McDonald's Corporation (MCD) Q3 2016 Earnings Report, Transcript and Summary

Hello and welcome to McDonald’s October 21, 2016, Investor Conference Call. At the request of McDonald’s Corporation, this conference is being recorded. Following today’s presentation, there will be a question-and-answer session for investors. [Operator Instructions] 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. Today’s conference call is being webcast live and recorded for replay by webcast. Before I turn it over to Steve, I want to remind everyone that the forward-looking statements in our earnings release and 8-K filing also apply to our comments. Both documents are available on www.investor.mcdonalds.com, as are reconciliations of any non-GAAP financial measures mentioned on today’s call with their corresponding GAAP measures. And now, I’d like to turn it over to Steve.

Thanks Chris, and good morning, everyone. I’m encouraged by the actions we’ve taken and the progress we have made as we execute our turnaround plan. Customer perceptions of McDonald’s have steadily improved over the past 18 months, and the third quarter marked five consecutive quarters of comparable sales growth across all business segments and many markets gaining share. For the third quarter, global comparable sales increased 3.5%; operating income was up 7% in constant currencies. Earnings per share rose 9% in constant currencies. Excluding the impact of previously announced current and prior year strategic charges, earnings per share for the quarter increased 17% on constant currencies. Profitability has increased both for McDonald’s and franchisees. At the restaurant level, franchisee cash flows reached all-time highs in many markets including the U.S. These results are testament to our diligent execution of the turnaround plan as we put customers at the center of everything we do. We are at a point where we’ve begun to transition from a focus on revitalization to a mindset that’s concentrated on strengthening the business to drive sustainable growth over the long term. We expected performance through 2016 to be uneven and it has been. Markets such as the UK, Australia and Canada continue to grow sales and guest counts, whilst markets including the U.S., France and Germany work to overcome challenges of varying degrees. We are mindful of the near-term headwinds we face, most notably in the U.S., as lap the very successful introduction of All Day Breakfast, which was immediately popular with customers. However, we are not managing the business quarter-by-quarter. In fact, our commitment to investing in the business is stronger now than ever. We’ve taken action in the areas that matter most to customers. In particular, we’re placing significant emphasis on food quality, the customer experience and value to give people more reasons to visit McDonald’s. We believe the long-term investments we are making in these areas provide the foundation on which we’ll build as we work to be recognized as a modern progressive burger company by customers. In the area of food, we’re taking important steps in how our food is prepared and the ingredients we use. In the U.S., we completed our transition to chicken not treated with antibiotics important to human medicine a year ahead of schedule. We introduced new buns that do not contain a high-fructose corn syrup. And we’ve removed artificial preservatives from our popular Chicken McNuggets, and customers have responded favorably to this news, and we’ve seen sales accelerated as a result. Following the announcement, the sales of McNuggets increased nearly 10% and they’re sustaining above previous levels. We’re also modernizing the customer experience in markets around the world as we evolve to the Experience of the Future. In Canada, we’re engaging with customers in simpler, less stressful ways offering them more choices in how they order or pay. We now have dual point service and self-order kiosks in almost 90% of our traditional restaurants. In addition, we’re taking steps to redefine hospitality on both sides of the counter with dedicated guest experience leaders in all of Canada’s traditional restaurants. Finally, value, a critical priority in all markets. In Germany for example, we’ve deployed a two-pronged approach. First, we successfully added new layer to our value platform at mid-tier price points. At the same time, we’re celebrating the quality and taste of our core products through strong marketing and promotional campaigns. These steps build on the new pricing structure we introduced earlier this year to strengthen our value platform, and that’s resonating well with the price conscious German consumer. The actions we’re taking specific to our food, the customer experience and value and telling customers about the changes, all are making a difference. Customer satisfaction has improved significantly, up more than 6% year-to-date in both the U.S. and Canada with most major markets seeing improvements. This is a testament to the progress we’ve made since we refocused on running better restaurants as part of our turnaround plan in May of last year. With that context, let’s turn to performance highlights in the market. Beginning with the U.S., comparable sales remained positive for the third quarter, up 1.3%. Customers love All Day Breakfast and the way we’ve continued to build on its success. Since its introduction last year, customers asked even more choices. So, we recently launched the second phase of All Day Breakfast. Expanded menu now includes muffins and biscuits, as well as our beloved McGriddles all-day in all U.S. restaurants. At the same time, we’re enhancing experience to adapt alongside customers’ expectations. One of the most notable ways we’re doing this in the restaurants is by better integrating technology in visible tangible ways. For example, more than 90% of U.S. restaurants now use digital menu boards. These new menu boards enable us to showcase the quality of our food with fresh photography. Because they’re less congested and better organized, the menus now do a further job highlighting the board range of choices available. The menu boards are also smart; the robust content management system that we haven’t even become tapping into yet. When fully enabled, we’ll be able to adjust what to feature on the menu based on time of day or even weather conditions. We’ll be more relevant to customers as we remind them about our ice cream cones and McFlurrys on a hot summer day, or a handcrafted hot McCafé beverages if it’s chilly outside and they feel the need to warm up. We also continue to emphasize value because we know how much budget-oriented customers count to McDonald’s. Franchisees and customers alike have embraced the McPick 2 platform. They appreciate the choice and flexibility it provides. In September, we promoted McPick 2 for $5 nationally whilst other variations of McPick 2 were offered on local level. Some of our best performing regions offered beverage value to complement the McPick 2 platform. We’ll continue to tap into these learnings both nationally and locally as we design future McPick offers. Underpinning these efforts is a continued focus on running better restaurants. Our commitment to raising the bar with an emphasis on underperforming restaurants is making a difference. Customer satisfaction scores have improved the most for our bottom quintile restaurants. And we’ve cut the customer satisfaction score gap between the top and bottom quintile performance nearly in a half through our efforts provide a better, more consistent experience for customers in every restaurant, every time they visit. Turing to the International Lead market segment. Third quarter comparable sales were up 3.3%, driven by positive performance across four of the five major markets with France being exception. The UK, Australia and Canada delivered yet another quarter of comparable sales and guest count growth. These markets share similar elements that underly [ph] their strong track records of success. Contemporary restaurants designs with over 90% of restaurants reimaged. Compelling menu strategy is tailored to local customer tastes, such as the Spice it Up event in Canada featuring Spicy Sriracha sauce on a country chicken or Angus beef sandwich. And modern service experience that incorporates the elements of Experience of the Future to provide customers with more choice and flexibility in how they order, what they order and how they are served. These elements amplify each other to create a notable difference by customers who then reward us by visiting more often. I’m encouraged by the progress we made in Germany, which I had a chance to experience firsthand while I visited the team their last quarter. Comparable sales were positive in the market for the third quarter. Earlier, I mentioned the steps we’ve taken to strengthen our value platform. Combined with strong promotions featuring customer favorites like the Hamburger Royale with cheese, these actions are making a difference and getting us back on track to grow top line results once again. That said, I want to stress that growing guest counts remains a top priority. That’s the key to winning back the share we’ve lost in recent years. In France, third quarter comparables sales were negative. This was driven in large part by ongoing macroeconomic challenges including a declining GDP, high unemployment and the continuing concerns of personal safety, which is impacting both inbound tourism as well as the French consumer. The customers appreciate the actions we’ve taken to strengthen our value offer including further extensions of the well-regarded and successful Petite Plaisirs value platform. We’re also satisfying French consumers growing appetite for premium burgers through strong promotional campaigns featuring customer favorites like the 280 Burger and the Big Tasty. In addition, we’re introducing a new signature line of sandwiches in our Experience of the Future restaurants to customers even more great tasting burger choices at convenience and value they come to appreciate at McDonalds. In the High Growth segment, third quarter comparable sales were up 1.5% driven by positive performance in Russia and most other markets, partially offset by negative comparable sales in China. Whilst third quarter comparable sales in China was down 1.8%, results improved as the quarter progressed. Excluding the impact of temporary protests surrounding recent events related to the South China Sea, China’s comparable sales would have been positive for the quarter. A strong focus on enhancing convenience through greater integration with third-party delivery providers combined with aggressive core menu sampling events designed to offset the impact of the protests contributed to market share gains amidst a still challenging macroeconomic environment. In Russia, the economy remains difficult as consumer purchasing power continues to decline. Despite these challenges, we’re growing comparable sales and guest count, and gaining market share. Specifically, our performance is a result of a heightened focus on value as well as the successful marketing campaigns to grow the breakfast daypart. And I’d be remiss if I didn’t mention Japan where comparable sales increased 17.7% in the third quarter. Diligent execution of the market’s comprehensive turnaround plans, which include strong promotions, exciting menu variety, compelling value and a more modern restaurant experience is enhancing McDonald’s relevance to customers and contributing to sustained momentum in this market. As we look to the future, we recognize the importance of having the right structure, the right people, a common focus, and lastly, greater accountability across the entire McDonald’s system. We’ve taken steps forward in all four areas to set the proper foundation for long-term growth. First, the right structure. Building on last year’s shift to segments of similar markets, we took further steps in the third quarter to transition to a leaner, more efficient and more nimble organization. This will enable us to better share expertise, improve efficiencies and drive down costs, taking greater advantage of our size and scale. Kevin will provide further details in a moment. Second, the right talent. An important component of our turnaround plan has always been to ensure we have the right people in the most critical positions. Management changes have been and continue to be an anticipated part of the process. That’s why we’re focused on a blend of promoting individuals who are ready to take on additional responsibilities, continuing to develop leaders; they have the right skills necessary to grow the business, and attracting new executives, into the business to provide fresh energy and innovative thinking. I am confident in the recent selections we have made. This includes Chris Kempczinski succeeding Mike Andres as President of McDonald’s USA, effective the 1st of January. As part of a thoughtful transition, Chris is already spending significant time with Mike and our franchisees in the field. In the High Growth segment, Joe Erlinger has made an immediate impact upon stepping into the role of President in these markets. He knows these markets well having been CFO of the segment and the former Managing Director of Korea. Third, a common focus. In addition to making forward progress on running great restaurants, we’re putting greater emphasis on acceleration initiatives that will bring more customers into our restaurants more often. This includes the Experience of the Future, which we’re looking to roll out with greater speed in the U.S., and we look forward to sharing more details of those plans as they’re finalized. And lastly, accountability. We’ve made great progress executing our turnaround plan. Now, we’re starting to balance those efforts with a greater focus on longer term growth. We’ll take all of our franchisees, employees and suppliers working together and holding each other accountable to achieve our ultimate goal of becoming the modern, progressive burger company. We have a long term view on our potential and the opportunities that exist. I’m confident in the actions we’re taking to run better restaurants and the investments we’re making. We’re getting the right people, foundations, and platforms in place to properly grow the business and reassert McDonald’s global brand leadership. Thanks very much. And now, I’ll turn it over to Kevin.

Thanks, Steve, and good morning everyone. We’re pleased with our third quarter results. By staying keenly focused on our customers, we maintained positive momentum while continuing to make meaningful strides toward building a better McDonald. Since Steve talked about sales and earnings per share, I’ll focus on margins and G&A. I’ll also provide an update on the key outlook items and the recent progress we’ve made against our financial targets. Starting with the performance drivers for the quarter. Franchise revenues continue to become an increasingly significant portion of our revenue stream as we evolve to a more heavily franchised organization. For third quarter, franchise revenues increased 6% in constant currencies, reflecting strong comparable sales and the impact of refranchising. For the quarter, franchise margin dollars exceeded $2 billion, a 6% increase in constant currencies, and contributed over a $100 million to our growth in global operating income. This solid performance reflects sales-driven improvements across all segments, led by results in the International Lead markets. In addition, we maintained strong global franchise margins of over 82%. These results are a testament to the benefits of transitioning toward a more predictable and stable revenue stream. Growth in Company-operated margins also contributed about $75 million to our growth in global operating income, as Company-operated margins rose to more than $730 million, an 11% increase in constant currencies. Company-operated margins climbed 260 basis points with the U.S. and China leading the overall improvement. Our emphasis on running better restaurants from enhanced conveniences to tighter operating controls is yielding a better experience for our customers, as well as improved restaurant profitability. In the U.S., the Company-operated margin percent increased 450 basis points for the quarter, reflecting positive comparable sales and a favorable commodity environment. These results also reflect a benefit from our refranchising as we optimize our Company-operated restaurant portfolio and the ongoing contribution it makes to our bottom-line. Moving on to G&A. At the end of last year, we noted that we expected to realize about $150 million in savings during 2015 and 2016 with about half of the savings to be achieved in each year. For third quarter, our G&A expenses increased 1% in constant currencies due to higher incentive-based compensation as a result of our year-to-date performance. For the full year, we now expect G&A to be relatively flat in constant currencies. However, excluding incentive-based compensation, G&A for the year is expected to be down about 3% in constant currencies, which equates to roughly $75 million in savings due to lower employee-related costs, resulting from our restructuring initiatives. This will bring our total G&A savings at the end of 2016 to at least $150 million. Let me switch gears now for an update on menu pricing and commodity costs. In the U.S. commodity costs declined by more than 6% during the third quarter. Given the strength of our third quarter savings combined with our outlook for fourth quarter, we now expect the segment’s full year basket of goods to be down 4.5% to 5%. Commodity costs for the International Lead segment were down about 1% for the third quarter and are expected to remain relatively flat for the remainder of this year. While we continue to benefit from favorable commodity costs around the world, we continue to experience rising labor costs in many of our markets. These pressures are considered as we made pricing decisions over the course of the year. Our objective is to manage pricing in a way that maintains our strong value proposition, contributes to guest traffic growth, and supports restaurant profitability. In the U.S., third quarter pricing year-over-year was up about 3.5% compared with food-away-from-home inflation of about 2.5%. For U.S. Company-operated restaurant pricing, our goal is to approximate food-away-from-home inflation over time. So, we maybe a little higher or lower in any given quarter. We are also mindful that the current 450 basis-point GAAP between the costs of eating at home versus dining out is the largest spread in more than 30 years and maybe impacting consumer behavior. We continue to track these metrics and expect our overall menu price increase at year-end to be more in line with food-away-from-home inflation. For the International Lead segment, while price increases vary by market, year-over-year increases for these markets averaged about 2%. Next, I’d like to provide an update on our foreign currency outlook. Based on current exchange rates, we project foreign currency translation to negatively impact our earnings per share by $0.01 to $0.02 in the fourth quarter, which would bring the full year impact to $0.09 to $0.10. As always, please take our currency guidance as directional only because rates will change as we move throughout the year. Last quarter, I committed to providing more detail on today’s call regarding the role that our organizational restructuring is playing in reaching our previously announce G&A savings targets. For the last several months, we have been working with outside advisors to thoroughly analyze our G&A spending an organizational structure from our corporate functions to the individual markets and the critical role they play in the field. Our overall goal was to focus our resources and talent and customer-facing activities that drive business growth, while creating a more globalized system that more effectively leverages our size and scale to spread learnings better and drive cost improvements and efficiencies. As we move toward becoming a leaner and more agile organization. We’re positioned to make quicker and better decisions and to execute on our strategic intent to create a better customer experience. The pace at which All Day Breakfast moved from the U.S. to Australia is a great example of how we’re accelerating knowledge transfer across the system to benefit customers globally. I am confident that our redesigned organization is now better equipped to adapt to today’s rapidly changing environment. As a result of our reorganization, we incurred roughly $80 million in restructuring charges for the third quarter. While this component of our restructuring is nearing completion, we do expect to incur some additional but less significant charges in the fourth quarter. We remain on track to achieve our net annual G&A savings target of $500 million by 2018 with the vast majority of the savings expected to be realized by the end of next year. We also continue to make changes to the business through our global refranchising efforts. Since the beginning of 2015, we refranchised nearly a 1,000 restaurants including a 140 in the third quarter. The large majority of restaurants refranchised to date have been sold to existing conventional franchisees. As previously indicated, we’re also actively pursuing a transaction in China where we are currently in the process of vetting a select number of qualified bidders. In addition, we have made meaningful progress in our search for long-term strategic partners in Malaysia and Singapore. These markets collectively operate almost 400 restaurants, more than 80% of which are Company-owned. We are in the final stages of the process and expect to complete these transactions by the end of this year. Given where the transactions stand, we recorded a non-cash charge of approximately $40 million in the quarter to account for historical currency losses. As we moved into the month of October, we also completed the sale of 75 Company-operated restaurants in the euro region of Russia to an existing developmental licensee. The results of this transaction will be reflected in fourth quarter. So, we remain on track to refranchise about 4,000 restaurants by the end of 2018, and will continue to keep you apprised of our progress. Last November, we increased our three-year cash return to shareholders target to $30 billion by the end of 2016. During the quarter, we returned $3.4 billion to shareholders through a combination of share repurchases and dividends. Share repurchases for the quarter totaled $2.7 billion, the vast majority of which was completed under our second accelerated share repurchase program of the year. Further, in September, our Board of Directors approved a 6% dividend increase effective in the fourth quarter, the equivalent of $3.76 annually. This increase marked the Company’s 40th consecutive year of delivering a dividend increase for our shareholders. As a result of these activities, the cumulative cash return under our three-year target stands at nearly $28 billion and we are on track to complete the remaining amount by the end of this year. To summarize, over the course of the last year, we’ve demonstrated our commitment to meeting our financial targets. By the end of 2016, we will have met our $30 billion cash return to shareholders target, achieved nearly one-third of our G&A savings target and completed more than one-third of our restaurant refranchising with some significant transactions on track for completion in 2017. We continue to measure our progress and hold ourselves accountable in each phase of the turnaround to ensure that we are appropriately allocating our resources to strategic operating plans that will grow our business. As we move in to the final quarter of 2016, we are mindful of the hurdles we face in the near-term but we’re keeping our line of sight clearly focused on the long-term. Through our actions, we’re unlocking financial value and using it to fuel the innovation and investments that will create a better customer experience and deliver sustained profitable growth for the long-term for our system and our shareholders. Thanks. Now, I’ll turn it over to Chris to begin our Q&A.

Thanks Kevin. We will now open the call for analysts and investor questions. The first question is from David Palmer of RBC.

Thanks. A question on the U.S. A common perception of McDonald’s U.S. is that All Day Breakfast and McPick 2, the value message, these are the real the big two and they are running out of gases, sales drivers. There is not a lot else going on -- and at least this is a common perception. Perhaps you can comment on these two initiates. And relatively, can you comment on the inventory of tested marketing renovation, innovation value as you look into 2017, are you getting better visibility on U.S. growth? Thanks.

Hi, David. Steve, I’ll take this one. So, first of all, on the All Day Breakfast and McPick 2, so that was the -- they are two of the foundational elements of what’s helped maintain and -- establish and then maintain momentum of the business. So, as you know, All Day Breakfast around this time last year, it served us well. As you know, the initial peak was higher than we expected and it settled down to a level that we are very happy with. In the meantime, we worked on how can we extend that platform both operationally and making sure the consumer demand was there and they extended it just a couple of weeks ago as well, three or four weeks ago. So that is here to stay, is doing well for us and is a foundational element of our business momentum. Similarly, it really is well-embraced by both our operators and by our customers. So, as you know, we tried both, McPick 2 for 5, which is typically the platform we use at a national level and we’ll be bringing that back, I don’t know, three, four times a year and hitting at a national level and so using the flexibility of that platform to rotate different items through that menu. But, what you don’t see perhaps so visibly is across the regions is how the Pick 2 is always on. And typically the regions will use a greater value element like a McPick 2 for 2.50, McPick 2 for 2, McPick 2 for 3, and again depending on seasonality and the customer preference we’ll rotate products through there. So, both those platforms are good contributors to us and are important part of our business going forward. In terms of what we’ve got to be excited about going forward, there’s plenty and the part of what we’re enjoying about the new structure in this business is the greater visibility we have to what works around the world and what’s creating some of that success internationally for us, but also the way that they’ve simplified the structure in the U.S., what’s working on a regional level. So, there is a lot of product innovation, local product innovation at regional level, but we’re looking to learn from and lift where appropriate. Earlier this quarter, I spent some time in Phoenix and Scottsdale in Arizona, and then went up to Portland in Oregon, and one common success factor in both those regions, both of them are the strongest sales regions we have in the U.S. currently, and what was also particularly successful there was they were complementing local beverage value alongside the McPick 2 platform alongside fundamentals of running better restaurants. So, there are these pockets of great success that we’re looking to lift and localize and then launch rapidly. But the other piece that I always come back to and I won’t hesitate to coming back to is probably the most important element of what has established momentum in the U.S. is the operational improvements around running better restaurants. And that is something that is so, so fundamental, and it may not be a headline grabber. So, if you think about the 27, 28 million customers that come in every single day, if we can offer a more consistent, friendlier, more convenient service to them that is where our greatest reward is. And the customer satisfaction scores are going in significantly right direction. And again, we have a number of ways we’re looking to improve the operational experience including using technology to make it more easier and more convenient for customers. So, we have multiple future growth drivers. And internationally, again, we’re scanning the horizon, clearly. I mean, you’ve seen the success of the very -- very consistent solid success across the International Lead markets, and there are certain common success stories across those, most notably how they’re embracing what they’re calling and describing the Experience of the Future, which is how we use modern facilities are totally redefined, front of house hospitality experience, use of technology with self order kiosks for example, integrating that with mobile apps and again offering a degree and appropriate degree of customization for customers so they can really exert their choice and enjoy variety across our menu. So, again, you can expect us to incorporate some of those successes into the U.S. business as we move forward.

Next question’s from Andrew Charles of Cowen.

Two questions from me. I don’t think you shared the [Technical Difficulty] sandwich and you commented on the past on the consistency of that gap. So, can you disclose the number and also the cadence of the 3Q? And then, Steve, with the departure of several key leaders from the senior team combined with the focus on becoming more nimble, reach faster decisions, can you talk about the bench of talent that remains following these changes? I know obviously you mentioned new executives coming in for fresh perspectives but anything more to just give assurance around the changes would be helpful.

Yes, sure. First of all, on the gap, competitive gap, we had a positive gap for the quarter. Positive gap was 0.6%. As you know, it’s a market shift I tell that really is a scramble. There is certainly a softening top-line across the sector with consumer confidence. All of us in this sector would prefer some tailwinds. If you look out, there aren’t many tailwinds at the moment. There is not great economic growth to help provide a lift; consumer confidence is muted. We’re at a rather unusual stage of the election cycle. So, none of that’s really providing a tailwind for us. That said, there is a significant market out there and we’re going to keep battling for market share. That said, seeing the softening of the gap, there is not a great surprise to us, because it was a particular -- this time last year and heading into the fourth quarter, had [ph] a really strong performance for us. So, the reality is the trends we’re seeing are no surprise to us and certainly aren’t shaking us from our longer term objectives. From a leadership perspective, I’d like to talk about it. I’m exciting about where we’re at. We’re heading into 2017 with really a world-class team that one would expect for world-class business; we have made changes. And as you go through the various phases of a turnaround into growth, there are times when the skill sets required, as we transition, also need to change. So, it’s a delicate balance between leveraging experience, the knowledge, the tenure, the understanding of the system with our more tenured leaders also bringing innovative thinking. But, I can just draw some examples to this. I mean, giving Chris Kempczinski the opportunity and lead the U.S. business, I’m really excited about. Because the reality is whilst he has somewhat limited McDonald’s experience, a, he brings some phenomenal external leadership experience from global brands, consumer brands which will be valuable to us. But also let’s not forget that it would take the five or six keys [ph] to direct reporting, he has reporting on this, more than 120 years of McDonald’s U.S. experience amount. [Ph] So, I think we’ve got the McDonald’s experience piece covered with his fresh thinking. I’m sure that’s going to be a very, very perfect combination. If you look at the role that we’ve created with Doug Goare now, I mean Doug has been around the best part of 40 years. And there are very few roles in this business that Doug hasn’t field. He’s had functional leadership, supply chain functional leadership, franchising, real estate as well as field leadership both here in the U.S., previously ran Europe and now he is proving to be a great leader of our International Lead markets. Leveraging Doug’s experience to help blend in with the new experience by Chris, we are one team and that’s a good balance. Joe Erlinger taken the High Growth. I mean Joe started up in U.S. business 15 years ago, again a regional manager very successfully here in U.S. transitioned to become a market leader and Managing Director of the Korean market, has financial experience and became the CFO in the newly formed High Growth market and is perfectly placed to step in and add his energy and insight into leadership position. And then, if you were to talk about for Chris’s transition, we’d already prepared for that, we’d already had Lucy Brady come and join our business. She is a Senior Vice President of BCG; 20 years experience in helping global businesses develop growth strategies; so, ideally placed to seamlessly fit into that. So, it’s an important balance; it’s something that I enjoyed leading when I was in the UK when we were transitioning from probably a McDonald’s only management team to one I felt had the right combination. And getting that balance right now is critical. And I am really excited to be into next year with the team that’s sharp and ready to go ahead.

Next question is from Brett Levy of Deutsche Bank.

If you could just share a little bit more on the macro thoughts with what you are seeing, not just in China and the Asian regions and the U.S. but also Europe, just a little bit more on where you are seeing the strength in the four core markets?

Yes, sure, absolutely. Really it’s a fascinating time to be running international business, it really. Because if you speak to the team in France for example who have led so much for our strategic thinking and the innovation across our business, they’re now facing really -- not an unforeseen, but previously not experienced challenges. And given not just their macroeconomic environment, we know that GDP is down in France but the different dynamics and given some of the situation and the security, terror situations they faced there, it really is creating some very significant dynamic changes in that market. Tourism, which has always been a substantial part of this fuel of the economy in France has really softened. And you see it in the hotel bookings and you can see impacted in certainly the more tourist areas where it’s the Southern France or Paris within our business where we do have a heavy concentration of restaurants. But you’re also seeing effect of the way that consumers live their lives, French consumers. So, there is a slight reticence to go into high density tourist areas because they’re slightly concerned at environment. Now, I think some of those things are temporary and some of the things maybe slightly more permanent. But it certainly means our management teams in France having to be much more agile and responsive to act in accordance with consumer sentiment. When you go to a market like Spain where they have probably suffered more through the economic crisis than any other market that we do business in, youth unemployment up at 25% for example, so we have just gently slowed down the new store opening there and also focused our efforts and our investment on existing store portfolio. And I’m delighted with the progress that market’s made as it’s built its momentum, is returning to grow through the second half of this year and the outlook looks very confident. UK is probably a well and -- an often spoken story. I think its 42 consecutive quarters of growth now and that momentum really does look very solid and well baked in. So, I won’t say too much more about that. But then you can go internationally across to Asia. China is a challenging market. And the manner in which the teams are adapting to the variations that they have to experience, both getting in consumer sentiment and the broader economy is admirable. As they are seeing, just as one example, they now have a substantial part of their business is the delivery business. And not just -- originally we set up and established our own McDonald’s delivery service and that proved to be very successful. We’re now integrating into third party delivery providers and that has way further accelerated our momentum in business and customer satisfaction, as more people are getting used to ordering and eating at home. So, we are seeing different trends around the world. And the one thing that’s particularly beneficial to us now is as we remove some of the layers in our business, the visibility we have into what’s going on and how we can transfer that knowledge and use it to our advantage in other markets. And part of the advantage of having Chris in this position now, he spent his first year travelling around the world, both with myself, with other senior leaders and on his own facing these markets, seeing what’s going on, understanding the big levers of our business and is now perfectly placed to help take over the U.S. business.

Next question is Matt DiFrisco of Guggenheim.

Just had a question with respect to the context of pricing of 3.5, and obviously that gap that you noted, so historic level between food-at-home. I wonder can you talk about how does that translate into the promotional environment that you’re seeing now and perhaps going forward. I think this time last year, everyone was sort of getting into the 499 meal offerings and trying to promote heavily but obviously your margins are strong and you’re taking price. Should this be a read that the promotional environment though still existing is not as heavy maybe or going forward?

Yes, Matt. Thanks for the question. I’d say you can see out there, there is still some promotional offerings certainly around the industry. I think all of us certainly including us would like to see kind of just a stable platform where you can -- that’s why we put McPick 2 in. The idea is to have an ongoing value platform that customers can count on and not have to come up with some discounted promotion, if you will, every now and then. On the pricing side, to your point, right now we’re a little bit ahead of food-away-from-home and we certainly experienced very favorable margins here in the U.S. in the third quarter. Some of that is the timing of when we take pricing. So, if you look at last year, we actually took some pricing in October whereas this year, we took it in September. So that when you look at a year-over-year basis, you have a little timing shift. There is about 70 to 75 basis points of pricing that would be in last year’s fourth quarter that we may not replace some or all of that in the fourth quarter this year, which would bring some of our pricing down and maybe more in line with food-away-from-home. But we still do keep an eye on both food-away-from-home and food-at-home, which you mentioned is -- the food-at-home is extremely low right now. Thanks.

Just to add to that, what I would say is we’re trying to get the right balance, that is we build our plans. But we don’t want to have a price-led strategy; we want to have an experience-led strategy of which value is a critical component. And our teams, as we look over the immediate term through 2017 through the three-year plan, that is the fundamental basis of how we’re building our plan. Yes, value but we don’t want to be price-led. And we can see some in the sector being drawn that way; that’s not the place we really want to have.

Next question is from David Tarantino of Robert W Baird.

Steve, my question is on the U.S. business. I think you mentioned several times about the short-term headwind associated with cycling, the launch of All Day Breakfast. And while I understand you want to focus on the long-term, I think investors are very focused on how you might lap that initiative this quarter and next quarter. So, I was wondering if you’d be willing to share how the business is trending currently or how you think Q4 and Q1 might play out given that very unusual comparison.

As you say David, it is an unusual comparison. So, we entered this period with our eyes wide open. And as we say, look, we are mindful of where the performance spiked last year. I can assure you, we’re not building tactical plans to try and hit a comp in a given month or a given quarter. We are building for the long-term and not getting shaken up our strategy. So, we will still fight for market share at local level. We’re going to leverage All Day Breakfast through quarter four into quarter one. We’ve got some exciting promotional activity in quarter one that we’re looking forward to. So, we’re not sitting on our hands here but at the same-time nor are we going to get drawn into a year-on-year comp strategy at all. So that’s the visibility I’m happy and open to share with you, but not getting into predicting comps.

Next question’s from John Glass of Morgan Stanley.

Thanks very much. Steve, I know you said in the U.S. you’re going to update us later on your progress on the Experience of the Future, but do you think it’s going to be a meaningful or could be a meaningful driver to the U.S. business in 2017? And what are the things that need to happen in order to implement that? I know remodels for example is a key part of that. So, where are you now on remodels, have you been sort of remodeling quietly behind the scenes and maybe some update on what needs to happen in order for Experience of the Future to be rolled out fully?

Yes, thanks John. I say it’s starting to make the contribution in 2017. I mean the reality is we would see this as something like a three-year program, which is exactly what we’re seeing through the markets like UK, Canada, Australia. These are rolling programs and actually give us growth upon growth upon growth. For the UK for example, they’re already almost 40% converted to the entire Experience of the Future, which is introducing the technology along with the hospitality as well as the food elements. And therefore, their visibility on year-on-year growth of next two to three years looks pretty strong. In the U.S., we’re certainly early in that cycle. In terms of modernized restaurants, it’s just over 50% of the U.S. state is modernized; we’ve got some work to do to complete that. And then of course within that we want to layer on top of the other elements, the broader [ph] elements, consumer facing elements of Experience of the Future, integrating that into the self order kiosk, offering different ways that customers can be served, they can place their orders, they can customize their food. So, we expect to start seeing that wrapped up through 2017 and literally the minute you convert the restaurant, we see a sales lift. So, yes, it’ll be a contributor, but we’ll probably be getting that full rate through 2018 and 2019 as well, which I think is a very strong program. One of the things we have benefited from is, we’ve learnt a lot of what works, also one or two things that don’t work in the markets that we nearly adopted, Australia, Canada for example. So, we can bring that best practice into the U.S, make sure it’s locally relevant and then go hard at it. So, we’re really excited. The barrier to it is really -- is just a collective will to invest. I mean, there is an investment element to it over an operator level helping the company, and certainly from a company perspective we’re allocating our capital to provide significant support alongside the operators to co-invest with them and we’re really -- at the moment the U.S. cash flows are all time high. That means their ability to invest never have been greater. So,. I think we’re in a good place.

Next question’s from Sara Senatore of Bernstein.

Hi, thank you. I have a follow-up and then a separate question. One, just on the pricing, the follow-up is you’re talking about rolling off. To the extent that you know kind of what elasticity looks like in your business, is there any sense that maybe by allowing to roll off your traffic could accelerate in the sense that traffic has been negative and maybe the higher prices is a contributor to that so that we could see that composition change a little based on what you know about your customers? And then my second point is -- second question is about the unit growth, taking it down. Is that because you’re intentionally steering more capital to existing unitary models, or is there something in the markets that you’re seeing that would suggest kind of a slower pace of unit growth is appropriate? Thank you.

Thanks Sara. Let me hit both of those. The pricing, it’s a fair point. As I mentioned, there is a lot of elements of pricing. What we try and balance is certainly restaurant profitability with continuing to grow guest counts. So, we’ve talked about our main focus being growing guest count certainly in the U.S. And again, as I mentioned, the pricing is a little bit of a timing issue. So, it wouldn’t be a surprise to see that come down a little bit, which could help then accelerate some of the guest count growth. Regarding unit growth, we brought it down by around 100. I think we had a 1,000, about a 1,000 last quarter; now, we said about 900. It’s a little bit in various markets, a few in China, few in Spain, nothing of significance I would say. The reallocation is really to some of these investment areas that Steve was just talking about, certainly in places like Australia and the UK where we’re implementing Experience of the Future seeing good sales lifts from those investments; we continue to reinvest in those types of investments. So, you saw the capital didn’t come down; it was really a reallocation of a little bit of the new store openings to some of that reinvestment to continue to grow sales.

Next question is from Nicole Miller Regan of Piper Jaffray.

Good morning. One of your larger QSR/coffee peers reiterated guidance the other day and they really kind of implied stable or positive fourth quarter comp trends. So, I’m wondering if this is a case for the QSR industry overall. What does it seem like to your team? It seemed relatively better and if so why? And then, part B, if I may. How do you want us to think about…

Nicole, sorry to interrupt. Could you just repeat that? The line is muffled. You talk about a competitor with…

I’m so sorry. Let me pick up my headset.

Please repeat that. It would be great.

I apologize. So, one of your larger QSR/copy peers reiterated guidance earlier this week implying positive or just stable fourth quarter comp trends. And I’m wondering if you and your team feel like this is the case for the QSR industry overall. And if things do seem relatively better for the entire industry, why now? And then part B, as analysts, how do you want us to think about and model that in comparison to your very difficult U.S. comp comparison in the prior year? Thank you.

I’ll take the first one. So, we plan our business to grow on a global basis. So, growth is fundamental, both clearly at the global level but also at a local level with our owner operators. Our rich history of continuing to grow this business over 60 odd years through changes in -- societal changes as well as competitive environments as well as different economic backgrounds, we have proven to be pretty a resilient business. So, certainly as we go through quarter four and into quarter one, yes, we’re planning to grow our business. Now, there’s going to be ebbs and flows within the global business on where those pockets of success happen and that is why our geographic diversification is one of our great advantages. But we’re planning to grow our like-for-like sales and we see that as being the life of our business as we look out over the medium to long term as well.

Next question is from Jeff Farmer of Wells Fargo.

Just shifting to the capital structure. What was your rent-adjusted leverage ratio at the end of the third quarter? And theoretically, where could you guys take it and still maintain that investment grade credit rating?

Jeff, this is Chris, I’ll be happy to give that back to you offline. We don’t have those numbers in front of us.

I guess what I would say is we are kind of -- we’re certainly in the middle of BBB+ right now, have a little bit of room but not a lot of room, and we’re committed to remaining at that BBB+ rating. And so as we look at any further debt addition, we keep in mind kind of wanting to stay at that existing credit rating. So, that’s our intent certainly.

Next question is from Joe Buckley of Bank of America Merrill Lynch.

Two questions, both kind of follow-ups on previous discussions. I’m curious, in your point of view that gap in the food-at-home inflation versus food away-from-normal inflation is part -- or the reason why restaurant sales -- and I’m talking industry-wide, not on McDonald’s are relatively soft. And then secondly going back to the questions on the U.S. future of the experience. If you have the same sheet of what elements you would try to include in that and is the U.S. in particular challenged because the driving [ph] percentages is so high in absolute terms or relative to other markets?

The gap clearly plays a role but it’s not the reason for the broader softening, it’s not the sole reason. So, I think it is an element. But when you are lower average check business like we are, I don’t think that magnifies out the same as if we were a mid scale dining or fine end dining. So, yes it’s probably in the mix but it’s certainly doesn’t explain. I think there are broader macroeconomic issues of consumer confidence and just uncertainty of wage increases, the slight squeeze on discretionary spend with gas prices aging back up and healthcare costs going back up. So, I think those are sort of things that we see affecting customers and basically the spare cash they have in their pocket. Regarding Experience of the Future, I mean one of the great learns we’ve had and particularly with launching so aggressively in Australia over year and a half ago which the main food element was something we described as create your taste and that was an in-store only premium food offering. Now, it worked great but we wanted to find a way that we could take that to our entire customer base. So, with Aussie team we worked on solutions now, what we can now bring. So, we believe there would be food elements customizing premium quality food that we can deliver through both the drive through and in-store. And I think that’s one of the benefits we have of getting those early adopter, in our case going aggressive, learn, bring it back over and localize it and launch it. And so we believe we have a good solution for that.

Last question is from John Ivankoe of JPMorgan.

Just a couple of follow-ups, if I may, firstly on G&A, I think that Kevin made the comment regarding that you guys have recently -- you brought in some third party consultants that were helping you to thoroughly evaluate the organizational structure. I wondered, do you think there might be some opportunity beyond the previously announced $500 million with some of that work that’s recently coming in? And then secondly, if I may, there have been a lot of conversations on and off regarding your capital budget. What is the direction of CapEx for the business, new units and existing units over 2017 and 2018, if there is an initial direction we can get?

Yes, thanks John. Let’s start with the G&A. As you mentioned, we’ve been spending some time certainly as an organization looking through, I’ll say everything, our organization structure, our layers, the way we’ve designed structures et cetera. And for now, what we’ve agreed to is that we’re going and reducing our G&A by just $500 million net. That still allows us to continue investing where we believe we need to, to continue to grow the business. So, we’re very conscious of making sure that we’ve got the right investment levels to be able to strategically still invest in the business. Might there be some opportunity beyond the 500, I guess, I’d say we’re not going to stop looking or stop having the discipline in the organization to continue managing the business appropriately. But there has been a lot of change in the organization in the near-term. And our belief is that for us right now, this is the right level for us to focus on in the near-term. I wouldn’t say that that means we stop and then never kind of manage the business effectively going forward but for us right now the commitment is for the 500. Regarding capital, right now, as you know we’re right around $2 billion. What you may see in the near-term is as we convert some of these countries to development of licensees where we free up some of that capital, some of that maybe redeployed to the U.S. to spend on this Experience of the Future investment that Steve was talking about. So, you could see some reallocation of that capital in the next few years that would effectively keep our capital envelope relatively similar to what it is today. And then once that’s complete, it’s likely to go down after that. But in the near-term, we may reallocate some of the capital that we’ve freed up to spending to accelerate that U.S. Experience of the Future investment.

We’re at the top of the hour, so I’ll turn it over to Steve who has a few closing comments.

Thanks Chris and again thanks to everyone for joining us this morning. In closing, I want to reemphasize our focus on giving people more reasons to visit McDonald’s. We’re committed to creating customer noticeable change across our business especially in the areas of food, experience and value and it’s making a difference. Customer perceptions of McDonald’s are improving and so is our performance. And moving in the right direction, we know there is much more work to do as begin to transition from our turnaround plan to mindset focused on strengthening the business to drive sustainable growth over the long-term. I am encouraged by the progress we’ve made and I’m excited about the opportunities ahead as we begin to reinsert McDonald’s as the global leader of the IEO industry. Thanks to all of you, and have a great day.

This concludes McDonald’s Corporation investor conference call. You may now disconnect.