McDonald's Corporation — 2024 Q1

Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Ian Borden.

Thanks, Mike, and good morning, everyone. I join you today inspired from our recent worldwide convention, a time when McDonald's comes together to celebrate the success of our system, the relevance of our brand, power of our Accelerating the Arches strategy and the collective strength of our system were on full display as we welcomed our global McDonald's franchisees, restaurant teams, suppliers and company employees to Barcelona.

to deliver delicious feel-good moments at an affordable price each and every day.

offering our customers delicious food at unparalleled value and convenience. And it's exactly this approach that will continue to drive growth. McDonald's is best positioned to win in the industry because when we combine our strong system alignment with our fully modernized estate, a globally recognized brand, delicious food on our core menu and the highest level of execution across our 4Ds, no competitor could match us.

Thanks, and good morning, everyone. As Chris mentioned just a few minutes ago, strong execution against our strategic plan delivered global comp sales of nearly 2% for the first quarter, driven by growth across our U.S. and IOM segments. As we've said before, as customers continue to be more intentional with the dollars that they spend in a pressured economic landscape, we expect moderated top line growth this year.

Thanks, Ian. We like to say that when culture calls, McDonald's answers. With a brand that is renowned throughout the world and marketing that is resonating in culture and with consumers, it's no wonder that we've been recognized yet again as one of the World's Most Effective Marketers by Work in association with Cannes Lion. We're elevating our creative excellence, scaling great ideas globally and building meaningful relationships with the next generation of consumers.

hot fresh orders delivered with convenience and accuracy. The future restaurant experience is already underway in markets across the world, whether it's Ready on Arrival, a dedicated drive-thru lane for digital orders in China or other flexible format concepts. And by building the technology infrastructure to support the 3 long-term platforms we've discussed, we will create a more reliable experience and operate more efficiently.

Our first question is from David Tarantino with Baird.

My question is on the comps outlook. I think, Ian, you mentioned on the last call that you had expected comps in the U.S. and IOM to settle to the 3% to 4% range this year. And now I think your commentary suggests you're operating in a tougher climate than when you gave that guidance.

Thanks for the question. Let me start and then I think Chris will probably jump in to kind of build out on whatever I say. But look, what I would start with is, as you know well, we don't typically give comp guidance. I think what we were trying to do as we looked back was to provide a directional perspective on what we felt the industry kind of historical range looked like in more typical years. As you know, we talked about '24 being a year where we felt top line was going to moderate.

And then turning to value in the U.S., I think it's important to first recognize that there is some great value that our system, our franchisees are offering in the U.S. 90% of our system in the U.S. is offering meal bundles for $4 or less. And if you look at digital value, we've got some great digital offers out there. I just opened my app while I was waiting to jump on this answer and we're offering right now a Big Mac for $0.29 when you buy a Big Mac or you could get 30% off McCrispy. So there's a lot of great value out there.

Our next question is from Brian Harbour with Morgan Stanley.

Yes. I guess, given kind of the response to that prior question, what's some of the timing on that value plan, especially in the U.S.? Do you think that we'll start to see some improvement in the second quarter? Do you think it sort of takes longer than that? What else could we think about from a sales driving perspective or maybe a product perspective that will be noticeable U.S. comp drivers as we think about this year?

Sure. Well, I think what we've seen, if I turn to France, as an example, France, I was talking about last quarter as having a number of areas of opportunity and in my prepared remarks, I noted that, that system in France came together very quickly around a national value program that they then put significant marketing support against and they got to north of 80% awareness in a very short period of time that's starting to drive encouraging trends in their business results.

And maybe just the only build I'd add to what Chris said, Brian, is, I mean, I think I know, as Chris said, our U.S. leadership team is really -- is working really closely with our owner/operators. I think we have a good understanding of what we need to do, kind of how to do that well. And we're going to move, obviously, as quickly as we can together with owner/operators to kind of address that opportunity. And we've seen that work really well in other markets globally, as Chris was talking about.

Our next question is from Dennis Geiger with UBS.

Wondering if you could speak a little bit more to kind of what you're seeing with that U.S. consumer, whether it's by income cohort or spending pattern.

Sure. Well, I think one of the things that we noted when in our opening is that the consumer is certainly being very discriminating in how they spend their dollar. And the inflation that has occurred over the last couple of years in the U.S., I think, has certainly created that environment.

And Dennis, maybe I'll just build on what Chris was saying because I think it's such an important point. I mean our -- the foundation of our business, the vast majority of our business is in an incredibly strong position. I mean, I think we come into this more challenged macro environment kind of in an advantaged position. And I think the emphasis with that would be we have a fully modernized estate, as Chris kind of referred to. We've got, I think, a marketing and brand engine that's best-in-class meaning I think the team continues to deliver great creative execution. I think that's resonating with customers in culturally relevant ways. We've got our system financial strength that's at one of its strongest points in our history. So we've got the ability to kind of lean into opportunities together because of all the work we've done over the last couple of years.

Our next question is from John Ivankoe with JPMorgan.

I was wondering what kind of opportunity or maybe need that we have to address core menu pricing in the U.S.? And I speak specifically about things like Quarter Pounder combo pricing or Big Mac combo pricing that can actually be very different across the restaurant base even within a given market. And obviously, the press will communicate some of the highest pricing in certain stores as you talk about what the direction of pricing has happened to McDonald's across the country even if it is just certain stores.

Sure. Well, let me start with -- I think it's important to recognize that if you look at margins in the U.S. today, restaurant-level margins for franchisees versus where we were in 2019, we've just now rebuilt franchise restaurant-level margins back to where we were in 2019. So the pricing that's been taken over the last several years was all taken as a means to offset what we were seeing around quite high labor inflation and quite high commodity -- food and paper inflation.

Maybe John, I'll just build a little bit on what Chris talked to because I think -- maybe the way to think about it is what do we think good looks like in getting value and affordability right. And I would -- I think we would say it's a couple of things. It's making sure, as Chris said, we've got those entry-level items at affordable price points for people -- or for consumers. It's making sure that we've got an entry-level meal bundle that's at an affordable -- compelling affordable price point and doing that generally with products that consumers know and that we've got strong equity behind. And then I think if breakfast is a big part of our business like it certainly is in the U.S., making sure we've got compelling value at breakfast as well.

Our next question is from David Palmer with Evercore.

You noted that customer satisfaction scores had been heading higher. And that definitely doesn't surprise me given all the improvements to the restaurants and digital and the core food renovations. But it does -- I guess what does surprise me is that the gap to the industry, at least in the U.S., has eroded that out-performance gap. I wonder whether it's the surveys or certain consumer trends as you slice it thin, even dayparts.

Sure. I think on our overall satisfaction, again, we look and we're seeing improvement across all of our major markets on satisfaction, and as you noted, there's multiple aspects to that.

David, just maybe to build because I think experience, as you noted, is encompassing of a number of different factors. I mean, I think we're driving better speed of execution consistently across our top markets. We know when we put capabilities in place, as you've heard us talk about previously like Ready on Arrival, which is in place in the U.S. that we're delivering hotter, fresher food as customers arrive to our restaurants and delivering an overall better experience. I think the sharp point and Chris mentioned this is just we've got that opportunity on affordability and we're really laser-focused on making sure we can meet the need that consumers are expressing in the current context. But we feel really good about all the other aspects of the experience and how we're delivering against what customers are expecting.

Our next question is from Eric Gonzalez with KeyBanc.

On the pricing discussion, and I appreciate the point that your store-level margins are back to 2019 levels, but perhaps you could speak to the current level of year-over-year pricing and your current inflation expectations for food and labor this year?

Sure. Well, my guess is your question is focused on the U.S. because obviously I could give a different answer depending on where you are in the world. But if I focus just on the U.S., most of the pricing that you see now in the U.S. is carryover pricing. It's not new pricing per se. Most of it again is carryover pricing.

Maybe just to build, Eric, to what Chris said, I mean, the food and paper low single digits. So I think we have seen kind of favorable movement in this year, although we've still got a fair bit of carryover effect from '23 inflation, certainly into the first part of '24 from both food and paper and labor.

Our next question is from Sara Senatore with Bank of America.

I guess one clarification and then a question. You mentioned that the QSR industry traffic is flat to declining. I guess, I always think of this as an industry where traffic is kind of, at best, flat. So I'm just trying to understand, given you usually have better data than I do, whether that's an inflection point? Or this -- the sort of traffic trends have been more consistent, which it sort of sounds like?

It's Ian. Let me take the clarification and then I'll let Chris address your question. So what I said earlier was that industry traffic, and I was talking about across many of our top markets, is flat or we're seeing declining trends.

Yes. And then turning to franchisee and your question about how we support franchisees, you're right that our U.S. franchisees, and I could go through other markets as well, but they're in a strong position. When you look at franchisee cash flow, we are at, I think, our second highest level ever, 2021 being the peak, but we're at very strong franchising cash flows. We're going to see franchisee cash flows increase in Q1.

Our next question is from Lauren Silberman with Deutsche Bank.

I had a follow-up on the value question. You mentioned you're offering value 50 different ways. Can you just talk about what a future national value platform could look like given how different the cost environment looks like across the U.S.? I imagine price point value could be difficult.

Yes. I'll maybe start and then I'll hand off to Ian. But I think Ian outlined in general a construct that we see as sort of being our successful playbook, which is you need to have good entry level price points. You need to have a meal deal. And then there needs to be something that if you have a big breakfast business, you need to be offering value that's specific to breakfast.

Our next question is from Brian Bittner with Oppenheimer.

As it relates to the operating margin guidance, mid- to high 40s range is still a very wide range, Ian, and I fully understand there's a lot of moving pieces in the financial model. But I'm curious, with a quarter in the books, if there's an opportunity to perhaps tighten the expectations around that range? As we look towards last year's 47%, is that kind of a good base case target for operating margins this year? Or should we anticipate declines similar to like what we saw in the first quarter?

Brian, thanks for the question. Look, I mean, you hit on it. It's obviously in the context we're working through in '24. There are a lot of variables at play. And I think the macro context means it's difficult for us to kind of predict the forward look in terms of what's the duration of the macro headwinds we're seeing and the depth. So I think that obviously is impacting performance. And as always, our op margin leverage is going to be dependent on our strength and level of sales growth.

Our next question is from Andrew Charles with Cowen.

Chris, looking to learn more about how this national value platform will be different from years past. So if I think, historically, back in 2018, for instance, the $1 $2 $3 was launched. It looked like it was a negative traffic year for the U.S. business just in that regional approach to value had been more successful the brand despite what you said about competitors that are pursuing more national value. So I'm curious what you think is going to make this time different that will lead national value to be more successful, if you can put about the constructs of what that will look like going forward.

Sure. Well, state the obvious. It's up to the U.S. team in partnership with our owner/operators to define what is a national value proposition look like in the U.S. As you know, with $1 $2 $3, it took a minute for that program to gain traction, but it then drove very strong results. I think, certainly, if you look at the U.S. performance over the last many years under the $1 $2 $3, I think we're now -- we were in year 6 or 7 of the $1 $2 $3, that was a very successful platform for us in driving performance across the U.S. business.

Our next question is from Greg Francfort with Guggenheim.

My question is just on the International business. And I'm curious what you're seeing, I don't know if it's maybe from a protest standpoint or if the business has continued to weaken there into the second quarter in the same way that it's done in the U.S. business and what you might be doing from a support perspective through the ideal royalty rate or anything like that?

Sure. I think if you look at the impact of some of the boycotts in a few of our markets, I wouldn't say things are getting any worse there. And then, I think, in some cases you might be able to look and say perhaps it's getting slightly better in some places.

Yes. Maybe just one kind of build on the headwinds. I mean, I think what I said upfront, that the macro headwinds that we were seeing were more significant across a number of our large international markets and that's continued into the start of quarter 2.

Our next question is from Brian Mullan with Piper Sandler.

Just a question on CosMc's. I wonder if you could just talk about what some of the early learnings are in your tests in both Illinois and Texas.

Sure, Well I'm going to disappoint you, Brian, in telling that there's not a lot to report. I think what we're still seeing is there's a lot of interest in CosMc's that's sort of curiosity driven. And as a result of that, it's tough to get a sense of sort of what are the true kind of underlying performance expectations.

We have time for one more question from Jeff Bernstein with Barclays.

Great. Just following up on the U.S. comps. I know you guys have mentioned the lower-income households and the weakness seen there and maybe some trading into food at home. Just wondering if you can maybe compare that to past slowdowns. I feel like the message has always been the benefit of the quick-service segment. Maybe you lose some on the low end, but importantly, you inherit some who trade down from above, like you said, if everyone is looking for value.

Sure. Well, so I think it's tough to go back and compare the data today versus our last time that there was an economic slowdown. I think the dynamic that you described is what we do typically see in the business. I think, as you also know, Jeff, that our business over-indexes with lower income consumer. So there's that consideration.

Jeff, maybe just 2 quick hooks to what Chris said. I think across markets, I think what our leadership teams are spending time on talking to the business, talking to our franchisees about is what I'll call making sure we've got a street-fighting mentality in the current context. I mean, clearly, the macro is more difficult. Clearly, everybody is fighting for fewer consumers or consumers that are certainly visiting less frequently. And we've got to make sure we've got that street-fighting mentality to win irregardless of the context around us.

Okay. That concludes our call today. Thank you, Chris. Thanks, Ian. Thank you, everyone, for joining. Have a great day.