the organizational changes, as we get the team in place and as we really get into then the specific timing of the execution of the various phases, we'll continue to provide updates of our financial targets along the way. Again, reiterating something that Steve mentioned, we'll continue to evaluate all opportunities to further enhance value for all shareholders.
Joe, I'll just add to that. Coming into the role and wanting to seize the opportunity that we have done here to restructure the business, clearly, we had to reset the time parameters to start today, I believe running through 2018 is an aggressive and purposeful move on a number of the fronts. Clearly, I've inherited a couple of the financial commitments we made previously to 2014-2016, both the franchising numbers and the cash returns. Now, as we work through this, we'll be in a position to realign those going forward around the operating turnaround of the business. Once we've done that, we're going to share that with you.
Next question is from Sara Senatore of Sanford C. Bernstein.
Hi, thank you. Two follow-ups, if I may. One is about just the franchise mix, going to 90%. Can you just remind us sort of philosophically why that's the right number? We are seeing others target 95%, 100%. Is there sort of a critical mass you need to test? Is it a number of units? Is it a percentage, in each market? The other follow-up is, obviously reducing CapEx, closing some stores. Again, I'm just trying to understand, is the idea, is the view more about where you think you're saturated or how growth might be affecting existing stores? Or is it strictly a capital use? In which case, would you consider more developmental licensees where it's very capital light and you can continue to grow fast? Thank you.
Sara, I'll just comment on the first part of that, if I can. Franchise mix and why 90? Well, I guess this is a point in time. 2018 is not an end state. This was, I felt, the best way that we could evaluate our global structure at the pace which I think is necessary, whilst absolutely having quality of decision making underpin that as well. There's a pace and a quality. 2018 is not when the world ends. There'll be a point in time and we'll reassess as we go forward. At the moment, we felt that was a good point in time, a stake in the ground that we could work towards and share that information with you.
Regarding, Sara, where we'll use DLs or developmental licensees and conventional licensees. There's a lot of different things that go into that determination. How many stores are in a market? What's the existing ownership structure today? What are the new growth opportunities and the reinvestment requirements? We look at external factors like political risk, currency risk, et cetera. I think in this level of scrutiny that we've gone through this time, we also took a strong look at what are the internal resource implications for the market. What are the G&A implications? What are the capital implications, et cetera? You will see a mix, as I said, as we are able to share more details, as we finalize some of the timetables and the specifics, we'll be sharing that.
You'll see those kind of considerations being given to the decisions as we move along.
Sara, I just want to take the opportunity just to maybe comment on a broader philosophical point of franchising. That is, as we unlock the power of franchising, that is what's incredibly liberating to us as a McDonald's system. We're a franchisor, and that has always been part of the essence of what's made McDonald's successful and the power of the system as we describe it. I bring with me some very personal experience in the U.K., where when I took on the U.K. at the start of 2006, we were 35% franchised in that market. Within the five years of running the business, we moved to 65%. That was just a really strong contributor to just driving energy and the ownership and the accountability and the local restaurant ownership really did underpin and infuse a system that was looking to be lit up.
I have a strong philosophical commitment behind franchising. I think it's incredibly important to our business. It's something that I just personally believe in, as well as providing all the other financial pieces that we've described today.
Next question is from Will Slabaugh of Stephens.
Yeah, thanks, guys. I had a question on food quality. You mentioned this as an issue for the brand in the past. I wanted to get a better idea of how you're thinking about the evolution there. Can you talk about where the food quality today is now relative to where you want it to be? Similarly, around the perception of food quality versus where you think it should be and what you can do to quickly improve that.
Yeah. Okay. Well, I guess the way I tend to look at where we're at as a business and the way we're looking to address it is perhaps there are three components to this. One is just opening ourselves up and being more transparent in support of the quality of the food that we serve today. There are perceptions and there are misperceptions out there. I think one thing we can do is make available the facts as they are today, so that people can make those judgments based on reality rather than perhaps misunderstandings. That said and done, consumers' tastes are changing. The things they're inquisitive about are changing. Therefore, we've got to be seen to moving with those.
Yeah, we will be, as we have done, making moves through our core menu items, through our core recipes that drive the business forward, and in the eyes of customers, show that we're in step with the sorts of things they care about. A recent example could be the removal of the antibiotics from chicken here in the U.S. Really does resonate well with customers. That's the second piece, that commitment to ongoing continuous improvement. Third piece I'll describe as making big moves. What can we do in the restaurants that signal and enhance and bring to life the confidence we have in our food and that we deliver against consumers points, we have wonderful opportunity around the personalization or customization of food. Consumers we know respond well to feeling like they have ownership of the items that we're serving.
Around the world, whether it's in Australia with Create Your Taste or whether it's with TasteCrafted test here in the U.S., we're trying a number of different things to bring personalization to customers where they feel in control, and that really does enhance consumer perception of the quality of the food they're ordering as well. So I'd say three different approaches. They're all interrelated and we have seen in markets that are successful, that does move the needle on the perception of food quality.
Next question from Matthew DiFrisco of Guggenheim.
Thank you. I'm a little conflicted with the rate of investment going forward for how you guys have historically shared the cost with your franchise system. Should that change at all going to this larger 90% franchise mix? I ask that sort of in the context of some other brands, smaller brands, of course, that have refranchised. We've seen a slowing of the growth, subsequent to the refranchising. Sometimes they eat up some of that franchise capital that would've been used for growth. I wonder as sort of a follow-on to that, could you talk about what you envision beyond 2018, 90% franchised, are you setting yourselves up for greater growth as you're more franchise skewed, or would it be sort of in line with what you would've been if you remained sort of an 81%?
Mostly sometimes people talk about growth accelerating beyond the refranchising, and that's one of their catalysts to refranchising. Thanks.
Thanks, Matt. I wouldn't read too much into it from our perspective, really because we have a rich history here of standing shoulder to shoulder with our franchisees when it comes to supporting major growth initiatives. We feel that helps accelerate decision-making and frankly, execution in the restaurants. That's a kind of modus operandi that I am keen to continue. As we build plans with our owner-operated leaderships in markets all around the world, a component of that is if it's going to drive customers into our restaurants, if it drives the top line, then we will stand shoulder to shoulder and support in some way, shape, or form to enable us to collectively grow our returns.
We think as Steve used that U.K. example earlier, that turning more restaurants into the hands of our franchisees around the world will help fuel some of this growth that we're looking to unlock going forward.
Next question is from Andy Barish of Jefferies.
Hey, guys. Wondering if, something you mentioned on the video, Steve, refocusing on value in the U.S. business. It sounded like this summer. Wondering if you could provide a little more color on that. Is this something you expect to be, I guess, using a popular term these days, disruptive? The summer isn't typically a time for focusing on value in the QSR sector, so maybe just a little bit of color on what you're thinking there.
Yeah, sure. Let me respond to this from another different direction. First of all, customers love value all year round. Let me get that out there. There are certain times where you can see different tactics employed, but trust me, customers appreciate value all the year round. We don't look at it as a seasonal tactic. The way the U.S. builds their plans, because they're going through the evolution of their structure, value works for them on two levels. They have a national value programs, and they have local. More recently, a lot of the emphasis has been on the more local, regional based through the local co-ops.
What the U.S. team, the owner-operators and management under Mike's leadership are doing is looking to have a one-two punch where there'll be a noticeable presence on value at a national level to work alongside the local executions as well. Clearly, you don't expect me to get into the details because that's commercially sensitive. For me to see the owner-operator leadership step up and work with the company and put out and develop a national level plan to support locally is very encouraging and has my full support.
Next question is from Nicole Miller Regan of Piper Jaffray.
Thanks. Just two things quickly. I just wanted to confirm that the four new regimes wouldn't change the reporting segments. I understand what's going on, from the commercial logic standpoint, I think we understand. Will you still have the same reporting segments for us from a modeling perspective?
I'll let Kevin answer this properly, but they're not regimes, Nicole. I just want to say that. I like to call them segments rather than regimes. Anyway, I totally accept your question and Kevin will be better placed to answer it seriously.
Hey, Nicole. We will change our reporting beginning, all of this new structure is effective July 1st. For the third quarter, we will change our reporting to follow these new segments, if you will. Second quarter reporting will be the same as it has been historically by geography, and beginning in the third quarter, we'll report under these new segments. We'll also restate prior years beginning the third quarter to conform to that new presentation.
Okay. Nicole, did you have a follow-up question? You said that you had two questions? Nope. Okay. Jeff Farmer from Wells Fargo is next.
Thank you. You guys did touch on it, just considering that the restructuring of the business will be a major focus of the company for at least, let's go with the next 12, 18 months, why would you guys continue to pursue 1,000 unit openings in 2015? Do you expect to continue to control the majority of that real estate as you move forward?
I would comment on this. Part of what gives me the confidence that as a business, we won't skip a beat, and that this will just help us drive meaningful change and performance improvement in the business is, this doesn't change anything at a market level. The lines of reporting are different, but if I'm the managing director of any of these, particularly these major markets, their plans are locked and loaded, and we are driving their performance and their accountability. Part of that too is they can plan for the future with knowing what the opportunities are on the development side. We have absolute confidence in our ability to grow the like-for-like business over time. That we'll have to prove it to demonstrate that. Also, we do believe there are certainly new store opportunities, and we have a strong pipeline.
I use the word forensic. It's a forensic pipeline. This isn't random across the world. We have a very specific growth areas that we want to develop, and we will execute that for as long as the returns and incremental returns justify it.
Next question is from R.J. Hottovy of Morningstar.
Yeah, thanks. Just had a couple quick follow-ups on some of the consumer-facing changes we might see in the months and years to come. First, on the video this morning, you hinted at the Create Your Taste for Australia going pretty well. Wanted to know if you had any metrics to share with that regard, what that might mean for the U.S. and some of the other international lead markets. Second, Steve, you had mentioned about building a world-class digital platform in the video this morning, and just any details that you might have on what that might mean as well. Thanks.
Yes. Thank you, R.J. First of all, if I could just take your Create Your Taste question and just broaden it out. What we're looking to develop here is the McDonald's experience of the future, which has a number of components in there. There is different, as well as things like customizable or personalized food opportunities. It is introducing technology, different service systems, sharpening up the drive-thru execution, just getting the basics right. It's a multi-pronged approach, of which one of them is the customization opportunity. Create Your Taste. I wouldn't want to share numbers regarding Australia now, because they're still in the rollout phase. I would say that the operators and the management are sufficiently encouraged. They've accelerated their rollout to a level where they can now nationally advertise by the end of July.
We had been indicating it would be second half and towards the end of the year. They are encouraged. They believe there are exciting things happening. The consumers are responding well to it. The beauty is, particularly under this new structure, is that the learnings we get from Australia can transfer quicker across the other lead markets because there aren't the geographic barriers. There's just the direct contact between the five. We will share more, but we will also be testing other customizable platforms around the world just to see, check off investment levels, check off complexity versus simplicity, different levels of investment, and how the customer responds. It's always going to come back to how the customer responds. We're certainly encouraged that customizable food for sure could play an important role in our experience of the future.
Create Your Taste is certainly exciting and has really captured the imagination of customers and our own teams in Australia. They're doing a great job leading with that. With regards to digital, what we have, you would've seen certain digital activations come to life, somewhat more tactical, where we've launched partner, for example, with Apple when they introduced Apple Pay. We showed we can move nimbly and be agile and keep pace with our tech partners out there. You could argue that the announcement today that we are testing with Postmates on the delivery system is again bringing technology and a digital platform to life and generating results in our restaurants. The most noticeable change you would tend to see will be into the second half this year, we'll be launching what we are calling our global mobile app.
Basically an app which will go global, but the launch market is going to be the U.S., which will have some fairly solid functionality initially, and then we're going to build upon that to make it increasingly exciting and compelling.
Next question is from John Ivankoe of J.P. Morgan.
Hi. Great, thank you. Two questions if I may. Firstly, China and Russia have historically been difficult to refranchise markets. As part of, the big refranchising plan that you've talked about, how significant of a refranchising opportunity do you see in these two markets specifically? The second question, if I may. In terms of refocusing on operations, talk about the U.S. specifically. Are you thinking about an up or out type of attitude with the franchisees that they need to significantly improve to continue their brand rights? You probably wouldn't word it like that, but how important is it in just moving the franchise system in the right direction? Are you prepared to make changes if changes are needed? Thanks.
Thanks, John. I'll address both of those, and Pete and Kevin may want to enhance them. First of all, China, Russia. We are moving into, and building experience of franchising in both those markets. In particular, we think it makes absolute sense for us to maintain a more traditional structure around the, if you like, the tier 1 cities, the major cities in both of those markets. They are huge geographies, and we're finding our ability to attract partners, particularly out into the provinces, if you like, we have a lot of demand for potential entrepreneurs from those areas and their ability to assimilate into those local cultures, drive the pace of franchising and actually be that local face of the brand, is really standing up well for us. We're more developed in China.
It's earliest stages in Russia, we do believe that franchising, a form of DL type structure, really works well for both those markets and enables us to accelerate our presence and drive market share. With regards to the U.S., our belief in this, and certainly my attitude to this is, not just for the U.S., but for all of us as a business, we all need to step up our game a little bit. If we can each play our part in a contributory fashion, then that's where our success will come from. If all of our restaurant operators, be it the company-owned or our owner operators, can just make the experience a little bit better tomorrow than it is today, a little bit better next week than it is this week, then customers will respond.
Similarly, I think we're asking everyone to step up and raise their game a little bit. That's where I talk about accountability a lot. This isn't about just one part of our business or one part of our system. This is across the board. As we do that collectively, we can look each other in the eye and know we're all contributing to the turnaround. I think Mike's got that market on track, and I believe our great operators will step up. If there's one or two who don't quite fancy it, then they will let us know and we will do what we always do, which is have a respectful conversation and wish them well.
Next question from Howard Penney of Hedgeye.
Thank you so much. Steve, I was hoping if you might be able to rip up the script a little bit in the answer to this question, in the sense that, when you look at the operational changes that you're looking to make at McDonald's and you want to restructure the company and reposition it for growth again, one of the things I think has to happen is that you have to reset the bar a little bit. Meaning there are mistakes or issues or things that were done in the past to complicate the problems within the four walls of the box. I was hoping you could address what you think some of those issues are and what you're doing, if you're doing anything, to reset the bar if you feel the need that the bar needs to be reset. Thank you.
Yeah. No, thank you, Howard. Absolutely. It's always a difficult balance when you try to address a global restructure to then get into that granular details that people often want. I totally accept that. We are not short of content or tactics, frankly. To your point, let me just say this, we have made visiting McDonald's a little more complicated than it needs to be, and we've made it a little more complicated for our teams in the restaurants to deliver. Break that right down. How can we deliver hotter, fresher food more accurately and a little quicker? That's the nuts and bolts of what makes McDonald's successful. 27 million people a day choose to visit McDonald's in the U.S., for example. How can we make the experience just a bit smoother and a bit easier?
We are absolutely actively testing things like simplifying the menu, simplifying the merchandising, just to make the decision-making easier for customers. Speeding up payment options so that becomes slightly more seamless. Re-hitting the basics of training programs for our teams in the drive-through. Our people on the registers and where we pass the food across, the windows you tend to stop at. How can we help retrain those guys back to the basics? This will be an operational led turnaround, not just operating growth, but operational. We just need to run better restaurants. I can assure you across quality and across service and across cleanliness, which have always been the pillars of McDonald's, we have active grass level, restaurant level plans in place to improve the experience for customers.
That is ultimately what's going to signal more than anything else, that we are back on our game and we're a business on the move.
We are at the top of the hour, I'm going to turn it over to Steve, who has a few closing comments.
Thank you everyone again for joining us this morning. Just to wrap up, I do want to just reemphasize our commitment to moving more quickly and assertively to meet the needs of our more than 69 million customers every day around the world. I am confident in the steps we're taking with our new organizational structure and ownership mix will move us closer to our customers and accelerate these efforts to deliver a better, more meaningful experience for our guests. Working together, we will realize our commitment to become a modern, progressive burger company. Our entire system is focused on modernizing McDonald's as we build the business and brand and deliver long-term value for customers and shareholders. Thanks again to all of you for your interest, have a great day. Thank you.