Earnings Call: Q1 2015

Apr 22, 2015

Welcome to McDonald's April 22, 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. I would now like to turn the conference over to Mr. Chris Stent, Vice President of Investor Relations for McDonald's Corporation. Mr. Stent, you may begin. Hello, everyone, and thank you for joining us. With me on the call are President and Chief Executive Officer, Steve Easterbrook and Chief Financial Officer, Kevin Ozan. In addition, McDonald's Chief Administrative Officer, Pete Benson will join us for Q and A. Today'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 earnings release and 8 ks filing also apply to our comments. Both documents are available on www.investor. Mcdonalds.com as are reconciliations of any non GAAP financial measures mentioned on today's call with their corresponding GAAP measures. And now I'd like to turn it over to Steve. Thanks, Chris, and good morning, everyone. Since stepping into this role nearly 2 months ago, I've been relentlessly focused on assessing current plans, challenging our people and teams to think differently about what we're doing and how we're doing it, and working with senior leadership to determine the best path forward. As we announced this morning, we've scheduled a separate call on the 4th May to share the initial details of our turnaround plan. We appreciate your focus sorry, your patience as we focus today on our Q1 results and the overall approach we're taking as we develop plans to reenergize the business. 1st quarter performance reinforces our imperative to stabilize and improve our underlying business performance. Let me start by sharing an overview of recent performance across the top 9 markets that contribute most to our overall consolidated results, starting with Australia, the U. K. And Canada, which are trending positive. Australia is in the early stages of turning around this business through a multifaceted approach to enhance brand appeal for consumers. This includes meaningful enhancements to our menu, including both core and new menu items across several categories, value platforms and better restaurant operations. The U. K. Continues its strong track record of positive performance with 1st quarter comparable sales representing the market's 36th consecutive quarter of growth. These results reflect the market's diligent execution of its customer centric plans that span multiple initiatives, including food choice and food quality, marketing and promotions and enhancements to the service experience, such as expanding drive thru capacity during peak periods and building the overnight experience. In addition, in Canada strong promotional performance and new menu news drove average check and positive comparable sales performance for the quarter. Next are Germany and China, 2 markets that have shown recent signs of improvement. In Germany, negative comparable sales trends have moderated the last two quarters. The market has strengthened its value platform and at the same time promoted premium products and add on purchases to grow average check. We expect recovery in this market to remain uneven however as reflected in March's weak comparable sales performance. China continues to recover from last year's supplier issue. Efforts to regain brand trust are working and the market remains on track to return to a normalized level of performance by mid year. And finally, the U. S, France, Russia and Japan where challenges persist. U. S. Results remain disappointing. Recent actions taken by Mike and his leadership team including implementing a more efficient operating structure, simplifying the menu and holding the U. S. Turnaround summit with operators in March are helping to create a renewed set of energy and focus around better delivery of local customer needs. In both France and Russia, consumer confidence remains low and challenging macroeconomic conditions continue to negatively impact results. Despite a declining IEO industry, France continues to maintain market share as efforts to strengthen the value platform and enhance the customer service experience are differentiating the brand in the market. Amidst the external pressures in Russia, the team remains focused on driving sales through strong products and promotional offers, growing the breakfast business and initiatives that focus on rebuilding brand trust with consumers in the market. Japan's recovery from the supply issue has not been as strong as China and subsequent consumer perception issues have further depressed sales and profitability. As evidenced by last week's announcement of the business revitalization plan, the Japanese and APMEA teams are intensely focused on addressing the significant challenges in this market. Though we expect results will continue to be negatively impacted for the foreseeable future. And Kevin will provide more details around our Q1 results in a moment. Let me shift gears now and discuss the approach I'm taking to lead McDonald's into the future, my operating principles, if you will. First is a greater emphasis on personal accountability. I'm honest and fair, but I don't dispense false kindness. Where we need to fix the fundamentals, we need to act now. And where we need to make an impact, I'm not looking for incremental steps. We intend to make meaningful impact with customers and how they perceive our brand and our food. I hold people accountable for tangible actions and outputs and I can assure you that I hold myself accountable to these same high standards. My second operating principle is grounded in the customer. As a retail business, we must be even more customer centric. This means deeper understanding, better listening, better segmentation, genuine sharp insights regarding what our customers want and need and when they want it as determined from the smart use of data and analytics. We need to be the best at knowing what matters most to consumers and we will focus our best talent and prioritize spending where it will optimally support our turnaround. My third philosophy is progress over perfection. We will try new things, move fast with what works and even faster from what doesn't. And when we find winning plays, we'll be more nimble, much like we did with the rollout of Apple Pay this last fall. For first contact to go in live took 12 weeks. We can make meaningful changes for customers in weeks. We just have to do it more often. My final approach to leading is by champion simplicity. We're simplifying for greater transparency, accountability and speed. We're making the business more responsive to market conditions by using our scale advantage more effectively. We cannot afford to carry legacy attitudes and legacy thinking and we won't. My overall vision is for McDonald's to be seen as a modern progressive burger company delivering a contemporary customer experience. Modern is about getting the brand to where we need to be today and progressive is about doing what it takes to be the McDonald's our customers will expect tomorrow. We're already moving more assertively in this direction with actions that delight our customers and energize our brand. For example, we recently committed to enhance the benefits to employees at company owned restaurants in the U. S, including a wage increase and paid time off for full and part time crew employees. In March, we announced in the U. S. That we'll stop using antibiotics that are important to human medicine in our chicken supply chain within the next 2 years. And there are plans to feature 100 percent sirloin burgers for a limited time in the U. S. Along with a current test on all day breakfast. We also undertook a significant effort to excite our customers and bring the world together virtually with I'm loving it 24. About 70,000 people participated in the events, which included 24 hours of McDonald's inspired disruptive creativity in major cities around the world and it garnered more than 2,000,000,000 impressions across public relation stories and social media interactions. Last month, the German team opened a new 500 seat flagship restaurant in Frankfurt, showcasing our most modern digital and service amenities. And just yesterday, we announced our global commitment on deforestation, which confirms our aspiration to end deforestation throughout our supply chain. We are harvesting the power inherent in the McDonald's brand and in our network of valued franchisees, employees and supplier partners to make this great brand even greater. One of the advantages of my broad experience within McDonald's and running other restaurant chains is seeing other cultures, different structures, different models. Through this experience, I see McDonald's and its fundamental advantages, challenges and opportunities much more clearly. It is this perspective that's helping me look objectively at the business and make decisions to position McDonald's to deliver enduring profitable growth for shareholders and the system. Thank you for joining us this morning. And now I'd like to turn it over to Kevin. Thanks, Steve, and hello, everyone. We begin 2015 taking action to lay the foundation for McDonald's turnaround as we work to address the significant internal and external headwinds that are impacting our business. Today, I'd like to begin by discussing the performance factors that impacted our first quarter results, including the strategic charges taken in the quarter. Then I'll provide updates on key financial metrics and close with some final thoughts about our path to realizing our long term potential. Our financial model and therefore my remarks start with top line sales. 1st quarter comparable sales were down 2.3%, reflecting negative guest traffic across all of our geographic segments. Apnea's 1st quarter comp sales decline of 8.3% had the largest impact on our global performance, with Japan and China posting declines of 32.3% and 4.8% respectively. While these results are partly due to the lingering impact of the apnea supplier issue, Japan's performance reflects the broad based consumer perception challenges that the market is working to overcome. Japan accounts for the lion's share of the segment's quarterly comparable sales decline. Sales trends in China continued to show sequential improvement as we moved through the quarter. And Australia remains a bright spot, posting its 3rd consecutive quarter of positive comparable sales. In the U. S, comparable sales were down 2.6% for the quarter, as the segment's slightly positive breakfast dayparts was offset by weakness across all other dayparts. We are working to enhance the customer experience with locally relevant tastes, a simplified menu and compelling value offerings. Europe comparable sales ended the quarter down 0.6% with positive performance in the U. K. More than offset by weak results in France and Russia. Looking ahead to April, global comparable sales are expected to be negative. This weak top line performance accounted for about half of the constant currency decline in operating income for the Q1. The other half of the decline in operating income is attributable to the $195,000,000 of strategic charges taken in the quarter to optimize the business. The first component of the charges totaling $85,000,000 includes asset write offs related to our refranchising initiative, as we made decisions to sell certain restaurants to developmental licensees. The next component of these charges is related to the strategic decisions to close about 350 underperforming restaurants, primarily in Japan, the U. S. And China. These restaurant closings are in addition to the 350 global restaurant closings originally planned for 2015. The total charge for asset write offs related to these incremental closings was approximately $72,000,000 Most of these restaurants were not contributing to our overall profitability or cash flow and we'll continue to review our restaurant portfolio with the intent of optimizing our asset base around the world. The final component of the charges was $38,000,000 related to restructuring costs for our U. S. Business. This amount consists primarily of employee severance and other related costs. Earnings per share for the quarter was down $0.37 which includes $0.17 related to the strategic charges and $0.09 in negative foreign currency impact. Excluding the impact of the charges and foreign currency translation, earnings per share for the quarter was down $0.11 or 9%. From an operating perspective, with 81% of our global restaurants franchised, the largest driver of operating income continues to be our franchise margins, which declined $152,000,000 to $1,600,000,000 a 1% decrease in constant currencies. Global company operated margin dollars declined $164,000,000 to $560,000,000 for the quarter, a 13% decrease in constant currencies. The company operated margin percent decreased 180 basis points to 14.3%, reflecting negative comparable Next, I want to provide an update on our commodities, pricing, foreign currency impact and cash return to shareholders. I'll start with commodity costs for the U. S. And Europe. For the Q1, U. S. Commodity costs rose approximately 2%, primarily due to higher beef prices. To help offset this pressure, we took some price increases. Our first quarter pricing in the U. S. Year over year was up roughly 2%, which was below food away from home inflation of around 3%. The current projected increase in food away from home inflation for the full year is 2% to 3%. Excluding currency, Europe's commodity costs were relatively flat in the Q1. Our pricing increases in Europe vary by market with the overall segment excluding Russia averaging about 2% year over year. Now turning to foreign currency impact. The U. S. Dollar has strengthened dramatically against nearly all of the world's other major currencies. During the last 8 months, the dollar has experienced its fastest rise in 40 years. At these levels, foreign currency translation is having a significant impact on our reported results, as evidenced by the $700,000,000 impact to our Q1 reported revenues and the $0.09 impact to our Q1 reported EPS. Based on current exchange rates, we now expect foreign currency translation to negatively impact our results by $0.13 to $0.14 in the 2nd quarter and $0.40 to $0.45 for the full year. As usual, take this as directional guidance only because rates will change as we move throughout the year. And keep in mind, this is an accounting translation impact more than a cash impact. Despite our top line and margin pressures, our business continues to generate significant cash flow. In addition to reinvesting in the business to drive future growth, we returned $1,400,000,000 to our shareholders in dividends and share repurchases in the Q1. As Steve mentioned, we're taking a close look at our challenging ourselves and the status quo. Our goal is to position the company for enduring profitable growth. We must get back to better leveraging the benefits of our business model, including the entrepreneurial spirit of our franchisees. We must utilize our considerable resources more efficiently and we must meet our customers' evolving needs more consistently. I'm energized by the challenges before us and I look forward to working with Steve, Pete and the broader McDonald's system to bring our vision to reality. Thank you. Now I'll turn it back to Chris to begin our Q and A. Thanks, Kevin. Before we begin Q and A, want to make a comment about our financial outlook for the full year 2015. As you know, each quarter we provide details around our expectations for several key components influencing annual earnings per share. In light of the upcoming announcement of McDonald's turnaround plan, it was not appropriate to update our outlook in management's prepared remarks or as part of today's 8 ks filing. An update on our outlook will be provided in conjunction with the announcement of our plans on May 4, 2015. We will now open the call for analysts and investor questions. The first question is from Brian Bittner of Oppenheimer. Thanks. Really appreciate it. Question on the U. S. Business. In the U. S, I've heard a lot over the last few months about the need for more simplicity, needing to improve speed which I think suggests a diagnosis of a throughput problem. But when you look at the underperformance in the comps versus the industry and on an absolute basis, It does suggest a bigger, more pure demand issue. And so the question is what's going to be going on over the next couple of months to really drive a resurgence in guest counts that may be more dramatic than simplification? I guess like are the extended breakfast tests going well? What's the plan there? As far as new products being rolled out more rapidly like you guys just did the chicken sandwich, Is that something we're going to see more of? If you could just kind of talk about that altogether that would be great. Yes. I'll take that Brian. Thank you. So you're absolutely right. There is no one single solution to getting any of our businesses moving. We have a strong plan in place. I guess if I can dissect that question of yours. 1 is how we're going to drive demand and then secondly how we're going to manage that demand. The driving demand is going to be driven through both national and local menu news. So we have some strong and some exciting product pipelines ahead. So most recently we've announced the sirloin burger, which we believe will be a favorite with customers and have broad resonance. But also we are liberating the creativity and I guess the insights of our local markets to develop local food menu items that better resonate with the local customer base. So with the demand driving, I believe, can operate at 2 levels. That said and done, we've still got to make the entire McDonald's experience just a little easier for our customers and a little easier for our crew. And that's where the simplification piece comes in. And it's not simply the menu simplification. It's what else can we take off the workload of our teams in the restaurants to enable them to focus on what really matters with taking care of customers. So menu simplification will certainly help. There has been the initial phase of that from January where we have not seen a significant sales uplift from it, but we have seen it provide us with easing of operational complexity. There will be further moves on mini simplification coming up now because we have a number of tests in But also there's other things we can do to take workload out of the restaurants and just simplify the job from management crews that can focus on their frontline role, which is taking care of customers. So two things driving demand and then meeting demand and we've got actions on both. Next question is from Andrew Charles of Cowen and Company. Great. Thanks. Kevin to put the U. S. And China restaurant closures into perspective, what's the base of company restaurants that are currently cash flow negative? And should we expect these closures to be the 1st wave? And what could be future closures as well? Yes. So the restaurants that we closed or that we're announcing that we're closing right now, we're all certainly underperforming, not adding significantly to profitability and cash flow. We don't expect a lot more throughout the rest of this year. So you shouldn't expect to see a lot more happen through the rest of the year related to additional closures. There may be some little charges that I'll say come in through the next couple of quarters, some related to incurring costs as we actually close the restaurants and there may be a few additional restaurants, but you shouldn't expect a lot more significant closings, certainly nothing the magnitude of the Q1. Next question is from Joe Buckley of Bank of America Merrill Lynch. Thank you. Maybe a couple of follow ups on that. You and if you get to further somebody for it, I understand. But there was no mention of expansion in 2015. Are the old expansion plan is kind of still in place. So net net there would still be some increase in restaurants. And then somewhat related question, I guess, the $85,000,000 charge as you're from the prior or already previously disclosed refranchising plans. Is that coming because you decided to do those on a developmental licensing basis? And if so maybe talk about that change in thought if in fact it was a change? Thanks, Joe. I'll take that. First related to expansion, you saw we took everything out from the outlook. Obviously, we're still opening restaurants, but we'll update all the kind of outlook pieces, including expansion on the call on May 4. Related to the charges, a couple of things. So we refer to one of the pieces of the charge as costs related to write offs as we made decisions to sell restaurants to developmental licensees. That'd be consistent with our past practice. As we make decisions to sell, whether it's restaurants or countries to somebody, we need to look and see how it's valued and what we believe we can get in return for selling those restaurants. And as we make a decision and evaluate kind of the fair value versus what we have recorded on our books, it requires us to potentially write down the net book value to get to the cost of the selling price we're going to realize. That's what those amounts relate to. It would be consistent with prior practice. We made some decisions to actually sell some restaurants and developmental licensees. And we need to now record the cost so that it equals what we expect to realize when we sell those restaurants. Next question is from Jeff Bernstein of Barclays. Great. Thank you very much. Steve, just a question on the franchise relations or maybe the health of the franchisees, however you want to look at it. But obviously difficult for us looking in from the outside. On one hand, it would seem like your franchisees are probably among the most in quick service whether it's from a sales or a profit standpoint. But at the same time, I can imagine the recent weakness doesn't drive some frustration. So I'm just wondering that kind of as a backdrop. I mean, what's the greatest pushback or perhaps just maybe suggestions you'll hear from franchisees in terms of turning around at least the U. S. Business? That would be one thing because I'm guessing they have some pretty good insights. And secondly, do you typically discuss the initiatives and plans for the system with them ahead of time? For example, like the turnaround presentation in early May, they get kind of advanced look or do they opine on the initiatives that you plan on putting out there? Thanks. Okay, Jeff. Thanks for your questions. So the owner operator relationship is absolutely fundamental to the Owner operator relationship is absolutely fundamental to the ongoing strength. It has been for 60 years. And certainly, I want to continue that and champion that. When business is a little tougher like it is at the moment in the U. S. And with cash flows being challenged, yes, frustrations do arise as you would expect. The wonderful thing about the relationship we have with the operators is that there's a really open dialogue. Their views and our views we share openly as we build these plans together. So and I don't think that will change. As you go through turnarounds, I'm going to tell you from my experience in the past in other markets, they are a little bumpy by nature. It isn't just a straight line growth curve. And that will require it does require some bold and decisive decision making, which on occasions can lead to 1 or 2 friction points. And there's 1 or 2 things we can learn from 1 or 2 of the decisions we've made. But it doesn't mean the decisions we're making are wrong. Apart from it, I'm confident decisions that Mike's making from the U. S. And I'm making at a global level. And the ultimate objective from this clearly is, as you know with our business model of the 3 legged store is that our supply partners, our owner operators and the company succeed together. And I would love that to be an operator led success as well. That was nothing would thrill me more. With regards to what we're looking towards on May 4, there's a number of measures we'll talk to, some of which clearly you wouldn't expect me to talk to now. Some of which will be be able to share some broader operating plans of the markets with the broader audience. So some of the work's going on in the markets as we speak. There'll be other elements that we will save for May 4 to share with all audiences at the same time. Next question is from Keith Signer of UBS. Thank you. Steve, if I could circle back to some of your original points earlier about driving demand and ways to driving demand. You talked about the product, but in another increasingly important area is the digital engagement tool. Wondering if you could give us an update on the launch of a mobile app, maybe some of the details of what functionality you might include in the launch? And then is there going to be this role of subsequent updates and increased functionality? How do we think about adding in this tool to the driving demand aspect of the equation? Thanks. It's a great question, Keith. It's something we are excited about here, I've got to say. As you probably know, my previous role I was responsible for trying to establish our digital team and vision here and we've built a highly skilled and capable group of managing that for us. We are moving without a doubt from a world of mass marketing to what I describe as mass personalization and clearly technology allows us to do that now, which allows us to build a much more meaningful relationship with our customers to shift from a transactional relationship into a far more engaging and meaningful purposeful relationship where we can understand their needs on an individual basis rather than a generic basis. We are building a what we're calling our global mobile app. We will be launching it in the U. S. In the second half of this year. And there are 2 elements to our digital vision. 1 is the experience side and the other is the engagement side. The experience is what how can we use technology just to make the day to day customer experience easier and more convenient. And the engagement side is really more about the fun part of the brand. So the initial app that we'll be launching will be focused in primarily on the experience, just trying to make the day to day customer experience smoother and more convenient. And then future iterations, which are already building up the pipeline, I've got to say, will further enhance that experience and introduce more elements of funds to it. So I would not really be personally, we are not building in a sales build in relation to this for 2015, but we do see it as being a business driver as we look out. Next question is from Jeff Farmer of Wells Fargo. Thank you. In past 10 ks filings you've disclosed it looks like that the annual cost to support a typical company owned U. S. Restaurant was about $50,000 I'm curious if that number is still accurate. And just as a quick follow-up on that May 4, I'm just curious, how did you come to determine that that was an appropriate date to share the turnaround plan details? Thank you. Well, I can take the second one. I'll pick. Yeah, go ahead. So the date was clearly this is my 7th week now in position alongside Kevin as well. And you can imagine we've been working pretty hard on this. It wasn't a standing start. We both have our outlook history as we pulled into our current positions. May 4 is an important opportunity for us partly because, as I said, we're moving flat out to build the meaningful plans that are merit sharing with you. Also that we have our leaders from around the world in here as well and it's a great opportunity to share it with them at the same time as we share it with the broader audiences. So that date just sits comfortably in the cadence of action that we're building here. And then regarding your question on kind of G and 45,000 to 50,000 ballpark. Okay. And then 45,000 to 50,000 ballpark. Next question is from John Glass of Morgan Stanley. Thanks very much. Steve, to the extent you're willing to talk about it today, when you think about your turnaround plans, do you think about them focusing more on the operating part of the business? Or is it more of a financial restructuring? Or how do you weight those 2 in importance in your mind? If you're not willing or less willing to talk about that now, I also wonder about how you've your own turnaround experiences maybe the U. K. Or some other business you've been involved with. What are the important elements in those turnarounds? And are those applicable to this situation? Or is this very different in your mind? Yes. No, it's a great question, John. Thank you. Absolutely unequivocally, this is around driving operating growth in our operating business. Simply put, we want to sell more hamburgers to more customers more often around the world. So this is going to be a growth led turnarounds. There are things we can do to help that and probably to your second point and just from personal experience back in the U. K, which was there were certain things we can do as management as leaders in this business to help us run a more effective operating business. So the sorts of things that I have been looking at is around our organizational structure, around our ownership mix, about how we can get that drive in the restaurants most effectively, and about how we best use our resources. And you may have heard me say before, any leader in any business, there are typically 3 resources we have at our disposal. There's human resource, there's financial resource and there's time. So we're challenging ourselves to how we can most effectively use those three resources to prioritize them behind the areas that are going to deliver the greatest return and the greatest growth in this turnaround. Next question David Palmer from RBC. Thanks. Steve, just a question on premium and value. On the value side, particularly as you focus on the U. S, how confident are you that regional value marketing is going to be the way going forward? And how confident are you that this will be effective enough to replace what the dollar menu did for McDonald's over a decade? And on the quality side, how good I know this is a journey, what you're embarking upon and you're seeing a little bit in the Q2, but how good is good enough? For instance, one would have no doubt that if you had a chicken sandwich as good as Chick Fil A that that would sell well. But I'm just trying to get a sense of your commitment and how you're benchmarking and where your goals are on quality? Thanks. Yes. Thank you, David. So on the value piece, I would say regional clearly has a part to play, but it is a balance. And I know that Mike and the U. S. Team are working on that balance between getting national driven value where we can use our scale and that economy of scale on a national level along with freeing up the regions to really identify the menu items that matter most in their geography given maybe their climate and given affordability issues, it very, very much differs region by region. So there will be a balance to play on value. We haven't quite found that equation yet, but we know we're working hard to unlock it. In terms of quality, our benchmark is ourselves. What we're working on now and what Mike and the menu teams are working on is how can we deliver a better McDonald's menu. So we're very proud of our core products. What can we do to enhance the quality both direct quality and also the quality perception as we develop new items. Again, our benchmark is ourselves and our customers are guiding us on that. So we believe if we can bring great quality products at the value of McDonald's that is the equation that will drive growth. Next question is from Karen Holthouse of Goldman Sachs. Hi. Thank you. So looking at a number of initiatives whether it's on the improving sort of employee benefits and wages or improving the quality of products. Theoretically there would be a cost associated with most of these. And how do we think about it from a high level for the plan to absorb those costs versus push that onto the consumer through pricing in the company system? And then as these cost pressures on the ingredient side would flow to franchisees and then wages, there could be some spillover effects for McDonald's and then other large employers who are making similar moves. Just helping them manage through that without necessarily passing all of it on? Yes. Hey, Karen, it's Kevin. I'll take that. The minimum wage costs as well as all other costs certainly impact how we look at pricing, how we look at our margins. We've talked about with the minimum wage that it will impact our margins in the near term. But it also there's a lot of benefits to it in that it will be able to enhance our competitiveness in the marketplace. Our thought is that our turnover will decrease. We'll be able to attract and retain the best employees. So while there's a near term cost to some of those, we also look at the benefits. But we look at a lot of this as what do we need to do to make sure that we've got the business set up to be able to drive top line sales and those are some of the pieces. Just one piece to add to that as well is I talked about simplicity and simplification. Complexity typically adds cost in one way shape or form as well. So I know Mike and the team are working hard to try and strip either the non value added activity out of restaurants or make cuts as far away from the consumer as possible just to free up a little bit of room on the P and L, so we can mitigate 1 or 2 of the inherent inflationary costs that we face. Next question is from Sara Senatore of Sanford Bernstein. Hi. Thank you. One little detail and then I guess a bigger question. The details, can you I may have missed it, but could you give us the China comp? And then the bigger question is just going back to the store closures, can you give us a sense where were they more likely to come from later cohorts stores as in is there some evidence that maybe the store growth that we've seen over the last couple of years probably wasn't may have led to a point of kind of oversaturation. I guess, in general, when I look at turnarounds in this industry, they usually do include fairly significant amount of asset rationalization. So I'm just trying to get a sense of the sort of growth rate going forward that you would expect to see and how you think about the stores? Are they maybe some of the more recent development decisions were not ideal? Thanks, Sarah. It's Kevin. I'll take that. Regarding China's comp for the quarter was negative 4.8%. So that's the China question. The other regarding kind of optimizing assets, What I would tell you is we've been reviewing our restaurant portfolio around the world to ensure that we're set up to grow successfully in the future. So that review resulted in these decisions to close the 350 underperforming restaurants, primarily in Japan, U. S. And China. In China, a lot of those openings were, I'll say, between 2,009 20 12 where they've been consistently underperforming. Our sales estimation processes probably weren't as great during those years, but we now have better tools and better processes so that our sales estimation processes have been better. Japan, they're generally heavy loss maker restaurants that we're closing, so that will help the portfolio. And we're pretty much complete with that review. Like I said before, there may be some limited additional closures. There may be some limited additional charges, but the magnitude of any additional charges would will not be anything close to what we've got in the Q1. Next question is from Will Slabaugh, Stephens. Yes. Thanks, guys. Just a question around the menu globally and maybe even more applicable here in the U. S. Can you talk about the balance of launching new items that are enticing and different enough to actually drive new people or maybe lapse guests into your restaurants that's been lacking a little bit in the past number of years versus your plan to simplify the menu? Yes. So I think there's 3 elements to this actually Will. So one is our core menu, which is still our fundamental engine of growth. These are $1,000,000,000 brands a handful of products are $1,000,000,000 brands that are right and are much loved. So we are working hard to reinvigorate the consumers love and demand for that. On the new items, 2 elements. Some is launching permanent new items and some is just using LTOs. Again, they both play a different role. You can only absorb so many new permanent items because then that's clearly they demand a permanent place on menu boards and that does can typically add additional complexity. LTO can provide some fun. So you're talking 4, 5, 6 week promotional activity around themed events. It could be around World Cup Soccer, it could be around the Olympics, it could be around the time of year and the seasonal events. That just makes yourself rewards existing customers who may want to try something different for a little while and then return to their favorites. So that's always a balance. But part of what we're working on with our marketing leads certainly in the major markets is to understand how that best balance works. If we look too far one way and streamline it, we don't have enough new and enticing news out there. If we go the other way, it becomes a little frenetic and customers can't follow the restaurants find it hard to execute. So there's not a science to this, but all three are important, but primarily core meaningful new menu additions and then introducing some fun on occasion through LTOs just to spice up the market a little Next question is from Jason West of Credit Suisse. Yes, thanks. I guess going back to Jeff Farmer's question about the timing of the meeting. I guess, it felt like you guys were going to spend a little more time Steve since you haven't been there very long to kind of get the plan together based on some of your comments at the New York meeting. So I guess can you talk about is the meeting on May 4 meant to present the comprehensive sort of final plan that you've come up with? Or is this more of sort of first look at some of the things that you're working on and then you'll build from there? Can you help frame that a bit? Yes. On the call, we will be sharing the initial details of the turnaround plan. Clearly, I don't want to say too much about it because that's the reason I'm having the call on May 4th. But it will what we will we have selected that date because we believe our plans those initial plans will be well enough baked out that it will be meaningful news to all the audiences that have an interest in what we're doing at McDonald's. Next question is from Andy Barish of Jefferies. Good morning. Thanks guys. Just one I guess, quick follow-up and then a financial question. On the product news, Steve, do you think the brand has in the research you're looking at or doing, do you think the brand has credibility on the premium side? I mean, there have been some efforts obviously with most recently reintroducing chicken tenders in the past on premium burgers and wings that haven't really worked. So, I guess what's the current thinking on that? And then the financial question for Kevin was, you referenced higher lease costs in the franchise margin decline. Is there something going on with rent escalations or something above average? I just don't recall seeing that historically in your explanation. Yes. Thanks, Andy. For premium quality, I mean, I often describe McDonald's as possibly the most democratic with a small d brand in the world. And what customers love the world over and none more so than here in the U. S. Is how they can buy into aspirational quality products for at a McDonald's price. They don't have to pay over the odds for it. And when we're on our game and we have all elements of our business working well, our service experience, our digital engagement, the across the counter quality and new food news. Then all those components really do add value to the customer experience and their perception, their assessment of us. So yes, there's room for it. We have to be competitive in the marketplace, but we can bring great quality. So for example, taking removing of the antibiotics out of our chicken supply chain across the next 2 years it's a move that customers value because we can bring to them quality ingredients and quality menu items at the McDonald's affordable prices and they encourage us to do more of that. And we will continue as particularly here in the U. S. As Mike brings to life the food agenda that he has as part of his vision for the business, we will continue to make moves such as that to bring premium quality food at everyday prices. And again, the sirloin burger is a great example of that. It's a premium beef cut at McDonald's prices and looking forward to the customer's response to that. And then Andy related to the lease costs, to your point, we normally have rent escalation. So it's not necessarily anything new. Some of it is escalation, but more of it really relates to sales. We've talked about before, it's a top line game. So negative comp sales clearly put pressure on our margins. And when we don't have that sales leverage that significantly impacts margins. So that's really the bigger impact. Next question is from Matt DiFrisco of Guggenheim. Thank you. I think what stuck out to me also was a couple of the growth year markets where you're opening a lot of stores also seem to be some of the weaker comp stories this year. I understand it's a long term plan, some of those openings. But is that somewhat of a foreshadowing, I guess, for 2016, perhaps the lower comp environment that we're in now, might should it be presumed that we're going to probably see a little bit more pragmatic and slower development in those markets in response, especially from the franchise community more so of the emerging franchise community in China. Does that disrupt it at all? Hey, Matt, it's Pete. Yes, there's really no correlation between looking at the store growth numbers in the release and the comp sales. We have acknowledged in some of the major markets, we've got some turnaround activities to undertake and we're undertaking those obviously with the belief and the confidence that there is long term growth potential in those markets. And restaurant development is not something that we kind of turn on and turn off with a switch, because there is a pipeline involved, there is a from permitting to restaurant opening, it's a several month to multi year process depending on the country. So you shouldn't be drawing any correlation between those 2. And as we'll be able to talk about it in a little more detail on May 4, the efforts around turning the top line in the business are of utmost focus, especially in those markets where comps are weakest. Next question is from John Ivankoe of JPMorgan. Thank you. Just a 2 part question if I may. Steve, as you've kind of seen all the research that McDonald's has had, was there maybe 1 or 2 big things that consumers were telling you about 3 to 4 years ago that you needed to change and you could have kind of prevented the decline in the sales? And I asked this question really in the context of what were those preventable factors if you will? And is the organization kind of in a place where it can act on some of that right research? And secondly, if I may, which I guess is a little bit unrelated, there's been at least some illusion that there could be separate expressions of the McDonald's brand through the drive thru and the in store experience at least in the U. S. And Create Your Taste is certainly maybe moving in that direction. But if you could give us some light in terms of how some of the drive thru optimization tests are going around the U. S? Thanks. Yeah. Sure. Thanks, John. So looking back through the 4 years, I rather than anything we missed through consumer insight, I think perhaps the challenge we left ourselves with, we had 4 or 5 growth initiatives working together really through the 2 sales volumes. So from 2,003 to about 2010, 2011, we had a number of different growth platforms that worked and they worked around the world. Different markets sequence them in different orders, but everything from delivering great quality coffee, which then drove breakfast business going to extended hours, the reimaging program, for example, just to name 3. Perhaps what we didn't foresee and respond as well as we could have done ourselves is to create that future pipeline of growth platforms. Now sometimes the consumer will guide you there, but sometimes you got to take that into your own hands. And that was probably perhaps something that as we look back through our history, we wish we could have done a little better. The one trend that I would say we're working hard to address now is general consumer desire to be part of something big for food and treat as an individual. And that's where the whole personalization piece comes in. Whether that's the way we engage and communicate with customers, which is I believe technology will help us get there where we can have a much more personal relationship at a level that customers are happy with. But also on the menu side, that's where the customization of food comes in and then on to your second point on create a taste. One of the beauties we have here is we have an ability to test these things out and learn. So create your taste for example is an option within our broader McDonald's experience to the future ambition. We have a really concerted push on this in Australia and we will have 1 or 2 markets up and running within the U. S. And we will respond we will be able to see from consumers' response to that pretty quickly how that in store experience builds out and plays out. And then again in relation to your second point, how that then works through the drive thru. And time will tell, but we have a number of other ways that we can perhaps customize our menu or personalize our menu that we're also working on. We have test sales going on around the country and around the world better learn how we can best meet. That consumer need is around personalization. It is powerful. We believe we can deliver against this. And our confidence is when we start to really connect on that level and unlock the benefits of personalization, with 69,000,000 customers a day that will have a significant impact and drive long term sustaining growth. Next question is from Nicole Miller Ragan of Piper Jaffray. Thank you. Good morning. I just wanted to ask about the early stages of the efforts to drive results of the restructuring of the field level operations. I think that's something that was done in the U. S, I don't know, a quarter or 2 ago. And I believe it was maybe doing it by region or better matching up the corporate with the local consumer preference. Could you just let us know what you're hearing from the field level operations please? Thank you. Yes. So I'll take that Nicole. Yes. So Mike made a deliberate move at the back end of last year to announce a streamlining of the organization structure. I mean over time, structures can build up and it really he took a very concerted view of that. Really took out one level, one layer between corporate and then the regions. It leaves us with 22 regions around the U. S. What that has done is, is ask for a different role and performance out of our general managers and our operator leaders in the regions and a different way of engaging and speed of decision making in the center. So as the teams are embedding with these new accountabilities, new responsibilities, we're in that transition stage. I don't think we've got everything humming perfectly right now, but nor would I expect us to. It's a significant change for the organization. It's absolutely the right one to have made and had my full support. And we want to shorten the time period to get to further execution of the new roles and responsibilities in that structure. The last question is from David Tarantino of Robert W. Baird. Hi, good morning. Steve, just a high level question about your vision. I think you mentioned that you wanted to remove some of the legacy thinking and change the mindset of the organization. I was wondering if maybe you could share some examples of some of the legacy thinking that you need that needs to be changed. And then maybe secondly, based on the 7 weeks or so you've been in the job, maybe talk a little bit about how ready you think the organization or the system is to embrace some of that change in thinking? Okay. That's a nice soft one to end with David. Thank you. Right. So when I talk about legacy thinking and legacy attitude, I mean, we have been phenomenally successful for 60 years and there's so many good reasons much of that I would not ever wish to change our challenge. It's very precious to us and will stand us in good stead for the next 60 years. However, there is a certain conservatism and incrementalism that builds into that. And again, as a company that has not necessarily been a bad thing. But when you do need to make a step change, our organization doesn't naturally go there. It needs to be led there. And in my experience in McDonald's, whenever we've made substantial decisions and substantial changes, we are wonderfully adaptable once that has been spelled out. But we wouldn't actually take ourselves there as an organization. So with the team around me, we're challenging some of the conventional thinking on multiple fronts and some of that we'll be able to share with you over time. With regards to whether 7 weeks will get people into a state of readiness, I think there's a hunger and an interest in our business to embrace change. So I mean I hear it as I get into the market, hear it from the owner operators. And I think there is a pull and a hunger in the field for what are we going to stand for, where we're heading and how we're going to get there. And I'm not new to most of the McDonald's system. I'm new in position. I totally recognize that. And different expectations and capabilities come with that. But I think my track record and my history in McDonald's is relatively well known around the place. And probably don't come as a complete surprise. So I look forward to sharing more on May 4th and ongoing. We're nearing the top of the hour. So I'll turn it over to Steve who has a few closing comments. Thank you, Chris. And again, thank you everyone for joining us this morning. In closing, I want to reemphasize our commitment to reenergizing the business by moving more quickly and assertively to meet the demands and the needs of our more than 69,000,000 customers every day around the world. I'm confident in our ability to make the right move to reassert McDonald's as a modern progressive burger company that provides a contemporary experience for our guests. We will keep driving towards this vision as we build the business and brand and deliver long term value for customers and shareholders. I look forward to sharing the initial details of our turnaround plan with you on May 4. Thanks again to you all and have a great day.