McDonald's Corporation (MCD) Q4 2018 Earnings Report, Transcript and Summary

Hello, and welcome to McDonald's Fourth Quarter 2018 Investor Conference Call. At the request of McDonald's Corporation, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Mike Cieplak, Investor Relations Officer for McDonald's Corporation. Mr. Cieplak, you may begin.

Good morning, 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 is also being recorded for replay on our website. 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 the reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures. And now I'll turn it over to Steve.

Thanks Mike. We're pleased with our strong performance in 2018. Global comparable sales increased 4.5% for the year reflecting our broad-based momentum across the McDonald's System. This is a year when we brought our customers greater convenience, choice and value as we continued aggressively transforming our business. Customers rewarded us with more visits again last year, resulting in back-to-back years of global guest count growth for the first time since 2012. This achievement is even more notable at a time when it's all meeting our traffic growth has been muted. Most of our top markets excelled in 2018 and outperformed our competitors. The U.K. for example, now has 51 consecutive quarters of like-for-like sales growth and it continue to gain share in a shrinking market. Canada grew comparable sales and guest counts for the quarter and the year, extending its 10-year round of success. With 19 consecutive quarters in comparable sales growth, Australia continued their momentum with offerings such as the successful all-day favorites and the benefit of rising delivery sales. Germany is outperforming competitors as customers enjoy modernized restaurants and the benefits of one of the most effective digital engagement programs in the McDonald's System. The market now has seven consecutive quarters of comparable sales growth and posted its best annual comparable sales growth percentage in 25 years. Italy continues to be one of our best-performing markets. The foundation of that success starts with a great leadership team executing a solid growth plan. The market's also seeing positive results from investing in Experience of the Future and maximizing the business impact of other Velocity Growth Plan initiatives such as digital and delivery. McDonald's Italy had a strong 2017 and followed that with an even better year in 2018. In the U.S., we're in the middle of the ambitious program the market has ever undertaken. The U.S. is executing a significant number of initiatives at the same time. Still in 2018, we grew sales while continuing to invest billions of dollars in our restaurants, making foundational changes in our business and staying focused on our customers. While we have much ahead of us, we made significant progress with a lot of hard work in 2018. The U.S. is a much more nimble organization today than it was in the start of 2018. We reduced the number of co-ops from nearly 200 to fewer than 60 and half the number of field offices. The market trend down the number of most famous as it works with from dozens to fewer than 10. The most significant change in the market resulted in giving our customers better tasting food, greater convenience and a better overall experience. One example in the U.S. is last year's national launch of cooked right when you order fresh beef quarter-pound burgers, getting customers hotter and juicier burgers like [indiscernible]. In 2018, the U.S. converted about 4,500 restaurants to Experience of the Future. That meant we reopened more than 10 new restaurants everyday throughout the year, introducing local communities across the country to a dramatically different McDonald's. This is an aggressive pace with an ambitious agenda at a time when the U.S. market is experiencing intense competitive pressures. Chris Kempczinski and the U.S. leadership team remain engaged in collaborative and constructive dialogue with franchisees. At the end of 2018, they met face to face with franchisees in all 10 field offices across the country. They discussed key challenges facing the business, including the effort required to execute the plan at the current pace and the optimum balance between local and national decision-making. Once we made some tactical and timely adjustments to our plan, collectively we remain committed to the growth strategy. It gives McDonald's the best opportunity to win in what is becoming an increasingly competitive market share fight. I also meet regularly with franchisees throughout the U.S. and earlier this month, I had the chance to visit with several of them in Louisiana and Georgia. I heard first-hand how much they appreciate the flexibility and our continued willingness to work with them in carrying out the plan. This is the right strategy for our business and we're committed to driving shared success. Using our modernized restaurants is easy to see how the [indiscernible] refreshed decor and overall hospitality make a difference for our customers. We established a solid foundation in the U.S. last year that will serve us well in 2019. Now Kevin will discuss our financial results for the fourth quarter and full year.

Thanks Steve. With a relentless focus on our growth strategy, we continued our strong sales momentum across most of our top markets with global comp sales up 4.4% for the quarter. This marks our 14th consecutive quarter of global comp sales increases with each segment once again contributing to the growth. We also grew global guest counts for the quarter. Our top line performance and broad-based strength is a significant achievement given the muted Informal Eating Out environment in most of our major markets as Steve mentioned earlier. Looking across the segment, the international lead markets continue to outperform the competition with comp sales up 5.2% for the quarter, led by the U.K., Germany and Australia. For the full year, every market in the ILM segment delivered both sales and guest account growth, something these markets haven't achieved since 2011. High growth segment comp sales were up 4.8% for the quarter with Italy, the Netherlands and Poland delivering double-digit comp sales growth and positive comps across most of the segment. In the foundational markets, comp sales were up 7.1% with Japan once again leading the segment and positive comps across all geographic regions. Turning to the U.S. Comp sales were up 2.3% for the quarter while comp guest counts remain negative. In 2018, the QSR environment in the U.S. proved challenging with aggressive promotional activity throughout the industry. Despite this, we achieved a positive comp sales GAAP of 100 basis points for the full year versus our QSR sandwich competitors. In the fourth quarter, U.S. sales continue to benefit from healthy average check increases from favorable product mix shifts and menu price increases. Value and DL offerings like the four for $6 classic meal deal, limited time offers like the glazed tenders and triple breakfast stack sandwiches and our fresh beef quarter pound burgers all contributed to a higher average check. As I discussed on last quarter's earnings call, construction downtime and slower sales recovery related to the aggressive pace of modernization in the U.S. was a headwind in 2018. We've implemented processes to shorten project downtime and accelerate recovery to minimize the impact to the business as we continue our EOTF deployment. Turning to bottom line results. Earnings per share was $1.97 for the quarter, an 18% increase in constant currencies after excluding current year impairment charges and tax reform related items in both the current and prior year. In addition to strong comp sales performance, EPS benefited from a lower than normal 19% effective tax rate for the quarter while foreign currently translation was an offsetting pressure of $0.05 per share. Franchise margin dollars grew 6% in constant currencies for the quarter, reflecting sales driven performance in conventional refranchising. Franchise margin percent declined by 90 basis points as franchise revenue growth was more than offset primarily by higher depreciation costs related to EOTF modernization in the U.S. Despite cost pressures around the world like rising labor costs, sales growth and refranchising benefits drove a 20 basis point increase in consolidated company-operated margins. 2018 was the first full year we began operating under our streamlined and more heavily franchised business model and the benefits are reflected in our results. Our business continues to generate significant cash flow. In 2018, free cash flow was $4.2 billion, an increase of 14% over 2017. Our full year restaurant margin dollars grew by over $100 million in constant currencies. And excluding current year and prior year special items, our 2018 operating margin was 43%, up over 4 percentage points from the prior year. In the U.S., company-operated margins declined 190 basis points for the quarter. Wage pressures and continued investments in deployment of our key initiatives contributed to both higher labor cost and depreciation expense. Commodity costs were up about 2.5% for both the quarter and full year. Menu price increases were around 2% for the quarter as we look to strategically balance the need to offset cost pressures with our customers' willingness to pay. For the International lead markets, commodity pressures eased for the quarter up 1% while the full year was up 2%. Menu prices increased about 2% year-over-year. G&A for the year was down 2% in constant currencies. I'll put our G&A savings into perspective in a few minutes when I review our outlook for 2019. Now I'll turn it back to Steve.

For the two full years into executing the Velocity Growth Plan, our strategy remains focused on [indiscernible] guest count momentum and regaining customer visits. We're visibly demonstrating to our customers how we're becoming a better McDonald's with a robust range of initiatives. With our focus on improving the taste of our delicious food, enhancing convenience, offering compelling value, upholding the trust consumers place in our brands, we are maximizing our opportunity to improve customer perceptions and encourage more visits. We continuously strive to improve the taste of the iconic sandwiches at the core of our menu and introducing items to even to customers. During the quarter, we have many examples in markets of how success and encouraging visits and sales with menu changes. In Germany, customers continue to enjoy iconic favorites on the Taste of McDonald's platform such as the McChicken. Canada extended the successful launch of bagels earlier in the year by introducing All Day Breakfast Bagel Sandwiches with fresh cracked eggs. In Spain, [indiscernible] drives the popular customers seeking a snack and many also enjoyed adding them on to a meal. Last year Canada had a successful promotion introducing bacon on some of our classic sandwiches and this week the U.S. launched a similar campaign to encourage more visits to our restaurants. We were pleased to see the attention generated with yesterday's bacon events and the U.S. is following up by offering Bacon Big Macs and Quarter Pounders as well as cheesy bacon fries. Time and again we see the importance customers place on getting their food hot and fresh with fast, friendly service. Customers notice a difference when we run great restaurants and we continue to focus on improving the operations of our restaurants to provide customers with great all-round experience. I'm encouraged by the greater discipline we're demonstrating in many of our markets as I simplify menus, take other actions that reduce complexity and improve our ability to provide exceptional experiences for our customers. Serving delicious food and offering great service are vital, but not the only requirements for maintaining strong trust to consumers. Public expectations are leading companies like McDonald's have never been higher. In December we announced that we are partnering with suppliers and beef producers to reduce the overall use of antibiotics in our beef supply chains. This is the latest in a series of announcements throughout 2018 but we detailed both targets by using our scale for good and addressing some of the world's most pressing challenges. In committing our resources, attention and significant convenient power and influence, we are demonstrating to our customers, employees and other stakeholders that McDonald's is worthy of their trust. 2018 also marked a year of significant progress with each of our Velocity, accelerated delivery, Experience of the Future and digital. We will take action in 2019 to capture additional growth opportunities within the Velocity strategy. Delivery momentum continues and is now available for over 19,000 restaurants, over half of our global system. It took us almost 20 years to grow our annual delivery business in the Middle East and Asia to $1 billion. Over the past two years, delivery has become a $3 billion business for both McDonald's company and franchise restaurants globally. Delivery continues to grow rapidly as we expand through additional restaurants and third-party providers as well as benefiting from strong same-store sales momentum. Many of our major markets such as to the U.S., France and in the U.K. achieved delivery sales growth in the high double-digits in restaurants offering a service for more than 12 months and other markets such as Canada, Italy and Russia grew even more. We’re confident this delivery offers additional growth potential for our business. Even with the momentum we already have established, we know we have an opportunity to let more customers know the McDonald's will bring meals to their homes, offices and college dorm rooms. Driving awareness begins with encouraging more customers to try delivery. We talked before about the high satisfaction among our delivery customers and their willingness to reorder and we continue to see those trends hold steady throughout 2018. We placed a high priority on identifying the winning ideas developed by individual markets and spreading them elsewhere within the McDonald's system. With delivery, U.K. Canada and Australia are leaders within McDonald's and are developing innovative approaches to help restaurants with high order volumes. In Australia, awareness more than doubled through a major campaign of promotional delivery within-restaurant signs, engaging social media outreach, PR activity and advertising. And in its own awareness campaign, Uber Eats in Australia featuring McDonald's demonstrating the strength of our partnership. We also continue to bring learning from China, our most developed delivery market, to help our newer delivery markets, especially related to restaurant operations. As we have said previously, underpinning everything we do with this growth accelerator is our commitment to make delivery easy and convenient for our customers, which will help us maximize the competitive advantage of our business. Now I'll turn to another one of our Velocity accelerators, Experience of the Future. The refreshed decor, new ordering options and an enhanced focus on providing more enjoyable visits to our restaurants, we're introducing a new hospitality experience to McDonald's customers. Our guest experience of years have been the key to a better customer experience, which we've seen drive high customer satisfaction and sales and ultimately, strong business results. With about half of our restaurants around the world converted to EOTF, we have many more customers experience modernized restaurants and enhanced hospitality. We've identified an opportunity to be more consistent in assuring restaurants as proven best practices for engaging with customers in our updated restaurants. We've made significant progress for example in the U.S. in training tens of thousands of additional guest experience leaders to greet our guests with enthusiastic smile, assist the customer with kiosk orders, offering trays of Big Macs and fries to a customer's table. We're encouraged by the impacts on our business as we continue to enhance hospitality and complete more projects. Restaurants that have introduced Experience of the Future elements continue to perform in line with our expectations with higher sales and customer satisfaction. Customer expectations for the way they interact with brands continue to rise. We have made additional progress in 2018 rolling out digital platforms, making the McDonald's experience simpler and more personalized for our customers. In the years ahead, we will continue making strides through digital channels to reward customers with good value and relevant offers as well as incorporating fun experiences they appreciate from our brands. These opportunities are possible because the extensive work we completed in deploying technology throughout the McDonald's system, including self-order kiosks in nearly 17,000 restaurants, digital menu boards in more than 21,000 restaurants and new capabilities from low bottle room pay as available in over 22,000 restaurants. Now Kevin will discuss our outlook for 2019.

Over the last several years, we fundamentally enhanced the strength and stability of our business. In anticipation of being substantially complete with our refranchising efforts, we established long-term average annual financial targets set to begin this year. These targets reflect our confidence in our ability over the long term to increase system wide sales 3% to 5%, maintain our operating margin in the mid-40% range, deliver earnings per share growth in the high single-digits and achieve a return on incremental invested capital in the mid-20% range. The strength and reliability of our significant and growing cash flow enables us to return about $25 billion to shareholders over the three-year period ending this year, including our 15% dividend increase announced last September. Over the last two years, we returned over $16 billion toward this target through share repurchases and dividends. Looking into 2019, we anticipate some headwinds this year around labor cost, EOTF-related depreciation in the U.S., commodities and foreign currency translation, which will put some pressure on EPS growth this year. Higher depreciation expense in the U.S. will continue to impact both franchise and company operated margins over the next couple of years. Franchise-related depreciation expense will increase by about $100 million year-over-year in 2019 and depreciation on company-owned restaurants will also increase about $15 million, both driven by the accelerated pace of EOTF. We expect commodity increases in the U.S. of 1% to 2% for the year and an increase of about 2% in our key markets outside the U.S. Based on current exchange rates, we also anticipate currency pressures to continue for the first half of this year. At today's rates, we expect currency to negatively impact EPS by $0.08 to $0.10 in the first quarter and $0.13 to $0.15 for the full year. As usual, this is directional guidance only because rates will change as we move through the year. We continue to exercise strong financial discipline and we expect about a 4% G&A reduction in constant currencies for the year. At current exchange rates, this will result in total G&A of roughly $2.1 billion. Since the beginning of 2015, we will have achieved growth G&A savings of over $600 million. After reinvesting some of this back into areas to drive growth, like technology, we'll be down net of about $500 million from our initial 2015 budget of $2.6 billion. We've mentioned that most of our major refranchising transactions are complete. We will continue to refranchise some restaurants to conventional licensees across markets such as the U.K. and U.S. but to a much lesser extent. As a result, we expect gains on restaurant sales this year to be about $200 million less than 2018. Moving on to capital. We ended 2018 with capital expenditures of $2.7 billion. Although this was slightly higher than initially planned for the year, we completed about 4,500 EOTF projects in the U.S., well exceeding our original plan of 4,000 projects. As we've also noted, inflation in the overall construction industry has also been a pressure on EOTF project costs. We currently expect to spend roughly $2.3 billion of capital in 2019. Nearly $1 billion of that capital will be dedicated to completing approximately 2,000 EOTF projects in the U.S. Our recent adjustments to the U.S. plan now provide in the ability to more evenly balance remaining EOTF projects between 2019 and 2020. While we have provided an option for franchisees to extend the projects beyond 2020 at a reduced partnering level, most franchisees are choosing to complete their projects over the next couple of years. So we expect to be substantially complete with EOTF by the end of 2020. New restaurant development continues to be an important component of our growth equation. We plan to open roughly 1,200 new restaurants this year. We will spend approximately $600 million of our capital to open about 300 restaurants in our wholly-owned markets. Our developmental licensees and affiliates will spend their capital for the remaining 900 openings, nearly half of which are planned in China. This is a demonstration of how the financial resources and capabilities brought by our expanded network of developmental licensees create opportunities for accelerated expansion. As we enter 2019, I'm confident that we are well positioned to deliver sustained long-term profitable growth for the system and our shareholders.

With our strong performance in 2018, you can see why we're confident in our strategy. We have a lot of growth potential remaining in the core of the Velocity Growth Plan and the accelerators provide a solid foundation driving our business as we begin 2019. We also recognized there are significant challenges as we enter the New Year. Kevin shared several of the financial headwinds to growth that we are and as you've seen consumer uncertainty is growing from France to China to the U.K. and elsewhere across the Globe and as well as the tightening economies and shifting political environments. Still we remain optimistic. The investments we already made in modernizing thousands of our restaurants have placed us in a strong position. This will continue, we will continue to prioritize investments in our restaurants and our business so we can keep advancing as a leading global brand in our dynamic consumer landscape. In the fiber market share, some will succeed and others won't. We intend to keep positioning McDonald's on the winning side. And now I hand it over to Mike, who can lead Q&A.

[Operator Instructions] Our first question is from Eric Gonzalez with KeyBanc.

I have a few questions related to your capital spending plans. Based on your '19 guidance, it seems like you're expecting then roughly the same amount in the U.S. business this year versus last year, yet you're expecting to complete roughly half the number of EOTF projects. So I guess the question is, has the EOTF project cost materially increased or there other areas of spending that you're not previously - that you haven't previously considered? And also, how should we think about capital spending plans for the out years in 2020 and 2021 given some of the projects being delayed and considering McDonald's co-investment rate will decline to 40%? Thanks.

Yes, thanks, Eric. And yes, we're trying to stay warm but it's a little difficult these days. All right, so let me talk about capital both for 2018 and 2019. In 2018, we spent roughly $1.4 billion of our capital on EOTF projects in the U.S. In 2019, that number will be less than $1 billion. So it's going down by, I'll call it roughly $0.5 billion, the amount that we're spending on EOTF in the U.S. The other dynamic that's occurring though is there's a little bit different mix in the types of projects that are occurring in 2019 versus 2018 on a couple of fronts. One is our company-operated restaurants. So we did about 200 company-operated restaurants in 2018, but that was only 4% of the total projects for that year. We'll do a similar number of company-operated projects to finish those off in 2019, so about 200 again, but that will be 10% of the total projects for 2019. So that helps skew to a little bit higher average cost. The other dynamic that's happening is in 2018, as we've talked about, some of the projects are what we call non mods these are the ones that hadn't been modernized and need the full modernization of the restaurant in addition to EOTF elements. Those were about a third of the projects in 2018, while what we call modern or restaurants that have already been modernized were about two-thirds. Those are lower cost than the non-mods obviously. In 2019, that split have roughly half and half. So that also brings up down that average cost from 2018. So our average cost per project is a little bit higher in 2019 than 2018 because of those couple of dynamics. Regarding capital going forward, so we said we expect 2019 to be roughly $2.3 billion. 2020, you should expect to be relatively similar to 2019, maybe a little bit lower. And then beginning in 2021, that number should drop dramatically, probably $0.5 billion or so because as we mentioned, we should be substantially complete with EOTF projects in the U.S. by the end of 2020. So hopefully that gives you some more information related to the capital.

Our next question is from Andrew Charles of Cowen.

Kevin, two questions, Kevin, you caught up the U.S. comps outpace the benchmark about 100 bps for the year. If my math is right, it sounds like you guys were flat against the benchmark in 4Q. So curious what incrementally changed primarily in the in the year as the value environment was fierce throughout 2018? And I guess specifically, did the 50 bps headwind you saw from remodel construction in the first nine months accelerate in 4Q with a greater than expected number of projects? And then separately, this one is for Kevin or Steve, CapEx - can you talk about how you arrived at the guidance for 2,000 U.S. remodels in '19? Just given the fluid nature of discussions with operators and the topic, is the guidance based on some form of buying commitment or is the guidance based on a best case estimate, if you will?

So let me start and then I'll turn it to Steve to talk about kind of how we're going about process wise in the U.S. Related to the comp GAAP, you're right. It was relatively flat in the fourth quarter to get up to that 100 basis points for the year. I guess I would just say you saw the industry throughout the year certainly was competitive both from a price and value perspective. So I think we're pleased in that environment that we achieved 100 basis points GAAP for the year. But to your point it was relatively flat in the fourth quarter. Regarding the headwind, I'll say that EOTF costs, the fourth quarter was roughly 0.5 point. So that's kind of in line with where we had been in third quarter, roughly 0.5 point for the year, I think we expect as we progress into 2019 that will start dissipating so that by mid-year or so that should turn to be a positive impact. So again, partly because of the lower number of projects in 2019 and partly because of all the projects we did in 2018.

The second part of the question, Andrew, are we confident in those numbers? I mean, we have through the course of the 10 field office visits that Chris Kempczinski and the leadership team conducted, clearly we're keen to offer operators the chance to what we've described level load their commitments depending on how many projects they had left and just their own sort of cash flow management obviously. So we were really encouraged and shock but we still believe and know that the majority of those of the operators have come forward and they want to rate either retain the existing schedule or maybe level load across '19 and '20 but really want to take advantage of the partner that we have in place. And I think it reflects the confidence they're beginning to see. I mean, once you start to look at the impact of the EOTF, as you start to look at the ample digital menu board, then you start to introduce delivery alongside the self-order kiosks being half hospitality that combined suite of initiatives really is generating much stronger lift. If you look at the - those are completed, now we've got about 8,000 restaurants complete here in the U.S., we've got fact-based data to share with the operators which I think just continues to build that confidence. So I think the operators appreciated the chance of flexibility but the vast majority will complete within the next two years.

Just one last thing I'd add. Just - our 2,000 estimate right now is based on conversations with the operators. So we did - that could change a little bit as we get down to formally planning the exact timing over the next couple of months. There haven't been signed letters or anything like that yet, but based on the conversations we've had, that's where those numbers are coming from.

Our next question is from Sara Senatore with Bernstein.

A question and then just a quick follow-up on a comment Steve made in the prepared remarks, I just want to clarify. The question is again on EOTF interested at that most of the franchisees are sticking with the original schedule. But I guess to the extent that for the immediate impact has been somewhat mixed or is less visible to those on the outside. Have you contemplated or had anyone contemplated perhaps not co-investing as heavily and just allowing EOTF to roll out on its own with maybe returning more cash to shareholders? I mean it sounds like it's sort of a done deal at this point. But it’s been asked by sometimes even hard to effectively tack those in ROI given relatively flattish market share and some of that went listing. And then just my question - my clarification was, can you characterize the market share price has increased in the competitive and I was just wondering if that meant you're seeing - what you're seeing in terms of promotional activity [indiscernible] are you seeing any kind of trade up or down?

I'll start with the first part and then I'll let Steve come back and talk about market share stuff. Thanks for the question Sara. You know, related to EOTF and our kind of commitment and investment in that, we've seen it be really successful around the world consistently. It generally increases customer satisfaction, we've certainly seen sales increases around the world and we are seeing that same dynamic in the restaurants in the U.S. that we've converted. So we're committed to investing. We believe that our ability and willingness to invest in our restaurants at a relatively quick pace help some kind of separate us a little bit from others in the industry. And so we believe it's an advantage for us to be able to use our financial strength and be able to invest at the right pace and the right time in the U.S. business. So that's why we're continuing to do that.

And Sara, on the market share, I think it's probably both IEO and the sort of the broader Informal Eating Out and then the most specific to us the QSR market share is incredibly muted. I mean if there's any growth at all, it's going to be more likely in the QSR and largely a lot of that is down to new units additions. So I guess what that means is any traffic gain units get will be at the expense of someone else. All those people particularly in eating out a little less often and we can respond to those sorts of trends with home delivery, for example. But frankly, we're not expecting any tailwinds from broader growth in either IEO or QSR. Now, if you want to choose to play in one of those, must about being QSR so I feel good about that. And there's a lot of discussion that we have with our markets. It’s absolute sales growth is always attractive. That top line growth like-for-like sales is clearly always encouraging in a positive trend. But no matter what your markets and conditions are, as long as you're gaining share, you're going to end up in a better competitive position in the long term. So we look at market share very closely and we have a pretty aggressive mindset to it. We don't expect, as I said, just to reiterate, we're not expecting any tailwinds, so our share gains will be someone else's pain.

Our next question is from David Palmer with RBC.

Just looking ahead to 2019 and looking back to 2018. Traffic obviously slowed down last year particularly earlier in the year. When you look at the foundations you've created and the important changes that you're making heading into this year what are the most important ones when it comes to accelerating traffic in the U.S. in particular? And then with regard to the delivery business I would imagine you'll start in-app ordering at some point and with some advertising support behind that. Is the consumer data available only for in-app orders and not through orders through Uber Eats?

Let me take both of those. So I think the market where we really want to drive traffic momentum which will help the overall global figure is clearly the U.S. So I think we have a pretty clear perspective on where the - happening and we just need to get a greater focus on addressing those. So to be very specific we continue to look traffic at a greater level than we want at breakfast. We're doing well with average check growth but we really want the customer comes back and more often. So there are a number of initiatives that we are going to be deploying some of these real nuts and bolts stuff just looking at our staffing levels across those key - day mass. Clearly menu innovations always play a part. We believe the shift back into local breakfast value from a national value on the Breakfast Day part will help us fight against the local competition I guess the local consumer taste better. We believe we are on still - McCafe and the McCafe brand both through coffee and premium coffee. And also we do believe that more personalized digital engagement can also help drive our breakfast business but that's through having customers enjoy the experience and convenience of order and pay and also more personalized and tailored offers in the app. So that's just an example of the focus we have on breakfast particularly across the U.S. and that was hearing when I was in the field offices down in Louisiana and Georgia earlier in the year. Also we're continuing to fine-tune the value in deal promotions. I mean you're familiar with the four for $6. We have two for $5. And of course the $1 $2 $3 menus as entry-level platform in that deal combinations. We're going to continue working on product availability or product offers within those combinations and they can get more competitive as we view that up. Then finally, the one which again I'm excited about and its nuts and bolts McDonald's restaurant operations type discussion is a renewed focus on the drive-thru operation and then just making sure that we really submitted the model that we're seeing. So I think there's a number of areas where we believe the guest count traffic are growing and some - all of that is within our control. So that feels good. With regard to the in-app, now we can get several consumer data by third-party operators. But clearly integrating into our app will give us a fuller data set. So we can clearly data privacy is foremost in our mind. So we always respect that. But we are getting some useful information now but we're more optimistic as we get in there probably in the third quarter of this year integrated more into our app and actually then secure all that information that data set on customers and be more useful to them.

Our next question is from Karen Holthouse with Goldman Sachs.

In some of the markets that have had Experience of the Future longer in the U.S. Are there any metrics you can share specifically TF usage? And then are you seeing any signs of greater app adoption or app usage in those areas when you sort of have the kiosks for customers into that digital ecosystem?

Yes. So our most advanced advantage probably for example that really started adopting self-order kiosks earlier than anyone else and let me have some fast follower being Australia, Canada Italy, Netherlands for example. What we're intending to see is significant year-on-year usage percentages but in store customers. So I guess what I'm trying to say greater percentage of customers that go into our restaurants are using the kiosk and they get more confident with it, they get more familiar with it. They enjoy just the time they're able to spend on it and ultimately going in groups and then group order for example. So we are seeing some restaurants with as high as 80%, 90% of in-store guests using the kiosks. And particularly now as we had the enhanced hospitality with that they can just order pay on credit go straight to their table and we'll bring the order out. So it really has transformed the experience. So we're actually seeing not just our own data we're seeing customer satisfaction measure dramatically increase. So we're using these learnings to actually help markets that's still in the process of rolling our EOTF for the U.S. and so some other emerging markets because the data is powerful the data is proving on the business case and that's why we're going to continue supporting it as we go.

Our next question is from Jeff Bernstein with Barclays.

Two questions, one just on the U.S. franchise system, seems like they're getting increased visibility with the formation of their kind of women association and I guess we're seeing more reports talking about some frustration with things like delivery and investment the EOTF which you guys have talked about in the past. And I guess as all QSR peer seemingly having a - always have a small portion of franchisees out of this quarter. So I'm just wondering Steve maybe whether your concern that this concerns at McDonald's are more on escalating kiosks like it damage the system or maybe you can tell us what you think the biggest concerns on push-backs are. And my follow-up is just for Kevin. I just want to clarify what you said about 2019 EPS. I know you said it will be pressured but I wasn't sure whether that was benchmark and against where consensus is or versus your high single-digit kind of long-term outlook or how we should think about the reference to it being pressured. Thanks.

Yes I'll take the first one and around the U.S. - our owner-operator sentiments and our commitment to this bigger bolder vision plan. So again let's just keep in context just quite how ambitious the plan that the operators and our leadership team build together and that was always going to be hard work. In 2018 it was a year of hard work. It was a year when we as a company and the owner/operators individually become to write more significant checks as they were committing to the plan. So the dialogue always going to happen. The dialogue always does. Sometimes it's in a low level sometimes it just bubbles up a little. I think the good news is we're talking and our teams and the Owner/Operator leadership are talking with one another to see how we can help maintain the confidence in the plan - maintain the commitment to the plan if there's any adjustments or amendments that we need that we can make those as we roll. So I wouldn’t life be great if everyone was happy of course I am fundamentally concerned and it will derail from the shared ambition we have no I’m not at all. And I think just the fact that the dialogue continues means that we’re going to get to a good place and one where we’ll turn out of work feeling excited about the opportunity that we’re facing because more time we can be consumer facing and getting in our restaurants and activate in the plan - because of customer experience and the business results. Again I could hear that first hand from my market as it's this year but in the pattern erosion across Atlantis so the door is always open on that.

And then Jeff regarding where I mentioned there will be some pressure on EPS growth this year. I'm not comparing versus consensus I’m just talking about our internal targets. As I mentioned here just on one time things like games we will be ratcheting down between 2018 and 2019. So that impacts that EPS growth rate until one-time of a change if you will but we've always known we’ve always talked about our refranchising starting to roll off related to depreciation that I mentioned is obviously pressure on margins if you will in 2019 related depreciation. Now that won't impact cash flow or anything like that but it’s obviously has an impact on just bigger EPS growth rate so that’s all I was just trying to say.

Our next question is from John Glass with Morgan Stanley.

Two as well please one Steve you mentioned consumer confidence and other sort of cautionary notes about 2019 was that directed at maybe the year has been little softer after softer start than you thought or is that just sort of standard there's always things in the world to worry about. And then specifically on EOTF I suspect slowing the pace of the conversions probably help sales in 2019 maybe you can comment if there is a change or less burden on sales relative to that. And you also mentioned that your level loading I think at the end of 2019 it will be 10,000 converted in the U.S. and so there is another 4000 to go is that 2000 and then the rest just don't have to get done or how do you think about level loading if you got more to do still then to balance of 2000.

I think Kevin will take the second one. Now I was not looking to signal any short-term as of in those comments. I was just thought it was responsible just acknowledge as you enter 2019 as you look around just a global macro picture it just appears a little less certain entering the last couple of years. I mean evidence with all of us anyway I thought it was worthy of note but no I don’t want that to be read into any form of indication of how the year started. And then regarding two things one kind of the ETOF impact as you call it yes, by doing a little less projects in 2019 it actually will be a benefit more of a benefit to sale then if we had done 4000 projects in 2019. So that’s when I mentioned where the ETOF impact if you look at all the pieces should start off turning positive by midyear versus the direct that has been really all of this year. Regarding the number of restaurants or accounts if you will of the EOTF projects, right now through 2018 we’re little over 7500 restaurants complete if you will. If you then think about roughly 2000 being done in 2019 and roughly 2000 being done in 2020. And then likely another 1000 or so remaining that would happen in 2021 and 2022 that gets us to roughly most of the estate because at the same time there are some that we are either relocating or we have rebuild. And so you get another 1000 or so just of restaurants if they are relocate to rebuild over all of those years that gets you to roughly 13,500 or so of our 14 plus thousand estate that substantially all of them. They'll be a few restaurants that we don't get to won’t be a lift.

I just want to hook, I want to go back to Karen's question regarding the app usage trajectory because I don’t think I address that. I want to finish into the broader perspective because you’re asking around self order kiosks basically but it first. All of our technology initiatives whether it’s the global mobile app will be done from mobile order pay introduction of self order kiosks, the use of outdoor digital menu boards. So as we build the kind of customer relationship management, we’ve now trading this very, very proper ecosystem as we start to connect these technologies together. We'll offer our customer better experience, better value more personalization and we will get to understand our customers and their behaviors so much better. So I wanted to acknowledge your point that as we start to get identified customers - once we start to unlock that as self order kiosks or as they put into a drive through lane been our ability to smooth their experience make it more convenient, recognize them individually and also learn of them is incredibly powerful. So these are a lot of foundation investments we're making to create what I think will be an incredibly powerful ecosystem for one of the better word that some is going to provide a lot of knowledge a lot of data for us and a much better experience for our customers.

Our next question is from Greg Francfort with Bank of America/Merrill Lynch.

I just had one clarification to the earlier CapEx comments and then a question. I think to respond Eric’s question you were referring to 2021 CapEx and the 1.5 billion to 2 billion range but I think previously you’ve said sort of low one to through run rate is 2021 not a long-term number?

So 2019 and 2020 will be roughly the 2.3 billion - I just mentioned we’ll have about a 1000 projects left still for 2021 and 2022. So it won’t get all the way down to the longer term run rate if you will it will be substantially less than 2019 and 2020 but not quite get all the way down to normal ongoing run rates.

Our next question is from David Tarantino with Baird.

On the U.S. I had a question I think Steve you referenced a couple times sort of operational improvements and be the service and I know I have asked about this many times over the past few years. But just wondering if you could maybe share specific action steps you're taking to improve either service that drive-thru in the U.S. I know you referenced some technology benefits but is there going to be a greater push on add in 2019. And if so how are you going to achieve progress there? Thanks.

No, thanks David I mean this is the stuff we kind of really get into. So let me just give you a couple of examples of what we will be doing differently that what we believe will help reduce complexity and as a result improve speed. Introduction of technology we've got some new we just call them zoom boards, but these are little digital screens at the drive through present a window. So as where we toss out the food we can really start to provide real time service times within the restaurant and where the little bottlenecks can be whether it’s a delivering process, the payment or whether we are maybe we don’t have the food ready but have also lot of parking one of the parking base for example. But any formation real time setting others a positive competitive nature up against the local drive through restaurants so maybe all the other driver-throughs within overall greater group for example. We seen this operating really successfully in Canada, operating really successfully in Australia and it just provides the competitive spirit also that kind of bottleneck identification. If you’re running that shift you can see why the payment process, we're not handing the cash as quickly as possibly could do why is the ordering process taking slightly longer at the drive-thru? Maybe it's a training issue. Maybe it's a technology issue. So it just enables those issue identification so much greater that you can address them quicker and keep things moving, so kind of real nuts and bolts stuff we get into but allowing technology to help make our restaurant managers and crews' lives easier. And totally different one is, we've got to build a much more sophisticated tool for assessing menu complexity where we can understand the volume of certain menu items we sell, the difficulty that it is for us to prepare the average normal production time, the type of gross margin contribution. It makes our owner/operators and today it is helping us to better identify where and how we can simplify the menu with the minimum customer systems that have viewers are actually driving customer satisfaction and speed but also protects or enhance gross margins as well. So it's a much more sophisticated tool that we can run live product next dated through and really start to give much more fact-based information to our teams in the field so they can make these decisions with a much higher level of confidence. So that's just a couple of examples. But it's across all 10 field offices all 10 of them are have drive-thru service and with Chris mentioned international team have drive-thru focus in service as a key initiative.

We have time for one more question from John Ivankoe with JPMorgan.

Just a few very quick ones and first is actually the follow-up on drive-thru service times. Have you seen those peak? I mean in other words are they continuing to get worse or they're stabilizing? And if they're not stabilizing when might you see those stabilize? That's the first question. And then secondly what is your experience of delivery to the McDonald's stores in the United States had the longest not just as a percentage of sales basis but are they happy with incrementality and sales? Are they happy with profitability? Are there any changes that you could potentially see in that program to extend franchisees profitability of delivery? And then the third question if I can is a technical one. Notes receivable and accounts receivable, how are you kind of been bumping up actually for some time. I think there's around $2.4 billion in the fourth quarter. So there anything around EOTF related to that maybe in terms of what you're doing with franchisees and might you expect those accounts to be drawn back down a bit on the source of cash for you in the relatively near-term.

So I'll happily take the technical one over the [indiscernible] both too. Drive-thru service times have increased year-on-year for about the last five years. We collectively called that to a halt. So we expect to actually reduce service times across 2019 we're starting immediately the activities in quarter one of this year and actually in restaurants currently. So those are collected result service times have to a paint we will not except them for getting any longer and therefore we are looking to address those. So hopefully that response to that question. On delivery we're seeing just great growth in year-on-year for those that have been offering delivery for more than 12 months. So part of the measurement system we have here is not only just we had new restaurants but only where we want to grow the organic business. If you like - we're now into the lapping like-for-like on delivery, incrementality still remains encouraging in that kind of 70 percentage range, average check still remains around 2 times the normal average in-store. We note in the day part analysis as well that helps support our belief and covers any incrementally because it's peaking at day parts that we will ordinarily be a single sort of business piece. So we believe we're well set up to do more. I think the pieces that we're collectively still trying to back him out is how do we drive the awareness because we know as soon as customers try it, they stick with it and jointly stick with it. So awareness here in the U.S. typically we would want to have a critical mass of our restaurants here 70% plus before we were 17 with national awareness. We're marketing campaign or a broader social media campaign. I will say the local co-ops are getting off for it as of when the critical mass of the restaurants in that total now starts both - as we start to expand with Uber Eats and elsewhere around the world with uBer and on a third-partly operators getting the awareness is one of the key priorities we have. So we feel good about that. And now I will hand over to Kevin on the front end question.

Yes related to accounts receivable, so really most of that - most of the increase certainly is related to U.S. EOTF projects. The way it works is we generally manage those projects and so wealth project manage all of it and we'll collect from the operators. And so you are seeing that those balances are up because they've been focused on getting the projects done. Mechanically we need to go through some closing of job in collecting the money from the operators. It is an uncollectible money, it's a timing issue of when we'll actually just receive the - go through the logistics of closing our projects and collecting the money from the franchisees. So yes it should be - it will be at cash inflow as we continue on. I would expect that receivable number to go down now that there will be some pressure off of the number of projects as you think about 2018 everyone was just driving hard toward getting all the projects done. Now we can get some of the kind of other stuff associated with that done like collecting the money. So that's exactly right.

Okay. Thank you Steve and Kevin and thank everyone for joining our call today. Have a good day.

This concludes McDonald's Corporation Investor conference call.