Michael Allen Flores - McDonald's Corp. Stephen J. Easterbrook - McDonald's Corp. Kevin M. Ozan - McDonald's Corp. Lucy Brady - McDonald's Corp..

David Palmer - RBC Capital Markets LLC Andrew Charles - Cowen & Co. LLC Sara Harkavy Senatore - Sanford C. Bernstein & Co. LLC Brett Levy - Deutsche Bank Securities, Inc. David E. Tarantino - Robert W. Baird & Co., Inc. Gregory R. Francfort - Bank of America Merrill Lynch Karen Holthouse - Goldman Sachs & Co. LLC Jeffrey Bernstein - Barclays Capital, Inc.

Will Slabaugh - Stephens, Inc. Nicole Miller Regan - Piper Jaffray John Glass - Morgan Stanley & Co. LLC Jason West - Credit Suisse Securities (USA) LLC.

Hello and welcome to McDonald's July 25, 2017 Investor Conference Call. At the request of McDonald's Corporation, this conference is being recorded. Following today's presentation, there will be a question-and-answer session for investors. I would now like to turn the conference over to Mr.

Mike Flores, Investor Relations Officer for McDonald's Corporation. Mr. Flores, you may begin..

Hello, everyone, and thank you for joining us. With me on the call today 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 filings 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.

Now, I'd like to turn it over to Steve.

Steve?.

Thanks, Mike, and good morning, everyone. We had a solid quarter, driven by guest count growth. We grew global comparable sales 6.6% and global guest counts 3%, resulting in strong earnings growth. This demonstrates the progress we are making with our business today.

Our strength was broad based, as we grew sales and guest counts in every one of our top nine markets for the first time since 2008. Here are just a few highlights from around the world to illustrate this momentum. Italy experienced its best quarter guest count since 2010. In April, the UK saw the highest monthly sales volume in its 43 year history.

Germany had its strongest quarterly comp sales in nearly 10 years. Canada's sales growth was the highest in the last five years. And in the Netherlands, a market that's becoming a more meaningful part of our overall business, we had our best comp sales and guest counts in more than 20 years.

Our most important priority remains growing guest counts by serving more customers, more often. This is the ultimate measure of our turnaround as we strengthen and grow the business. We've talked before about the extensive research we conducted that gave us a much greater appreciation for who our customers are and what appeals most to them.

Guided by that insight, we're taking purposeful actions to retain customers who visit us today. We've gained lapsed customers and convert casual customers to committed customers.

Our second quarter results demonstrate that customers are responding as we serve hotter, better-tasting food, offer convenience on their terms and provide good value for their money. We'll spend more time today discussing the moves we are making in each of these areas that are driving growth around the world.

First, though, I'll ask Kevin to discuss our second quarter sales performance in more detail..

Thanks. Since Steve outlined the strength of our global top line results, I'll provide a little more texture on how each of our segments contributed to our global performance.

In the U.S., comp sales were up 3.9% for the quarter, as we benefited from the recent value and premium offers layered on the menu and operational initiatives over the last couple of years. And while the environment in the U.S.

remains very competitive, we're pleased with our comp sales gap for the quarter of positive 3.5% versus our QSR sandwich competitors, a good indication that we're beginning to make headway on regaining customers. Sales trends in the International Lead markets remained strong, with comp sales up 6.3% for the quarter.

The UK continued its momentum, reaching its 45th consecutive quarter of positive comp sales, while Canada and Germany also had strong performance in the quarter. The results delivered by the well-established markets in this segment are a testament to the resilience and adaptability of the McDonald's brand.

In the High Growth segment, comp sales grew 7%, with positive results across the entire segment for the third consecutive quarter. China's continued momentum was the strongest driver in this segment.

And the Foundational Markets had the largest percentage sales increase, posting comp sales growth of 13%, led by Japan's double-digit comp sales, along with strong results in each of the segment's geographic regions..

Thanks, Kevin. This reinforces that we are driving strong results around the world from our larger, more established markets to those that are still emerging. As we look at what drove performance, let's start with the food we serve. We're strengthening our existing menu while responding to shifting tastes of our customers.

Premium platforms pioneered in our European markets have become a standard on menus across our entire top markets. This is testament to our ability to share and scale ideas throughout McDonald's.

For example, in the U.S., we launched our Signature Crafted line at the national level featuring great-tasting sandwiches with premium toppings like pico guacamole and sweet barbecue bacon. In China, we introduced Chef Crafted burgers made with recipes from a Michelin Star Chef.

The more convenient we make it for our customers to enjoy McDonald's, the more they reward us with their business. Experience of the Future, or EOTF, as we call it, fundamentally changes the way customers interact with our brand.

We are providing an experience that is more personal and less stressful, matching our best people with technology platforms like self-order kiosks, digital menu boards and table service. Changes in the layout of our dining rooms and service areas create better customer flow and give us the ability to enhance our McCafé and dessert business.

Poland was our EOTF incubator market. On a recent visit to celebrate the market's 25th anniversary, Kevin and I experienced firsthand the big difference it makes for customers when our restaurants introduce and integrate all Experience of the Future elements at once.

We've talked quite a bit about Canada and their best-in-class Guest Experience Leaders. The market continued to enhance and build on the program with table service. And customer satisfaction scores are up significantly over the past two years.

As we continue to streamline the sharing of good ideas, we've taken what we've learned in places like Poland and Canada to other markets. Italy, for example, converted many of the local restaurants in Milan and Catania to EOTF. It's making a difference for customers and for our business.

Comparable sales and guest counts in those Italian cities are above the market averages and in line with the mid-single digit sales lifts that we have seen in other markets that have made progress with EOTF deployment. Shifting the conversation, we're also giving customers more reasons to visit McDonald's more often with locally-relevant value.

In the U.S., we launched a nationwide cold beverage value platform as we head into the summer. Guests came in more often for $1.00 any size beverages and $2.00 McCafé drinks, which included popular smoothies, shakes and blended coffee drinks. In France, McFirst is an affordable lunch on-the-go that has been popular with our customers.

And in Australia, more customers have been visiting McDonald's as a result of our $1.00 Hamburger. This complements some of our bundled value offerings on the menu and makes it more affordable to feed a family. I'll turn back to Kevin now so he can share insight on how all of the moves we are making are impacting our bottom line..

In addition to the strong comp sales and guest counts, we've strengthened our operating results as well. Operating income grew by more than $430 million for the quarter, benefiting from last year's results that included impairment and restructuring charges.

Even without the charges, our income grew by more than $200 million as a result of strong restaurant operating performance and G&A savings across all segments. At the same time, flow-through to our bottom line earnings was strong.

Excluding the impact of current and prior-year strategic charges, earnings per share were up $0.28 or 21% in constant currencies. The biggest component of our income is franchise margins, which represent about 75% of total restaurant margin dollars.

Our franchise margins are increasingly being driven by a relatively steady and predictable stream of rent and royalties. And in the second quarter, the margins grew to over $2 billion, an 8% constant currency increase.

Company-operated margin dollars were relatively flat for the quarter, while the company-operated margin percent increased 160 basis points to 18.7%. Both the margin percent and dollars reflect the impact of China's strong comp sales as well as the benefit of no depreciation expense for China and Hong Kong in 2017.

As I mentioned in the first quarter, we stopped recording depreciation for both markets once they were classified as held for sale. China's benefit to consolidated margin dollars was offset by the impact of refranchising in our U.S. and Foundational Markets.

In the U.S., company-operated margins declined 30 basis points to 16.5%, as positive comp sales were offset by higher labor costs.

These higher costs were due to both higher wages and purposeful investments that we've made to ensure that we execute at a high level and provide a great experience for our customers as we deploy mobile order and pay, accelerate the roll-out of Experience of the Future and ready the system for the introduction of fresh quarter pound beef patties next year.

Regarding other pressures, we continue to effectively manage commodity costs. In the U.S., costs for the second quarter were relatively flat versus last year. We still expect our U.S.

grocery basket to increase 0.5% to 1.5% for the full year, with more pressure in the second half of the year as we lap meaningful commodity benefits from the second half of last year. We're also closely monitoring key inflation indices to ensure that we maintain our value proposition while strategically taking price increases.

Our second quarter pricing in the U.S. year-over-year was up roughly 1.8%, which was below food away from home inflation of 2.2%. For the International Lead markets, commodity costs were up about 1.5% for the second quarter and our menu prices were also up about 1.5% year-over-year.

Turning to foreign currencies, for the quarter, foreign currency translation hurt our results by $0.03 per share. At current exchange rates, we expect the impact of foreign currency to be positive $0.01 to $0.03 in the third quarter and $0.00 to positive $0.02 for the full year.

As usual, this is directional guidance only because rates will change as we move through the year. Before I turn it back to Steve, I want to provide an update on the China, Hong Kong refranchising transaction. I'm happy to report that we expect to close this important strategic transaction in the coming weeks.

With its completion, we'll reach our global refranchising target of about 4,000 restaurants more than a full year ahead of our original targeted time line.

In addition to the China, Hong Kong transaction, we've completed several other important refranchising transactions since November of last year including Singapore, Malaysia, the Nordics and Taiwan. As I mentioned earlier this year, our key P&L growth rates for 2017 and 2018 will be choppy as a result of this refranchising activity.

From an EPS standpoint, we expect limited long-term impact from these transactions, as we plan to use the cash proceeds to repurchase shares. However, due to the nature of the weighted average shares outstanding calculation, we anticipate a negative impact of a few cents per quarter through third quarter 2018.

And while these refranchising transactions will have a dilutive impact on our revenue and operating income in the near term, these transactions are immediately accretive to our free cash flow, as we'll be operating under a less capital intensive model that delivers a more stable and predictable revenue stream.

We expect to return to revenue growth and achieve our long-term targets beginning in 2019, as our strategic partners invest and unlock the potential in these markets through unit expansion as well as sales-building initiatives.

Our refranchising strategy has been a key part of transforming McDonald's into a more purposeful, more stable and more efficient organization focused on delivering more growth. Further details on the impact of these refranchising transactions on our future operating results is provided on our website..

Thanks, Kevin. And this demonstrates that the retain, regain and convert foundations of our Velocity Growth Plan resonate with customers and drove top and bottom line performance for the quarter. Now, I'd like to talk about the progress we're making with our plan accelerators, digital, delivery and Experience of the Future in our U.S. restaurants.

These new platforms for growth build on our foundation and enhance or accelerate everything else we're doing for the customer. They bring the biggest benefit to the most people in the shortest possible time. And we're making great progress with bringing the accelerators to a growing number of restaurants.

Having said that, they are different from, say, our All Day Breakfast launch. This was an extension of our popular Breakfast business and drove an immediate increase in sales. Our velocity accelerators provide new ways for our customers to experience McDonald's.

It will take time to build awareness, which is the initial step forward toward changing customer behavior in a way that will be meaningful for our business. We remain confident and know these initiatives increasingly will prove to bear competitive advantages, unlocking growth in our business.

With digital, we see a clear opportunity to provide an even higher level of convenience and personalization for customers on their terms. To do that, our current priority is mobile order and pay. We are on track to make mobile order and pay available in 20,000 restaurants worldwide by the end of 2017, including our 14,000 restaurants in the U.S.

As part of a sequence roll out, we brought mobile order and pay to more than 5,000 restaurants around the world. Whilst we're in early days, we're seeing higher average checks and the curbside pickup is a convenience that customers value and thus, enabling us to grow capacity at peak times.

Delivery illustrates our ambition to redefine convenience for our customers. In the U.S., during the month of January, we piloted delivery with a couple dozen restaurants in Miami. The initial tests went well and we've moved quickly to expand. We've now scaled this initiative by launching delivery at more than 4,000 restaurants in markets from the U.S.

to Australia. Delivery also shows how McDonald's can leverage our size and scale, as nearly 75% of the population in our top markets are literally within three miles of a McDonald's, giving us an unmatched advantage in bringing great-tasting food to customers quickly.

In each of the markets where we've launched delivery this year, our size and scale has provided an additional advantage. We've been able to partner with the strongest third-party operators, like UberEATS, to pick up food from our restaurants and deliver to our customers. We're encouraged by the results we've seen so far with expansion of delivery.

They give us confidence there's meaningful opportunity with the customers we want to regain. And we've only scratched the surface. In many of our markets around the world, we're seeing average check sizes between 1.5 and 2 times higher than our overall restaurant averages.

And in most of our markets, we're utilizing our location advantage and operational efficiencies on customers' orders, getting food from order to doorstep in an average of less than 30 minutes. With 60% of orders being placed in the evening or late nights, we're seeing an opportunity to serve more customers during some of our slower periods.

This expansion of delivery is in addition to the 3,500 restaurants, primarily in Asia and the Middle East, where we've been in the delivery business for over 20 years. So we're now offering delivery in almost 8,000 restaurants, in 47 countries, across six continents.

The progress in our business is also the result of the changes we've made to our organization. We're fit for purpose with the right structure, right talent and right mindset. We have fundamentally transformed our culture. We're behaving like a leadership brand.

We have global cross-functional teams collaborating with a sense of urgency to achieve a common goal. And we're applying our learnings on-the-go. And nowhere is that more evident than the work underway on delivery. We are scaling faster than ever before. Now, as we scale, we're applying learnings from our best performers across all our delivery markets.

And tomorrow, we're going to celebrate our progress and have some fun, too, during our Global Delivery Day. There'll be events taking place around the world in select markets for both our customers and our employees. So feel free to join the fun by placing your own delivery order tomorrow.

As you know, the third velocity accelerator is rolling out Experience of the Future in the U.S. Taking advantage of learnings around the world, we're bringing EOTF to customers in the U.S. with greater purpose and pace. The U.S.

team devoted a lot of work to building a compelling version of the Velocity Growth Plan, and they call it the bigger, bolder Vision 2020 for their market, while U.S. leaders have worked closely with our Owner/Operators to share their vision for transforming the experience for McDonald's customers.

In addition to taking them through our Velocity Growth Plan in the West Loop of Chicago, we sent each U.S. Owner/Operator a letter detailing the company's commitments to them and laying out what commitments we expected in return.

While we give the Owner/Operators until October to commit to the plan, I'm pleased to share with you that more than 85% have already signed on. So getting our Owner/Operators on board three months ahead of schedule is now allowing us to move even faster to gear up for execution. We're moving ahead toward our 2,500 EOTF restaurants in the U.S.

this year and are preparing for a faster pace of deployment for 2018. We will continue sharing our pace as we redefine the experience for our customers with our velocity accelerators. We have always prided ourselves on continuous improvement and now we're doing it at an even faster pace. That is what makes me most confident about McDonald's.

We have strong leadership across our business. We're generating solid momentum. We've only started acting on the Velocity Growth Plan and early results validate that these initiatives are the right ones to accelerate our growth. We committed to pushing even harder and faster moving forward.

And with our customers front of mind, that's just what we're doing. Thanks, everyone. And now, I'll turn it over to Mike to lead the Q&A..

Thanks, Steve. We'll now open the call for analyst and investor questions. In addition to Steve and Kevin, we also have Lucy Brady, Senior Vice President and Chief Strategy Officer, joining us for the remainder of the call. Now, our first question is from David Palmer with RBC..

Thanks.

Just a quick clarification, first, when you do UberEATS today and you're going to be doing mobile order in the future, will those two be linked in some way? In other words, could you initiate a delivery from your app and perhaps tie it in with rewards in the future? And then, just a follow up on your leadership markets, those were very strong.

You listed some top-performing countries and some initiatives, but if you could talk a little bit about what perhaps promotional noise or other quarterly noise and what sort of truly sustainable momentum picking up we are seeing in some of these leadership markets. Thanks..

Yes. Thanks, David. So quickly on the UberEATS and really with all the third-party operators that we have entered into relationships with around the world, they all fully understand that as we develop our app, that customers will be able to route their delivery order through our app onto their third-party platforms.

And, thereby, as we develop our digital capabilities, any form of CRM loyalty will come with that. So, yes, we've been mindful of that and very transparent with our partners. And that'll further strengthen the experience for the customers. For ILM, I wouldn't say there is anything particularly tactical in the quarter that created that performance.

What I would say is we're seeing now the ongoing benefit of the EOTF platforms as we continue to roll out across those markets. The UK is going to be approaching, by the end of the year, more than 1,000 restaurants converted.

Australia is almost fully converted; Canada substantially as well on their first version of EOTF; and France and Germany working very hard as well to accelerate. What we're beginning to see now, though, is the critical mass of markets beginning to generate that sort of mid-single-digit type uplift over and above the market averages.

And I want to put this into the context that we are not seeing any tailwinds, whether it's economic or competitive, in any of those five markets. They're all incredibly competitive. It is a market share fight. So we're still being very competitive on value. Yes, we want to drive customers in. We don't get a pass on value.

We don't ever want to or expect one. So what we're seeing is the more customers we drive into our restaurants or through the drive-thrus, the more they begin to see and appreciate the improvements we've made in the business over the last two to three years.

So I'd say broad-based in confidence, but there are still economic challenges and macro challenges through France and Germany. We're having to battle hard, but we're focusing on market share and continuing to invest in those competitive environments..

Our next question is from Andrew Charles with Cowen..

Great, thank you. I have a two-part question on the UberEATS delivery program in the U.S. You guys ended the quarter with the service available at about 25% of U.S. locations. And I was curious.

What are the common traits of stores that are seeing the most success with it? And then secondly, what's the limiting factor to how fast you can add stores to the platform? Is the speed determined by where UberEATS has the penetration or is speed determined by what markets you feel most comfortable adding capabilities? Thanks..

Do you want to take that one, Lucy?.

Sure. I can go ahead and take that. In terms of where we are seeing some of the common characteristics of success, look, we're in the early days. We're digging in. We do see some variability. Stores near college locations tend to do much better than others.

I also think we're seeing some things in lower socioeconomic areas, in downtown areas or places where people don't have access to cars, also being a driver of success. But we're really getting in and understanding.

I think overall, one of the things we're pleased with is that we are seeing strong demand from our customers, that, as they become aware of the delivery, they're actually trying and then they're having a great experience, in many cases, better than they expected. And then, we're seeing really good repeat rates.

And so the focus for us is about building the awareness among the customers and then the rest will take care of itself.

And then, in terms of how fast we scale, I think that is really dependent on the growth and the demand that we're seeing and then working very closely with UberEATS to understand where they have capability in their markets, and then working together jointly to prioritize where we might go together for expansion above and beyond their existing markets..

And, Andrew, just to further support that, Lucy's absolutely right. One of the beauties of the broad-based expansion of this is that markets are learning from each other.

So they're having fun, on particular, whether it's days of the week or particular event days and how do we maximize the opportunity for people who are maybe at home watching, there could be a big game or a big tournament on TV. And, therefore, delivery plays a much stronger part. And also, as Lucy says, I know the UK pretty well.

And some of the strongest performances are absolutely in some of the slightly tougher parts of town, and particularly late at night and overnight, where people are much more comfortable having food delivered to them than necessarily venturing out.

So we continue to learn and that helps guide us as we do our planning, but also at a restaurant level to helping coach and train our Owner/Operators and our restaurant managers what to expect in sort of volume patterns. So this is a rapid learning environment, and we're enjoying being on the journey..

Our next question is from Sara Senatore with Bernstein..

Hi. Yes, thank you very much. I did want to also ask about two follow-ups, if I may, Experience of the Future and then also on delivery.

So on the delivery piece, is there an opportunity to maybe lower the delivery cost that UberEATS charges the customer? Just because if I think about McDonald's scale, you're probably the only company out there that can compete with the pizza restaurants in terms of speed of service and the cost of the ticket, but maybe the delivery fee is high and potentially a hurdle, so any color you could give us on the economics or whether there's an opportunity to even improve the value proposition further.

And then, I wanted to ask on Experience of the Future, the remodel, in combination with EOTF, gives like, I think, a 6% to 7% comp lift. Can you just give a little bit of color on Experience of the Future alone? I know Steve said that it's a slower ramp potentially than All Day Breakfast, but that's still a healthy lift in my mind. Thank you..

Maybe Lucy wants to offer up the UberEATS question. I'll take EOTF when Lucy's done..

Great. So, Sara, to your question on the customer delivery fee, absolutely we're always looking at ways that we can deliver great value to our customers and are testing, together with UberEATS, on different models. In the UK, the delivery fee of £2.50. In the U.S., it's $4.99.

And we're really trying to get in and understand the consumer demand elasticity. So we're very much focused on that. And as we learn and understand the customers' willingness to pay, we'll absolutely make sure we're working together to maximize the value for our customers..

So, Sara, on EOTF, so it's a good question that maybe I could better clarify. The slower ramps-up is when we're introducing a new platform which is changing consumer behavior.

So delivery and some of the digital initiatives like mobile order and pay, where consumers have got so used to experiencing McDonald's in a certain way, getting them to change those behaviors takes a little while. With EOTF, though, what we tend to see in that kind of mid-single digit; I wouldn't necessarily say 6% or 7%.

Let's just call it mid-single digit. Once the restaurant is transformed – it may close for 10 days, close for 12 days while the reinvestments and all the elements are being introduced – we see a pick-up almost immediately.

Within that first four to six weeks, we just see customer curiosity, word-of-mouth, local launch events where we create some fun around it because it transforms a restaurant both internally and externally. So we see EOTF kick in much quicker.

And the point I was making about the slower build was really more about these kind of new platforms of growth, which we think have years' worth of growth ahead of them and it will slowly ramp up.

Clearly, the more powerful we can start, the better, but the reality is consumers have got used to us, operating with us and experiencing us in a certain way for a fair bit of time and just changing those behaviors just take a minute..

Our next question is from Brett Levy with Deutsche Bank..

Can you give us a little bit more color on what you're seeing in the competitive landscape in the U.S. and also how you're thinking about your layering of initiatives? Obviously, you started to talk a little bit more excitingly about coffee at the Investor Day.

Just how should we think about what your next 12 to 18 months should look like between value, core, newness, as well as the EOTF drivers? Thank you..

So I guess from a competitive landscape, I mean, it's a market share fight. I mean, everyone's working hard to up their game.

So I'm certainly not going to comment on any individual competitor, but the fact that we've begun to open up that gap versus these sandwich competitors certainly gives us encouragement that we are certainly regaining those customers that we acknowledged on the 1st of March, that we had lost over a handful of years previous or some of these customer visits, I should say.

So our gain will result in pain being felt elsewhere. And others will decide what they disclose on that. In terms of next steps, I think we've been pretty transparent about our plans, to be honest with you.

I mean, clearly, we've got a substantial amount of restaurants that we want to introduce the full Experience of the Future to across the U.S., 14,000 restaurants, which we'll certainly look to by heading into 2020. But also the other initiatives, we're still only a quarter into the estate on delivery.

We have only just over – I say just, but we got that 1,300 restaurants in the U.S. on mobile order and pay, with some interesting learns from the consumer pick-up, but again, we want to drive behaviors that way.

Certainly, when I spoke to the commitment letters, if you like, which was kind of a really bold and brave plan that was co-crafted with our U.S. leadership team and our Operator leaders as well, we now have good visibility into internally, of course, into what our next three years looks like and what's going to underpin those plans.

And certainly, one thing that the company is committed to, and our Owner/Operators is also, is to remain competitive on value throughout that period.

So no matter how the landscape changes, whether it's on commodities, whether it's on inflation, whether it's on the economy in general, consumer confidence, we are committing to remain competitive on value as well.

So it is going to be a multi-dimensional growth plan, some just through the core improvements in how we operate our business, the day-to-day operations. And we didn't speak much about it in the prepared comments, but there's still an enormous focus on delivering just great QS&C day-in, day-out. Our Owner/Operators are committed to it.

We analyze deeply the consumer feedback we get from the Voice, which is a kind of a real-time feedback loop we get these days. And we can never underestimate the importance of clean bathrooms, friendly service and serving hot, fresh food.

So we're looking to operate on all levels and excited about the energy we have in our plans, along with the Owner/Operators, for next three years and beyond..

The next question is from David Tarantino with Baird..

Hi. Good morning. Steve, you just mentioned a little bit about this, but I was wondering if you could give an update on speed of service, which has been a hallmark of McDonald's. And I think you've taken a step backward on your speed in the last couple years.

So just wondering if you could give an update on where you are on that, if there's a big effort to improve the speed of service in the system operationally and then, perhaps, talk about how some of the digital initiatives tie in to the opportunity there..

Yes. Very fair question, David; speed of service, the absolute time, has gone backwards a little bit over the last, well, fair period of time, to be honest. Interestingly, customer satisfaction and the service scores in customer satisfaction have improved.

So whilst that doesn't mean we're not mindful of the speed, we obviously need to remind ourselves it's not all about the speed. That said, we want both.

So what you'll see with a lot of the elements that we introduce through the broader Experience of the Future and the digital programs are aimed at smoothing out the congestion points, the pinch points in the McDonald's experience.

So everything from if people want to pay through technology, whether it's through the Apple Pay feature or through credit, debit card, that shaves seconds off the payment process.

If they want to order in advance, through mobile order and pay or away from the front counter, the self-order kiosk, that again helps the congestion during the peak periods. And also, just the customer flow, we're very mindful.

Again, we don't talk a lot about it on these calls, as we reinvest in the restaurants and the dining areas, we're very mindful that the customer flow from when they enter through the doors, either go to the kiosk, go to the front counter, how that interacts with table service, how can we smooth that whole experience to eliminate, as you say, the pinch points.

So the technology absolutely will underpin our ability to shave seconds, and ultimately tens of seconds, off their service time. But at the moment, the customer is giving us positive feedback on the broader service experience. As I say, we're not satisfied with that. We want the friendliness as well as the speed, so we're working hard at it..

The next call is from Greg Francfort of Bank of America Merrill Lynch..

Hey.

Just one quick one on the incrementality of delivery orders, how incremental are they today? And where are the orders coming from? Are they coming from other quick service restaurants, just the industry more broadly or from food at home occasions?.

Yes, Greg. It's Lucy. I'll take that one. I think the short answer is we believe right now it is highly incremental. Our initial estimates are north of 70%.

And in some cases, even more incremental than that, with a lot of the demand, as Steve alluded to earlier in the prepared comments, coming at under-utilized dayparts, with 60% after 4:00 in the evening. In terms of where we're sourcing the volume from, I would say it's a little bit too early to tell specifically.

But what we're starting to hear from customers is that it's really a new occasion that they're coming to McDonald's for. Instead of eating at home or going to other quick service restaurants, they're choosing to come from us.

So some of our initial data is that we're tapping into a different use case for delivery, a different demand occasion that we weren't able to access before just through our restaurant and drive-thru business. So we're excited about that potential..

Well, just to add to that as well, one element, and again, this is somewhat anecdotal, but through the conversations we have with the third-party operators, it does also demonstrate what a great partner we are for them to have, because they're beginning to see a number of the McDonald's orders they fulfill are the customers who've newly downloaded their app.

So we are generating traffic to their app, which clearly is great for them, and it also shows incrementality to us. But also, the business benefits them as well. So we've long had an established and strong partnerships, if you like, for our supply chain.

It's part of the three-legged stool we speak about, so as well as them bringing value to us with the business that we generate in incrementality, clearly, we are very advantageous to them into introducing new customers to their platforms..

Our next question is from Karen Holthouse with Goldman Sachs..

Hi. Thank you for taking the question. Thinking a little bit more into sort of value plans in the U.S., curious if you saw sort of any particular change in comp momentum in the U.S.

when you had your national beverage value going versus not going, and sort of any updated timelines on when we might get more news on national value in the U.S., whether that be a more permanent solution or another six or eight week sort of promotion?.

Okay. Karen. Well, you saw the comp momentum over the last number of quarters and momentum is starting to build. And I feel encouraged that we're at the level we're at in the U.S. It's a very big business and it's a very competitive business. And we know we had to be more competitive on value.

Did we see a particular spike? Well, you can read the comp trends as well as I can.

What was great for us, when we look at the regain element on the customer visits we had lost over the previous years, we knew a meaningful amount of those were through the value line, but what's more important isn't just that we're selling $1 drinks and $2 McCafé products.

When we've invested the amount we have and our Owner/Operator investing the amount they have in the business, whether it's in core recipe improvements, whether it's in the service experience, whether it's in technology, it's great just to have more customers visit your restaurant to actually notice the investments we've made.

So to me, value isn't just what it does to the trading performance, it's also what it does to the broader brand appreciation and getting more people back into our restaurants and seeing the changes we're making, taking notice.

And it's no coincidence we launched Signature Crafted at the same time because when customers come in, they take a look at what's on the menu. They're curious, and they want to try it. It looks tasty, and they've enjoyed the premium platform as much as the value platform, but it's always the balance that's important.

In terms of next steps, as I say, we certainly, the U.S. team and our Owner/Operators, are committing to stay competitive on value. And we certainly know that $1 drinks are working well for the summer. And they'll work on the plans through the back end of the year and into 2018.

And when we've got something that we're willing to share, we certainly will do..

Next question is from Jeff Bernstein with Barclays..

Great. Thank you very much. Just two related questions on the cost side of things; one, just as it relates to the U.S. restaurant margin, I think consensus was in the 3% comp range with some expansion to margin.

Actually, you guys delivered close to a 4% comp, which I think you mentioned included close to two points of price, and yet there was contracting margins. So I know you had mentioned some investments in mobile order and pay and Experience of the Future. I think you even said fresh beef for next year.

I'm just wondering in this environment, what comp you would need to actually neutralize the margin, knowing you have those expenses coming or whether we should just assume that, in the current state, we should expect more pressure. And then my other related question was just on the G&A, because it did come in below our expectation.

I was just wondering if you would characterize this as just a lumpy line item type quarter-to-quarter or with the refranchising, I guess, are you seeing greater savings perhaps than you had anticipated? Thank you..

Yes, Jeff. I'll start with U.S. restaurant margins.

As I mentioned in the remarks, a chunk of it was on the labor cost side, both in terms of wages and in terms of investments that we've made in order to make sure that we create the right experience related to things like digital, Experience of the Future, getting ready for the introduction of the fresh beef quarter-pound patties in the U.S.

So some of those are investments that we're making that won't necessarily be long-term investments, but will be here for some period of time to make sure that we introduce these initiatives in the right way and kind of deploy them the right way in the restaurants.

In comparison to the first quarter, if you will, our comp this quarter, about half of it was average check and about half was guest count growth. And so it was probably a little bit more balanced than first quarter was, which was primarily, or more driven, certainly, by check.

If you recall, we actually were negative on guest counts, if you excluded the leap day impact, we're about flat on guest counts.

So really all of that first quarter comp was driven by price, if you will, or check, whereas we like the balance certainly of growing guest counts and so you had a little bit more balance this quarter between guest counts and check. And we're certainly focused on margin dollars more than margin percent.

And as we're refranchising, the McOpCo margin percent, I don't want to say becomes less meaningful, but is not the biggest focus, I'll say. Having said that, generally with all else being equal, if we didn't have these additional labor investments, we would have grown margin percent this quarter also.

Regarding G&A, it is a little lumpy, I'll say, quarter-to-quarter. This quarter, we saw some of the benefit being that we were lapping last year's worldwide convention. So that probably drove a little bit more of the percentage decline, if you will, or some of the percent decline this quarter.

But in terms of on our plans for the year, we're pretty much in line with our plans to still have it go down by 7% to 8% in constant currency. So, so far what we've seen first half of the year is pretty much on plan related to the G&A timing..

Next question is from Will Slabaugh with Stephens..

Yes. Thanks, guys. I had a question about fresh beef. I wonder if you could talk about that decision to roll out fresh beef on the Quarter Pounder and how realistic it would be to roll out fresh beef across your entire line of burgers, if you were to decide to go that direction in the future..

Yes. So I think Kevin and I both spoke to this on the last call actually, because we both visited the fresh beef test markets. And there was a genuine test market both in Dallas and in Tulsa. Kevin went to Tulsa. I was in Dallas.

And the reality is we really had to very robustly test with the customer whether, effectively, the Quarter Pounder was tastier and juicier using fresh beef. And if that was the case, did it then warrant the operational and supply chain adjustment that come along with it. So we had a resounding yes from the consumer on this one.

So we're now in the transition where we're making the adjustments through the supply chain, because, as you can imagine, our patty suppliers have to adjust both the way they prepare and then store and transport the finished product. So we're working our way through.

We will have that supply in place into the second quarter of 2018 and we are feeling pretty excited that the customer is going to respond well to that. Oh, by the way, it's not just the Quarter Pounder, because we use the Quarter Pounder in the Signature Crafted premium platform as well.

So the premium sandwich customers will also benefit from the fresh beef. As to whether we then extend that to the 10 to 1s, (47:29) time will tell. We look at our operating systems. We look at our capacity and capability to handle the fresh product. And we will see.

We would always try and let the customer be our guide, but, at the same time, there's a lot of change that has to be absorbed at a restaurant level right now, which talks to Kevin's previous point about why we are purposefully investing labor and training and capabilities in our restaurants to handle the technology advances, Experience of the Future adjustments, the enhanced hospitality, all the way to fresh beef.

So it's a balancing act for us, but the customer will always be our ultimate guide..

Next question is from the Nicole Miller with Piper Jaffray..

Thank you. Good morning.

In your earlier comment about being committed to remaining focused on value and understanding that value can take on a bigger definition, are you talking about more or the same level of promotion? And then, just if you will indulge us, do have an opinion on the Amazon, Whole Foods conversation that's ongoing, maybe just generally speaking to meal kits at home and where you see that playing out? Thanks..

So, first of all, just to clarify on value, I think probably the best way I could say it is we are committing to remain competitive on value. If I said focus, I think a better word would be competitive. We're going to be competitive on value. We're not obsessed about winning on value.

We're not sure if that's the best place to be, because we think we've got a lot more about our experience above and beyond value. But we commit to remaining competitive on value.

With regard to Amazon, Whole Foods, certainly no comment on that particular announcement, but it just demonstrates how disruptive the business world is and how quickly it moves. And we continually challenge ourselves to be our own internal activists.

Something I said very early on in my tenure and we've got the culture now running through our leadership teams, both in the markets and here in the headquarters, where we're continually challenging ourselves, knowing that the market's not standing still.

And I think delivery is a great example of how we're responding to the rapidly-changing tastes and expectations of consumers. So it's an interesting world. And it's only going to start moving quicker.

Whenever I've have the opportunity to meet fellow CEOs at occasional events, and I think that the one common observation all of us would make is that today is about the slowest the world's ever going to be moving at. It's only going to move quicker tomorrow. So saddle up and enjoy it because it's a frantic pace..

Our next question is from John Glass of Morgan Stanley..

Thanks very much. Kevin, you mentioned there's going to be some choppiness due to the sale of the China business in a few weeks in the coming quarters.

A couple of questions; one is, is the appropriate time now to talk about what that transaction alone would mean to your operating margins in the business and maybe if it was appropriate to talk about the royalty rate in it? And forgive me if it's already in the website, I couldn't find it.

But it would seem to me just based on our modeling, it would get you pretty close or maybe to your target of mid-40% raw operating margins alone, so maybe just correct that if that's a misperception.

And separately on China, have they committed to doing the Experience of the Future? Is that part of that transaction or are they already on that path; maybe where are they are on the Experience of the Future? Thanks..

Do you want to take the China? I'll come back or do you want me to go?.

You go with the financial one. I'll come back....

I'll talk about the China, Hong Kong transaction. I'll give you a few headlines. I'm not going to go into all the numbers, because it is posted on the website. If you can't find it, you can call IR afterwards, and they can direct you to exactly where it is. But let me give you a couple of the key headlines from that.

From a revenue perspective, there's about $4 billion – and this is the combination of all these transactions, the big transactions since November, which is China, Hong Kong, Malaysia, Singapore, Nordics and Taiwan.

If you add all of those together, in total, there's about $4 billion of company-operated sales on an annual basis that are now going to be transferred, if you will, to franchise sales that we'll get a royalty on. So that's kind of the revenue side.

At the same time, there's about $2.5 billion of sales that were originally classified as franchise, primarily conventional franchise, where we got a rent and royalty, that are now going to be developmentally licensed, so still within franchise sales, but converting from conventional to DL. So going from receiving rent and royalty to just royalty.

Net-net on all of this, it's a little less than $300 million of operating income, which is a little less than 4% of our total operating income, that we will, I'll say, give up in the near-term. And that translates then into the EPS impact that I talked about in my script.

At the same time, we'll save couple hundred million dollars of capital, so that free cash flow will increase. To your point, operating margin percent will increase. And we believe we'll be well set up, again, beginning in 2019, because in 2018, going up against some of this, you're not apples-to-apples.

So 2019 will be the first kind of clean year of comparison, and that's where we set our financial targets beginning for that year..

And I'll take the EOTF example. Part of the critical element of the partner selection was about that shared vision into the future McDonald's. And speaking on behalf of our partners, they absolutely shared our appetite to transform the McDonald's experience and the brand. So EOTF is proving to be – the customers are responding really well in China.

I'll give you just one anecdotal piece of evidence of that. Where we've introduced it, the self-order kiosks currently have 30% utilization already. So you can see how the Chinese consumer actually embraces the technology and experience. It goes way beyond just EOTF.

So, yes, they're committed to that, but also, they want to accelerate the broader digital players that we had. Yeah, they've got greater ambition than we'd already had established. They want to accelerate the openings.

And also, the other growth driver we've spoken to, delivery, is proving to be a very influential part of the comp sales build in China and actually, is a greater part of the comp sales build in China than it is in any other market in the world.

So they're actually at the front edge of a number of these trends, and our partners certainly, as I say, have a shared vision with us for that..

Our next question comes from Jeff Farmer with Wells Fargo. Jeff? I think we lost Jeff. We'll take Matt DiFrisco with Guggenheim..

Hey, guys. Thanks for taking my call. This is Jake (55:10) on for Matt.

Just a few quick questions; one, on the digital side, can you provide any color on the overall percent of sales that digital makes up in the U.S.? And then within that, do you have a percent of sales that delivery takes up, or is it still too early to tell on that front? And then a quick follow-up..

Well, I'll get you to the follow-up pretty quick, because we're not going to disclose either of those, Jake (55:36). First of all, it's early days. And secondly, it would be, at the moment, too commercially-sensitive for us to share that. That wouldn't make sense for us, so happy to take your follow-up.

Then, I think we're heading towards the end of the call..

Okay.

And then so lastly, you already provided a lot of color on the digital roll-outs and how that is all coming, but in the future, do you see the pace of these roll-outs kind of ramping up or it will be kind level year-over-year in the near future?.

On digital rollout, well, I think as we've seen with mobile order and pay, the reality is we want to get products into the marketplace where we can learn, improve, learn, improve, learn, improve, because we'll never have the perfect product. Technology doesn't work that way.

So you would've seen (56:43) in March to our first restaurants here that were on mobile order and pay. We've now got over 1,300 in the U.S. And we're going to get to 14,000 by the fourth quarter.

So you can start to see the ramp-up curve and its importance in those early weeks versus two to three months; getting the learnings, improve the product and then accelerate. So I think that's typically the sort of ramp-up curve you see in technology, which is get in the marketplace, learn quickly, be agile and then go hard at it.

So I think you can see that's why we call them accelerators. These aren't initiatives that would fit into a normal annual planning cycle.

That annual planning cycle is important for many elements of our business, but actually these initiatives work on a totally different timescale and we're trying to adjust our thinking and our culture to embrace that as well..

So we have time for one last question, and that will be Jason West with Credit Suisse..

Great. Thanks, guys. Just a couple questions; one, on the roll-out of EOTF, I know that in the U.S., you have a decent number of stores that need to be remodeled more generally.

So is the plan to complete all those remodels as well as completing the EOTF or are you going to have situations where you're just kind of rolling in the EOTF elements, even though the underlying remodel hasn't happened? And then just a quick question on the delivery side, when you have delivery in some of these Asian markets that you've been in for years, can you just talk about what the potential mix is in some of those markets in your historical sort of averages?.

Yes, Jason, so I'll take EOTF. It's a great question. We want to introduce the Experience of the Future into a remodeled restaurant. So those that need remodeling, the entire work would happen at once. Our learnings from around the world is that has a far greater impact when you relaunch with all elements at once.

For the customer, notable change really does give you that kick up in sales. So absolutely it's a fundamental part of the roll-out, be to remodel alongside the EOTF elements..

Yes, and then to your second question on our delivery performance in Asia, what we've seen over time is really sustained growth on that business, with double-digit growth year-on-year off a strong base to the point where a lot of our existing restaurant in China, about 10% of their sales overall are from delivery, with our top-performing restaurants in some cases in the range of 20% to 40% even, so a very strong contributor to the business in Asia..

Well, that's a wrap, folks. Thank you so much for your time and interest. We'll be signing off now..

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