Earnings Call: Q1 2014

Apr 22, 2014

And welcome to the McDonald's April 22, 2014 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 call over to Ms. Kathy Martin, Vice President of Investor Relations for McDonald's Corporation. Ms. Martin, you may begin. Good morning, everyone, and thank you for joining us. With me on the call are President and Chief Executive Officer, Don Thompson and our Chief Financial Officer, Pete Benson. Today's conference call is being webcast live and recorded for replay by phone, webcast and podcast. And before I turn it over to Don, I want to remind everyone that the forward looking statements in our earnings release and 8 ks filing also apply to our comments. And these documents are both available on our website at www.investor.mcdonalds.com as are any reconciliations of any non GAAP financial measures mentioned on today's call with our corresponding GAAP measures. So now I'd like to turn it over to Don. Thank you, Kathy, and good morning, everyone. We began 2014 with our strategies and our business model sound and intact. From a financial standpoint, our system's number one goal remains enduring profitable growth, which starts with continuing to grow customer visits and comparable sales. From our diversified geographic portfolio that leverages the entrepreneurial power of local ownership to the breadth of our menu across state parts and mill occasions, our strategies, infrastructure and investments support this goal. And while we expect the market dynamics to remain similar to 2013, we do have experience effectively competing in challenging operating environments and I remain confident in our ability to be successful at McDonald's. Our global growth priorities are focused on ensuring that we remain relevant and appealing so that more customers will visit us more often. We're focused on optimizing our menu so that we offer our customers food and drinks that have strong appeal. On modernizing the customer experience in our restaurants, so that that experience for each customer is more memorable and on broadening accessibility, so that we deliver parallel convenience. The key to our growth lies in our ability to place the customer at the center of everything that we do. Over the past few months, I've had the opportunity to visit our priority markets, the U. S, Germany, Japan and Australia with Steve Easterbrook, Pete Benson and Tim Fenton. We focused on more deeply understanding how each of those markets are adjusting their plans to address current challenges and adapt to the environment and to our customers' expectations. There were 4 opportunities that were common to these markets and are being fortified in many other countries in which we operate. 1st, we're strengthening our planning process to more effectively bridge consumer insights into the right customer centric plans and actions, while striking the right balance against our internal financial objectives. 2nd, we're strengthening our marketing messaging to better resonate with customers and create stronger awareness. 3rd, we're enhancing our affordability platforms to ensure our value offers are consistent and clearly messaged. We want our customers to feel good about the value that they get when they visit us at McDonald's. And finally, we're more effectively balancing our focus on the core menu including the Big Mac, Egg McMuffin and our world famous fries. Our core products are familiar favorites for our customers. They truly represent McDonald's to all of our customers and at about 40% of total sales, they are an incredible business asset for us that requires a constant drumbeat of communication. Now our area of the world and local market teams are translating these learnings along with specific market findings into comprehensive action plans to improve the customer experience. A good example is the recent changes made in U. S. Marketing to more directly align our marketing efforts with targeted consumer segments. I'll talk more about this change and actions being taken in the other priority markets a little bit later. It's important to underscore that it will take time for consumers to notice the changes and reward us with increased visits. This is not about a silver bullet, rather it's about optimally sequencing multiple customer focused initiatives and executing them very well. While we expect results in these four markets to remain volatile in the near term, we are confident in our ability to improve over time. Now beyond our priority markets, we continue to pursue targeted growth initiatives that drive system wide performance. In addition to our ongoing emphasis on menu, these include brand extensions like McCafe beverages, dessert kiosks and delivery. They include increasing our global footprint through new restaurant openings in both established and emerging markets and by continuing to modernize our restaurants through reimaging. And also by leveraging the investments that we've already made in restaurants, particularly relative to restaurant technology like our global point of sale platform and in store wireless access to support our digital efforts focused on engaging more deeply with our customers and differentiating the McDonald's experience. Finally, in addition to market level activities, we're also evaluating opportunities to enhance shareholder value, while maintaining long term financial strength. Now Pete will speak more about this area of focus in his comments. Let me switch gears now and discuss global results. Year to date March, our global comparable sales increased 50 basis points with positive performance in all segments except the U. S. Operating income was up 1% in constant currencies and earnings per share was $1.21 a 2% decrease in constant currency. Comparable guest counts for the quarter continue to be negative. Our priority markets of the U. S, Germany, Japan and Australia drove that decline. Comparable guest counts would have been positive excluding those markets. While recent signs indicate economies may be stabilizing several of our major markets, the projections for the informal eating out industry call for flat to modest growth in 2014. With this as a backdrop, April global comparable sales are expected to be modestly positive. Let's now move to performance by area of the world and address our priorities going forward. In the U. S, comparable sales for the quarter were down 1.7% and operating income declined 3% driven by negative guest counts due in part to severe winter weather. The U. S. Is focused on strengthening the customer experience through better operations and service execution, balance focus between our core and new products and enhancing marketing effectiveness while maximizing our opportunities to grow our breakfast. Because service is such a foundational element of the customer experience, we recognize the need to elevate our service levels to ultimately build visits. During the 1st 6 months this year, our franchise and company owned restaurants are engaged in what we call a reset, which emphasizes the importance of proper staffing, scheduling and positioning of crew to build restaurant capacity, particularly during peak hours. Earlier I mentioned changes that have been made within our U. S. Marketing group. We've adjusted our marketing calendar so that we're introducing the appropriate number of new and promotional products and we're better sequencing them to maximize restaurant execution and the contribution to comparable sales. We're also looking to harness the power of our marketing strength, especially in support of our core menu. We're focused on creating a greater emotional connection between customers and our core products through our advertising and media spend. Those things combined with the fresh perspective of our new U. S. Chief Marketing Officer, these balanced menu changes and focused media strategies will allow us to strengthen our appeal to customers by offering them what they truly want, great food and great service at an affordable price. Finally, as the leader of the important and growing breakfast daypart, we'll continue to build on the strength of our morning business. Today customers choose McDonald's because of our great products cooked in our restaurants and our kitchens. We crack fresh eggs. We grill sausage and bacon. We bake biscuits and we toast muffins, all to serve up a delicious breakfast that is accompanied by our outstanding McCafe coffee. These things truly set us apart and position us to continue growing this daypart into the future. Now moving over to Europe. Comparable sales were up 1.4% for the quarter and operating income was up 4% in constant currency. Positive comparable sales performance in the U. K, France and Russia was partially offset by Germany's negative results. While we're encouraged by positive comparable sales trends and recent economic indicators that appear to be stabilizing in many markets across Europe, we remain cautious in the near term given a tenuous operating environment. Both the U. K. And Russia have successfully focused on growing breakfast, while balancing the core menu with strong promotional activity that is resonating with local customers. In France, successful marketing support for premium products and limited time offers along with a stronger affordability platform have contributed to the 8th consecutive month of positive comparable sales growth amid a declining IEO industry. Germany is one of the priority markets with persistent negative sales and guest count momentum. The new management team is working to rebuild consumer trust through a more relevant and consistent affordability platform. We've also adjusted our menu and marketing calendar to do a better job of connecting with customers by reducing and better balancing our core menu favorites with new food and beverage offers. Now let's shift to Asia Pacific, Middle East and Africa, where comparable sales were up 80 basis points for the quarter and operating income decreased 2% in constant currency. Solid comparable sales performance in China and many other markets was somewhat offset by weakness in Japan and to a lesser extent Australia. In China, comparable sales increased 6.6% for the quarter, partly reflecting the lap of the residual effects of consumer sensitivity related to last year's supply chain issue in the chicken industry. China's ongoing focus on brand extensions like delivery and dessert kiosk is strengthening our appeal as a convenient brand. Sales from our delivery business continue to grow at a double digit pace and while about 30% of the total restaurants in China offer delivery, these restaurants are concentrated in our key cities and offer additional customer benefits such as minimum delivery times and 24 hour service. We continue to see significant growth potential throughout APMEA. In China, we plan to open about 300 new restaurants this year. We also continue to accelerate our franchising efforts. About 15% of restaurants in China are franchised as of the end of the quarter and we're on track to achieve our near term target of 20% to 25% franchised restaurants. In Australia, recent comparable sales are negative due in part to the shift and timing of the Monopoly promotion this year. The market is enhancing its affordability platform by adding new meal bundles to the loose change menu to strengthen our value offer and remind customers that we have something for everyone. Japan continues to experience negative comparable sales and guest count trends amid a highly competitive environment. Looking ahead, Japan is focused on offering more relevant food and beverage choices, increasing the focus on the family business and repositioning the affordability platform to rebuild our customer connection and stabilize our performance. As we look forward, the market is also monitoring consumer reaction to the 3% consumption tax increase that occurred on April 1. Around the world, we're working hard to ensure our actions are driven by what our customers want and need from us today and tomorrow. As our business continues to generate significant levels of cash, our philosophy regarding the use of cash remains unchanged. Our first priority is to reinvest in the business to capitalize on the sizable long term growth opportunities that exist. And after reinvesting in the business, we're committed to returning all of our free cash flow to shareholders through dividends and share repurchases. In the Q1, we returned $1,200,000,000 to shareholders through dividends and share repurchases combined. I want to close by reemphasizing my confidence in McDonald's future. Approximately 70,000,000 customers per day across a geographically diverse portfolio of over 35,000 restaurants is a very strong foundation from which we operate. Our infrastructure and our fundamentals are sound. We're leveraging the power of our proven business model, our investments in restaurant capabilities and modernization and our hard earned competitive advantages to pursue the sizable opportunities that are before us. At the same time, we're thoughtfully evolving our approach to remain relevant, making appropriate adjustments to navigate near term challenges, while driving enduring profitable growth for our system and for our shareholders over the long term. Thanks again everyone and I'll now turn it over to Pete. Thanks Don and hello everyone. The McDonald's system entered the year with a realistic view of our near term opportunities, yet a firm focus on our path to long term success. We are diligently managing those things within our control, while continuing to position the McDonald's system for future growth. The battle for market share is expected to persist given projections for flat to modest category growth in our major markets this year. But over the long term, the $1,200,000,000,000 global informal eating out category should grow more significantly. And I expect McDonald's to fully participate in that growth. One of the reasons I'm confident in McDonald's future is the strong base off of which we operate. First quarter results were in line with our expectations and highlighted the resiliency of our system and financial model. Though top line growth was challenged, McDonald's generated $1,900,000,000 of operating income. This is an impressive number, but I'm even more encouraged by the significant long term opportunities we see to drive future growth. Turning to Q1 performance. We are primarily a franchisor with 81% of our global restaurants franchised. As such, our profitability is driven primarily by top line performance. Modest comparable sales growth combined with higher expenses and lower gains from sales of restaurants contributed to a 60 basis point decline in our combined operating margin to 28.9% through March. The largest component of operating income is our franchise margins, representing approximately 70% of total restaurant dollars. Franchise margins, which are driven by a relatively steady and predictable stream of rents and royalties, grew to approximately $1,800,000,000 in the first quarter, a 3% constant currency increase driven primarily by expansion. The consolidated franchise margin percent decreased 60 basis points to 81.1 percent, highlighting the need for stronger comparable sales gains to offset increased expenses and maintain this margin percent. Global company operating margin dollars grew to $723,000,000 while the margin percent decreased 10 basis points to 16.1 percent due to higher labor, commodity and occupancy costs, which were offset by positive comparable sales. In the U. S, company operating margins decreased 10 basis points to 17.3 percent as the positive impact from higher average check, primarily driven by pricing, was offset by negative guest counts and higher commodity and crew labor costs. 1st quarter commodity costs in the U. S. Rose nearly 3%, driven primarily by higher protein costs. We expect similar pressure in 2nd quarter then easing throughout the second half of the year. The full year outlook for the U. S. Grocery basket remains a 1% to 2% increase. At the end of March, the price increase in the U. S. Was about 3% higher versus a year ago. While the food away from home inflation index is 2.3% through March, it is projected to be up 2 point percent to 3.5 percent for the full year. In addition, we have seen more significant increases over the past 2 months in food at home inflation, which is also projected to increase 2.5% to 3.5% for the full year. We watch these indices closely, yet are also mindful of cost pressures, not only in 2014, but next year as well when making our pricing decisions. Turning to Europe, company operating margins increased 30 basis points to 17% as strong performance in France and the U. K. Was partially offset by higher commodity costs in Russia. Due to the impact of the weaker Russian ruble on import costs. Europe's grocery bill was relatively flat in the Q1 and we expect more pressure in the second half of the year with the full year increase still projected at 1% to 2%. And across Europe, the average menu price increase excluding Russia is about 2%. In Asia Pacific, Middle East and Africa, company operated margins declined 60 basis points to 14% as positive comparable sales were offset by higher labor, occupancy and other costs. While the margin percent grew in several markets, including China and Australia, refranchising in Australia and the weaker Australian dollar negatively impacted the segment's overall margin percentage. In addition, the new restaurant openings primarily in China contributed to the lower margin percent though to a lesser extent than in 2013. G and A for the quarter increased 4% in constant currencies. Over half of this increase was due to our sponsorship of the Winter Olympic and Paralympic Games in Sochi. We expect to experience a more significant G and A increase next quarter due to our worldwide convention and costs related to other initiatives such as restaurant growth, capacity enhancements and our digital capabilities. 1st quarter effective tax rate was 32.4%. It represented a significant increase versus the prior year rate of 30.1%, which was aided by a tax benefit of nearly $50,000,000 We continue to project the 2014 full year rate to be between 31% 33%. We remain committed to investing in our business to drive future growth and returns. We allocate capital in a disciplined measured way, opening new units across a diversified portfolio of markets while making prudent investments in existing restaurants. We are on track to open 1500 to 1600 new restaurants this year, including about 500 in affiliated and developmental licensee markets. We also expect to re image over 1,000 existing restaurants. The rollout of the new kitchen equipment in the U. S. Is progressing nicely and we are on track to have it installed in all restaurants by mid year. As I discussed at a couple of investor conferences last month, we are moving with more urgency to address recent financial performance in our priority markets. In addition to these efforts, which Don covered, we are actively looking at ways to improve shareholder returns by optimizing our capital structure, while maintaining our long term financial strength optimizing our ownership structure, including certain refranchising activities, especially in markets outside of the U. S. And scrutinizing ongoing G and A, while appropriately supporting our franchisees and our growth initiatives. As I said at the conferences, these additional areas of focus do not represent a change in strategy or financial philosophy. They fit squarely within our business model. We are not beginning with a given target in any of these areas, but instead are evaluating them with the ultimate screen of creating value by doing what is right for the business over the long term. Financial discipline has been a cornerstone of the plan to win and that certainly will continue because I believe a strong financial foundation is a critical component to building enduring profitable growth. It's premature to comment on any specifics, but we expect to provide an update on our progress over the next couple of months. Lastly, let me touch on foreign currency translation, which negatively impacted first quarter results by $0.03 At current rates, including the stronger euro, we expect 2nd quarter EPS to be minimally impacted with a full year negative impact of about $0.03 to $0.04 As usual, this is directional guidance only because I know rates will change as we move throughout the year. In closing, I am confident in our fundamental business model and our competitive position. We're the global leader in a $1,200,000,000,000 industry, yet have less than 8% market share, providing significant opportunity for future growth. Our geographically diversified portfolio and various ownership structures allow us to optimize our investments within a market. We are aligned with our outstanding owner operators and suppliers to leverage our distinct competitive advantages. We are making strategic investments today to seize those opportunities to create long term value for our customers, shareholders and the entire McDonald's system. Thanks. And now I'll turn it over to Kathy to begin our Q and A. Thanks, Pete. We're going to open the call now for analysts and investor questions. We're going to again try to give as many people as possible the chance to ask questions. So if you can limit yourself to one that would be appreciated and we'll come back to you for follow-up as time allows. So our first question is from Joe Buckley of Bank of America Merrill Lynch. Thank you. Could you give us a little bit more color on the U. S. Kitchen assembly prep tables? Maybe how many stores have them currently? And I know you said you expected the rollout to be complete by mid year. But also in addition to the number, just what you've learned so far in terms of speed of service or greater product assortment of variety? Hey, Joe, this is Don. Just a little bit on the prep tables. The high density prep tables and I think that's what you're talking about relative to the kitchen changes in the U. S. Are really they're a key enabler for the future menu. And the reason that they are is that they give us a few things we don't have today. One of those being room to add new ingredients, another being the chill rail, which enables us to include fresh ingredients. They also it also helps us relative to the way that the kitchens are structured, so that we have a mere to prepare to prepare some of our food, our sandwiches and our products. These things together really help support our future vision of the menu. And that doesn't necessarily mean that we're going to add a lot of things. But what it does mean is it gives us the capability to optimize some of the products we have and it gives us the flexibility to have some new toppings that will help us be able to customize some of the food products that we have. The U. S. Is on track to meet its completion goal by mid year, and it's going quite well. In addition to that, Joe, the other thing that the U. S. Is doing now and I mentioned it in my comments is what we call reset, which is focusing back on staffing and scheduling and positioning. This is really, really critical because at this point in time and with the volumes that we have in the restaurant, we want to make sure that we can handle the peak hour capacities that hit the restaurants. And so a combination of those things with the way that we're rationalizing the menu to make sure we're not implementing too many new products with a better balance of focusing on the core and the new products. Those things altogether are really what this major focus in the U. S. Is right now. And it's kind of a back to the basics with some enhancements in terms of our productivity and capability in the restaurants. Our next question is from Brian Bittner from Oppenheimer. Thank you. It just feels like the biggest opportunity here in the near term is Europe. It's 40% of profit contribution very similar to the U. S. And operating profit did decline in the U. S. And APMEA, but it was positive 6% in Europe. And I think this was despite your largest European market, Germany, being negative. And so just focus on Germany for a second. Tell us really what you think is going on that can help turn around some of those self inflicted wounds in that country? And really I just feel as though Germany gets turned Europe can really accelerate from here and therefore the profits of the company can really accelerate from here. So if you could just focus on Germany for a moment that would be helpful. Absolutely, Brian. So a couple of things in a broader set. As we talked about the key priority markets and I mentioned some of the things that we saw relative to commonalities. And those things really are what I would consider to be a translation of consumer insights into the action plans very strong and making sure that we're not trying to merely drive profitability on the end, but we're focused on customers and the insights around customers. There are several things relative to Germany. And these things are being addressed now by the leadership team that's there. One is Germany is a very price sensitive market. And if we look at our performance, we have a couple of main issues, one being our core EVM movement. And from a competitive perspective, actually the bakeries in Germany are doing quite well. What customers have mentioned to us is that there's several things that we need to focus on. 1 is to reestablish our relevance because our menu boys have gotten a little bit out of whack. What I mean by that, we've implemented a lot of new products, similar to some of the implementations in the U. S. System and it really has confused customers to a certain extent. The other thing has to do with our pricing and our strategic relationship on the menu board. And this basically is the relationship between the value based components and the rest of the limited time offers and the core EVMs. We've got to make sure that that is a much more rational and strategic pricing structure. Our teams are working on that. And lastly is the balancing of marketing. And that is the balance between our core menu that I talked about with Big Macs, royales or quarters, fries, how we leverage and talk about those things along with value, along with limited time offers like the Huttigali products in Germany. And so the combination of having a consistent balance there with having a consistent messaging around affordability and also making sure that we reestablish the relevance particularly with the offers we conveyed via our menu boards and marketing are the things the market is focused on. As we were having our session in Germany, it's clear that the new leadership team that we have in place there is focused on these things. We also had a chance to meet with the franchisees in Germany. They are very understanding of the situation that we're in there. And frankly, one of the things that galvanizes the McDonald's system is when you have poor performance and it impacts cash flow. And I know that our franchisees along with our company team there and it is a new team are all focused on improving the situation there and improving our aggressiveness in the marketplace. Next question is from John Glass from Morgan Stanley. Thanks. Pete, when you talked about optimizing the business model a little more, can you of the 3 big buckets you've outlined, which do you think is going to have the biggest impact or potentially the biggest impact to shareholder returns? Can you talk about how you plan to convey this information? Is it in next quarter? Or is it inter quarter? And is this the whole plan? Or is it just kind of an update? We'll get a lot of these updates along the way. Good question, John. I think you have to take the three levers that I mentioned, you really have to take those in combination with the what Don said in his comments about the focus on the 4 priority markets. So taking all of that together is really the combination of all of that is what's going to drive the value over the long term for shareholders in the system, not any one of those items in isolation. And as Don mentioned, to turn the sales trend lines in those big markets is going to take a little bit of time. And so as we look at what else is there within our business model that in the meantime we can do to be accretive to value. Looking at opportunities on the balance sheet, As we've said though, we want to maintain that single A rating that's been a cornerstone of our business model over the last 50 plus years and is an important piece of our financial strength and flexibility. Refranchising, at 81% franchised, obviously, that's our primary method of doing business. While we've done refranchising over the last couple of years, we think there's opportunities to accelerate that. And so, of the financial levers, that's probably the one that has the most opportunity to drive value. And that by its nature is going to be a multiyear plan when we talk about the details. It's going to be a multi year plan and it's really primarily focused outside the U. S. And but it's also prudent for us to take a look at our G and A spend, especially as we know there are growth opportunities in areas like digital, where we want to allocate more funds and rather than have all of that be incremental, we're looking for ways to reallocate so that we can finance those and live within a certain G and A envelope. So, you can expect to hear from us by the end of the second quarter. And I think what you'd expect to hear is something broadly that covers kind of all of those areas and not just 1 or 2 of the specifics. Next question is from Jeff Farmer from Wells Fargo. Great. Thanks. Good morning. What are the opportunities you see at breakfast? Have you increasingly focused on that daypart as a potential same store sales driver? It seems like it's been the attention there has been upped a little bit here recently. Thanks, Jeff. First of all, relative to breakfast, I mentioned in my comments, customers choose breakfast at McDonald's because our breakfast tastes great. It has very, very high consumer scores, freshly prepared products. Every morning, as I mentioned, we actually crack eggs. We cook in our restaurants. This is not a microwave deal. We actually cook. We have grills and fryers and ovens. And so that's the reason that we're able to prepare breakfast. The other thing is our breakfast model is also focused on how we serve up that breakfast quickly to customers that are on the go. And so we continue to focus on those areas of strength that we have. We've been serving breakfast now for over 30 years and it is our strongest one of our strongest dayparts clearly, clearly one of the strongest from a profitability perspective, the strongest. And so we'll continue to focus on our breakfast opportunities. The U. S. Is focused today primarily on breakfast via coffee and then our handheld sandwiches that we have at breakfast and also on some of the quality and freshness cues that I've just talked about. And so those things we'll continue to focus on, continue to focus on the operational opportunities we have there in the staffing and the scheduling and positioning at breakfast as well. Next question is from David Tarantino from Baird. Hi, good morning. Just one quick clarification on the last question then a separate question. 1st on the breakfast sort of initiative or focus there, is that being done in response to this competitive activity, for example, the Taco Bell launch? Maybe could you comment on whether that's having an impact on your business or not? And then the second question comes back to the focus on the reset initiative in the U. S. And it sounds like maybe some of the initiative there is focused on better handling the complexity. But one of the things that you haven't talked about is whether you'd be interested in reducing some of the menu complexity to sort of fine tune the operations and whether or not that's an opportunity. So perhaps could you comment on that as well? Thanks. Thanks, David. Just a couple of points. One is there has been breakfast competition for a number of years in the U. S. Market. We've had some of our major competitors that have made runs at breakfast and it seems every year there is someone new that is making a run and none of them have really stopped their focus on breakfast, whether that be the closer in competitors or if that's sandwich shops or if that's taco shops or anything else. Everyone has an opportunity and they wanted to look at breakfast. We have not seen an impact relative to the most recent competitors that entered the space. One of the things that happens at breakfast if anyone enters, customers will try the breakfast. It's new. It will be something that they've not seen in the marketplace. So we expect customers to try it. But what we also are confident in is our ability to execute at breakfast with again the things that I mentioned relative to being a restaurant that cooks and we have a delivery service that's capable of satisfying the time needs, if you would, of consumers. I think that new entrants into the market always bring a different level of attention to breakfast, which in many cases supports us. Our breakfast continues to be a positive driver in our business in the U. S. And actually sometimes when these entrants come in, it forces us focus even more on being aggressive relative to breakfast. I know you've just recently seen the coffee execution in the U. S. And our free coffee offers, which really are about supporting our breakfast and supporting our breakfast foods as much as they are about reintroducing Americans to a delicious cup of McCafe coffee. And so those are the things we do there. On the reset end, I did mention in my comments a bit about reducing potentially if this reduces the complexity. When you have a number of builds in the restaurant, basically what you're doing is you're leveraging the various condiments and products in the restaurant to build those sandwiches. If you can go to a more streamlined menu board approach and then still have those comments or condiments, so the customers can customize a bit, it will help in terms of reducing, if you will, complexity. Having said that though, customers want varied taste and so we need to be able to deliver that. They also want familiar favorites like the Big Macs and Quarter Pounders Filet O Fish Nuggets Fries and we need to be able to deliver on that. And we will be able to do both of those things. The system that the U. S. Is putting in place on reset just calls us back to a basic operations focus on our restaurants and it helps us to enable better productivity with some of the things such as the high density prep table and the high density kitchen setups we have. Next question is from David Palmer from RBC. Good morning. In your prepared remarks, you mentioned that you're strengthening your planning process to effectively bridge consumer insights with the right customer centric plans and marketing. I'm curious about what that means. Have we already seen the fruits of these changes in your marketing? Are big changes coming soon? Perhaps you can give us a sense of what you think is the marketing opportunity after some self diagnosis? Thanks. Several different points. Thanks David for the question. Several points that I mentioned. On the consumer insights piece, we have tremendous amounts of data within the McDonald's system. Question is whether the data is then being translated directly to the specific action plans that we see being executed in the marketplace. And that is a combined effort between the franchisees in the market, our leadership teams and our supply chain and our supply chain leaders. So we've got to make sure that we're translating those consumer insights. The whole notion here is that you can't be driven based upon optimizing profitability even in the face of external pressures relative to the P and L. We still got to remain grounded in the consumers. And that is what we saw as some slight gaps in some of the priority markets. So we've got to get back to that consumer focus while mindful of some of these additional cost pressures, but make sure that the plans are robust enough. But that is combined with several other things that I mentioned. 1 is the marketing messages. So if we are more streamlined and focused relative to this consumer insights to action plan, then the marketing focus and the messages won't be so disparate. And what we'll be able to do is focus that strength and highlight that strength a little bit more solidly. The other thing that we saw was that affordability is one of those things that tends to get a little bit of less focus in tougher times. And so in many of the markets, we fell off of our affordability messaging a bit. In some of the markets, they're coming back on that. And then the core menu balance, we were chasing a few too many limited time offers. So for these primary focal markets, this is going to take time. I mean our planning process you know us well. We plan with the franchisees and we plan not just 2 or 3 months ahead. We plan 6 months, 9 months and usually a year ahead of time. And so it's going to take a while to see some of these things layered in. And these things will take a bit of time. But I feel confident that our and these things will take a bit of time. But I feel confident that our markets now are focused on leveraging the right processes incorporating the right discussion points with the franchisees and moving the business for the long term in the appropriate manner. Next question is from Jason West from Deutsche Bank. Thanks. Just one around the overall portfolio review. Is part of that also looking at CapEx and the unit growth rate that's been picking up a little bit in the last few years? And I know you guys taking a harder look at whether that's the right growth rate for the business and the right CapEx spend for the business? Jason, an outcome so the refranchising plans are being built up market by market. So as we said, we didn't start this with a particular target in mind, but we want the markets to come back to us based on their knowledge of the franchisees, their local business environment, their growth And certainly, one of the outcomes of that will be, And certainly one of the outcomes of that will be as we get more franchised that is less capital intensive. So it will allow us to grow at the same pace, at this pace that we've been growing at that 2.5% to 3% new units with less capital. And so it is definitely an outcome. It's not the primary objective of looking at the refranchising, but it is certainly an outcome. It makes us a little less capital intensive. But it also makes it converts that a company operated earnings stream into the more stable and predictable rent and royalty franchising income stream, which we think is the most valuable piece of all of this. Next question is from Will Slabaugh from Stephens. Yes. Thanks guys. Regarding the U. S, can you talk about how you gauge the customer reaction so far to the dollar menu and more? And how you think you're positioned there versus your peers at the lower end? And at the same time, could you kind of talk about that in the context of the necessity there for a dramatic innovation to premium end as a big lever? Or is it as pressing in the near term at least as driving value and getting people in the door through your value proposition there? Okay. I want to make sure I catch the last part of that again possibly will, but I'll give this a shot. Relative to dollar menu and more, again stepping back relative to value menu in the U. S. During roughly the last 10, 12 year history, the U. S. Has evolved the dollar menu to ensure the menu offers are aligned with customer preferences several times. Those changes have been made over this 10 year period to make sure we stay relevant, but we're also mindful of the profitability aspects and the execution aspects of these menus within the restaurant. And we want to make sure that we provide the right things for our customers and we can do that over a sustained period of time. So when we look at Dollar Menu and More, it is another of those evolutions. Dollar Menu and More as a percent of total day sales seems to be relatively in line with our historical averages and we're not seeing any dramatic change to the usage of dollar menu and more. And so right at this point in time dollar menu and more has performed to the expectations that we've had. I think the last part, Will, that you mentioned was relative to premium products and the role that premium products play. I would say is there's a balance between what we just talked about with affordability dollar menu and more, our core menu offerings and our premium based products. So when you see Clubhouse Burger in one of the local window or one of the national windows, you'll probably see coming up in a local window, maybe some mentions of breakfast, maybe some mentions of affordability or mentions of a limited time offer product. So Clubhouse Burger worked great nationally, but you'll also have to marry that along with some of the value messaging. You'll also hear some beverage messaging and breakfast messaging. So that marketing calendar has to accommodate all of those. There's definitely a place for new food and innovation, new beverages and innovation. We just want to be mindful of the core offerings that we have, giving them the appropriate leverage in the marketing calendar as well as dayparts like breakfast. Next question is from Matt DiFrisco from Buckingham Research. Thank you. My question is with respect to the price and I wanted to know how that might look with obviously a lot of states having some minimum wage and California going up to increasing their minimum wage over a couple of years here. In your planning process, is that 3% price that you mentioned domestically being held, is that what we will see carried out and already assumes to absorb some of that minimum wage? Or is there an ongoing dialogue with franchisees as far as what type of minimum wage response they might have? Yes, Matt. There are actually 13 states at the beginning of the year that raised their minimum wage anywhere from $0.10 to $1 and that's before any federal potential federal minimum wage impact. So, as I mentioned in my remarks, we look at the traditional indices that tend to guide our pricing decisions. So, food away from home projected to be up 2.5% to 3.5% this year. I think inherent in that is you do see franchisees generally around the industry, not just McDonald's, anticipating some of these higher input costs. So, they've got what the states have already enacted today. They've got the discussion about a potential at the federal level. For a lot of them, the healthcare mandate kicks in, in 2015. So they have to be mindful of that. So these cost pressures are definitely on everyone's mind as you think about pricing. Yet as Don mentioned, you have to strike that right balance between everyday affordability and providing them premium products that will drive them into the restaurant as well. But as we get too focused on individual profitability and less focused on the customer, that's when we start to run into some of these challenges. Our next question is from Jeff Bernstein from Barclays. Great. Thank you very much. Just focused on the U. S. Business and the competitive environment perhaps obviously ex the weather. And I think you've talked about kind of the QSR promotional activity kind of ramping up. I know you mentioned the free coffee promotion you guys are doing. I know more locally perhaps we've seen kind of buy one get one Big Mac type products. So I'm just wondering whether you could talk 1st and foremost just about the competitive environment, especially with you guys having perhaps lost some share to some of your competitors over the past couple of quarters. And as it relates to that, the Brexit, which it seems like so far so good that it's fairly steady and I believe you said roughly 25% of sales. I'm just wondering if you can give us some insight that we don't perhaps have on the broader category and maybe how the category is growing relative to how your 25% has grown or contracted over the past year or so? Thanks. Thanks, Jeff. I will try to answer. I think you had about 4 or 5 different questions in there, buddy. But the first one relative to the U. S, U. S. Comparable sales trend stabilized during the Q1 of 2014 and we saw sequential improvement in our reported results comp results as well as the narrowing of the gap to the QSR sandwich competitive set. And excluding the impact of this year's severe winter weather, our U. S. Comparable sales for the Q1 would have been relatively flat. We had about a 1.4% a little over 1.4% impact due to weather, which we don't often talk about weather, because next year when it's much better, we probably won't talk about it either. But truth of the matter is it did have some level of impact to us. But you all will put that in the appropriate perspective. We don't plan around weather at McDonald's. We plan around customers. The a couple of other things. We continue to see some the IEO industry in the U. S. Is still relatively flat. So we know that this is going to be a market share battle. So we've got to focus on those things that our customers are focused on and desire. So in the U. S, there's a focus around breakfast and coffee as I mentioned. There's a focus on balancing our core menu along with some of the limited time offers like you just saw with the Clubhouse Burger and Chicken Sandwich. And we've got this basic focus on operations to ensure that we can satisfy the needs of customers particularly during the peak hours. So that gives you a pretty overall perspective I'd say of our U. S. Business and the state of that. From a breakfast perspective, I mentioned it a little bit earlier, our breakfast is strong and it continues to be a solid performer relative to our overall daypart segments. And what we want to make sure is that we just continue to focus on the strengths that we have. And actually, we have not talked as much about the quality aspects of our breakfast. We haven't talked as much about the fact that we're a restaurant business that cooks. There are entrance into the marketplace that don't have the same capabilities we have. And so we're going to leverage the strengths that we have and leverage the capabilities we have to inform customers of the fact of why we've been in the breakfast business for over 30 years and why we have become America's favorite place to eat breakfast. And we don't plan on giving that up. Next question is from Sara Senatore from Sanford Bernstein. Thank you very much. I just want to follow-up on the U. S. Business and in particular in the context of some of the commentary about maybe focusing on profitability, maybe at the expense of resonating with customers. So can you just talk a little bit about the margin structure there? First, is it still the case that you need a 3% comp to lever expenses? Should it be higher? Because it sounds like you're looking more for traffic driven comp. And then I guess what's the right margin company operated over the long term? If I look back 20, 25 years, it's averaged something close to 18% in the U. S. And Europe. Do you see anything that suggests it should go up or down from here or structurally just there's something that's changed with your margins? Thanks. Hi, Sarah. I just want to make a quick comment and I'll turn this over to Pete on margins. First of all, we have a fantastic group of franchisees in the U. S. Business. Matter of fact, next week we have our worldwide convention where our franchisees from around the world will be there and we're looking forward to the dialogue and discussions we'll have. So when we talk about profitability, what we're talking about is very viable astute businessmen and women who look at the overall environment and are looking at some of the implications of commodities along with legislative pressures and then they will make decisions relative to their businesses. So if we talk about a focus losing a bit of the focus on the customer, it's not because we don't have solid business people or we have people that are trying to squeeze the business. They're looking at the overall perspectives of profitability, which they should do. What we've got to make sure is that our focus relative to profitability starts and ends with a customer focus and those visits to the restaurant and that's why we talk about the balanced plan. So I just wanted to reiterate that fact. I don't think we could have better franchisees. But just like us within the company, we've got to make sure that we all stay focused on the customers. And in terms of the company operating margins, Sarah, we've historically said in a normal environment and we've defined that as being kind of a 2% to 3% inflationary environment. In that kind of normal environment, we need a 2% to 3% comp to maintain margins. And our assumption in that is that half of that comp is coming from check and half of that comp is coming from traffic. And so what you saw this quarter is we got a disproportionate share. The comp was negative while we had a over 3% price increase. So you had a disproportionate impact of the price increase this quarter is why you saw margins down only 10 basis points. So, we as Don mentioned in those 4 priority markets, getting the sales and guest count trend lines stabilized and going back positive is what's going to have the most significant impact on our margins. We've always said it's a top line game and we really need that comparable sales growth and the traffic growth to be able to benefit and leverage that profitability. So that's our focus. And really there's been no structural change that would cause us to believe that over time we can't continue to grow those margins as long as we're generating those positive comps. Our next question is from Karen Holthouse from Credit Suisse. Hi. 1 of the in your prepared comments you mentioned there is going to be some increased investments on the digital side and G and A. And how does that maybe relate to some of the things we've seen in the about testing for a mobile app? Or what sort of form some of the medium or longer term digital initiatives might what sort of form they might take? Thanks for the question, Karen. Relative to our overall digital strategy, this is something that we have been looking at in many of our markets around the world for some time. However, it's not been what I would say a systemic strategy where we've leveraged the overall strength of McDonald's. So our digital vision is to bring an entirely new level of convenience and fun to the McDonald's experience. And what we have done to be able to move that forward is identify a couple of areas of opportunity relative to that digital strategy. 1 is the field really around experience and the fact that technology can enable us to enhance the customer interactions with our brand. And many people would know of that by payment, ordering, redemption type opportunities as well as customer relationship management. The second area is an area of engagement. It's really how we engage customers both with us telling the story of some of the things we've mentioned, the quality messages around McDonald's, the opportunities within the McDonald's system as well as our marketing campaigns and engaging social media to a stronger level. So we're going to continue to do that. And from a global strategy perspective, it's really a framework that then allows the local markets to be able to move forward more effectively. We'll also leverage the strength of McDonald's system globally relative to our strategic partners as we move forward. So we've got several markets that are test markets around the world and we're leveraging from the things that they've already done. And we're really looking to be able to scale the best ideas we have, while those things are then combined with some of the global strategies and strategic partners that we have that are much larger in terms of their scope to help us along on our digital journey. Our next question is from John Ivankoe from JPMorgan. Great. Hi. Thank you. I think at this point just wanted to tie a couple of things up. Don, I don't think anyone either within McDonald's or outside of McDonald's would have said that you're an organization that was not run without consumer insights over the last 2 years. In other words, you've always been a consumer insight driven company. So I just wanted to get a sense from your perspective, what really will change, I mean, quantitative, qualitative, what have you over the next couple of years? And maybe with that, you mentioned you answered to a question in terms of how you plan with franchisees over a 6 or 12 month period in terms of products and promotions what have you. So not necessarily in terms of the cost of G and A, but maybe how that G and A is being spent. Is there a possibility of changing the way that decisions are made and the speed of which various decisions are implemented at a market? In other words, do you need to change kind of your entire decision making process and how things get implemented at the store level as we're clearly in a market that's moving much faster than it was over the past decade or so? Thanks for the question, John. We will always remain focused on being locally relevant and that's the reason we have as you know John some of the market teams out there in the field and they do a great job. And that is also to help us move quicker. So when it comes to many things at a local level, those are that's the way we'll continue to operate by leveraging those local teams and the local insights on consumers. You asked a question about whether or not things have changed relative to consumer insights and data. We've always had data. We've always attempted to leverage those insights as we put forward the plans. The only thing that's different and we've been through this in cycles is that when you have external pressures a number of them, sometimes our focus can shift a little bit more to how we ultimately will drive profitability at a restaurant level to handle some of those cost structures and we lose a little bit of the front end of those insights. And as a result, we focus more on the margin side of the business than we do on the guest count side of the business. And we know guest counts correlate to our overall results of profitability. So all we're seeing that's happening in the markets now is a refocusing on that front end of the insights and a refocusing on how those insights need to translate to plans that are customer focused first. We always will have the profitability aspects in mind as we plan, but it's got to be customer focused first. And all of the markets and our franchisees are well aware of this, but it can happen in cycles. And when it does, we just have to make sure we call that out and we go back to the drawing board around how we move this business based on customers. And our last question is from Andy Barish from Jefferies. Hey, guys. It's Alex on for Andy. I want to go back to the European business and ask you a little bit more about Russia and whether or not you saw any impact from the political unrest in the region and how that business is trending and if anything has kind of changed there in terms of the strategy with respect to value and premium products? Thanks, Alex. Pete and I will kind of double team this one a little bit. First part relative to Russia, one of the things at McDonald's and we've done this in all of the markets around the world. 1st and foremost, we'll always be the safety of our employees and our guests. That is of the highest level of importance to us. There's been no major incidents related to their safety in those current in these current markets, whether it be Russia or the Ukraine or Crimea or anything that's happened in the current situation. Our restaurants generally are operating as normal. Some are temporarily adjusting their evening hours based on customer traffic and we had 3 restaurants in Crimea that have been closed due to suspension of necessary financial and banking services. And so that kind of gives you a state of relative to Russia. There are some financial impacts and currency impacts and I'll ask Pete to speak to those. Yes, hi Alex. During the quarter, the ruble was down about 14% and it was down a little bit more subsequent to the quarter end. And why that's relevant is Russia imports almost 50% of their food that they use in the restaurants and those imports are denominated both in euro and U. S. Dollars. So, when the local currency devalues like that, they have a financial impact. So locally, they had a 200 basis point impact to their margins in Russia from the devaluation that translated into about a 55 basis point impact on total Europe company operated margin solely from the devaluation. So, if you assume the ruble is going to stay at this depressed level the rest of the year, that's something we're going to be battling with for the rest of the year in our European margins. That said, Russia has some of our most profitable restaurants around the system. So they're about 10% of our consolidated margins, but they're less than 5% of our overall operating income. So in the grand scheme of things to the overall profitability, they are less than 5%, but they do impact the margin line somewhat disproportionately because of those imports and because of the high volumes and the high margins they do run. Okay. That's all for Q and A. And I'm going to turn it over to Don for Athene's final closing thoughts. Thanks everyone again. And as we wrap up this morning's call, I just want to make a couple of comments about where we are positioned as McDonald's and where I see us. We remain committed to our strategies as we make thoughtful decisions to mitigate some of the short term pressures and grow this business over the long term. This has been consistent in terms of our approach. I have even more energy and passion around it today than I did 23 years ago when I joined the company because I know that this is a solid leadership team and we're well aware of what it is we need to accomplish. I'm confident about our future. We have defensible competitive advantages, some of those we've talked about, a resilient business model and the alignment across our owner operators, our suppliers and our company teams to drive enduring profitable growth for our shareholders and our system. So I thank all of you for your participation and for your thoughts about McDonald's and we hope that you have a great