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McDonald's Q4 2022 Earnings Call Transcript

Listen to Conference Call View Latest SEC 10-K Filing


Corporate Executives

  • Mike Cieplak
    Senior Vice President, Treasury and Investor Relations
  • Chris Kempczinski
    President and Chief Executive Officer
  • Ian Borden
    Executive Vice President and Chief Financial Officer


  • David Palmer, Evercore ISI International
  • David Tarantino, Robert W. Baird & Co., Inc.
  • Eric Gonzalez, KeyBanc Capital Markets
  • Jeffrey A. Bernstein, Barclays Bank
  • Dennis Geiger, UBS Investment Bank
  • Sara Senatore, BofA Securities
  • Jon Tower, Citigroup Global Markets
  • Andrew M. Charles, Cowen and Company, LLC
  • John Ivankoe, J.P. Morgan Securities



Hello, and welcome to McDonald's Fourth Quarter 2022 Investor Conference Call. [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.

Mike Cieplak
Senior Vice President, Treasury and Investor Relations at McDonald's

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. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website as are reconciliations of any non-GAAP financial measures mentioned on today's call along with their corresponding GAAP measures.

Following prepared remarks this morning, we will take your questions. Please limit yourself to one question and then reenter the queue for additional questions. Today's conference call is being webcast and is also being recorded for replay via our website.

And now, I'll turn it over to Chris.

Chris Kempczinski
President and Chief Executive Officer at McDonald's

Thank you, and good morning, everyone. When we gathered at this time last year, we expected 2022 to be a year of recovery from the pandemic, particularly in Europe. Little did we know that it would be another challenging year, and nobody could have predicted the extent to which the war in Europe would disrupt businesses around the world and the macroeconomic impact that would follow.

Despite continued volatility in nearly every corner of the globe, McDonald's delivered exceptional growth throughout 2022. We achieved full-year comp sales growth of 10.9%, delivered strong guest count performance with 5% growth globally, and saw our momentum strengthen as the year progressed with double-digit comp sales growth across all segments in Q4. These results are a testament to the resilience of the McDonald's System and demonstrate that our Accelerating the Arches strategy, which we unveiled in the early days of the pandemic, is working.

This strategy is anchored by three growth pillars, also known as our M, C, and Ds, Maximize our Marketing, Commit to the Core Menu, and Double Down on the 3 Ds. Our 2022 performance demonstrated the continued potential of each growth pillar. You've heard me say McDonald's is one of the world's greatest brands. In the last year, we've unlocked even more ways to elevate our marketing through creative excellence. Our scalable insights are helping us tap into our fans' love for McDonald's and create culturally relevant campaigns that resonate across markets and drive growth.

That momentum continued into Q4. In October, our collaboration with Cactus Plant Flea Market in the U.S. brought together our adult fans' love and nostalgia for the Happy Meal with one of the most on-trend brands and culture. Customer excitement was palpable, and it's fair to say the program exceeded expectations. This program drove the highest weekly digital transactions ever seen in the U.S.

To celebrate the FIFA World Cup, we launched our largest global marketing campaign ever with more than 75 markets participating worldwide. Want to go to McDonald's brought to life yet another fan truth, whatever the culture or language and whatever the outcome of the game, we can all unite under the golden arches. Our aim was to support fans that were watching the FIFA World Cup at home through relevant and meaningful McDelivery promotions, regardless of the time zone that their team was playing in. During this campaign we saw double-digit increases in delivery sales across our top 10 markets.

And just a couple weeks ago, the U.K. launched their Raise Your Arches campaign, which has generated significant excitement with our customers. Even though the campaign never shows our food, never shows our restaurant, and never mentions our brand name, it's nonetheless instantly recognizable as only McDonald's. Imagine that, a brand so powerful, it requires no introduction. The campaign has been quickly picked up by over 30 other markets, demonstrating our systems' ability to quickly scale compelling ideas across the globe.

Throughout 2022, some of our most successful campaign platforms brought our customers closer to the core menu items they love. The strength of our brand goes beyond the golden arches themselves and includes our iconic products such as our World Famous French Fries, The Big Mac, or Chicken McNuggets, and the McFlurry. Each of these products are billion-dollar brands. And in total, McDonald's possesses 10 of these billion-dollar brand equities.

In an environment where our customers are looking for the simple and familiar, our core menu items have never been more relevant or beloved. Throughout the year, we continued to step up our game on the favorites that build our heritage. We're delivering hotter, juicier, more delicious burgers, and building on the success of emerging equities like the McCrispy Chicken Sandwich. As a result, we are gaining market share in both chicken and beef.

When customers want to enjoy our classic favorites, they are increasingly looking for even more personalized and convenient ways to get their meals. Through our focus on digital, we are transforming from a brand that serves billions and billions all the same way to one that serves each of our billions of customers uniquely as individuals with customized products, offers, and experiences. By doing this, we strengthen our customers' love and loyalty for McDonald's.

These investments are paying off. In the fourth quarter, digital represented over 35% of systemwide sales in our top six markets. In 2022, the McDonald's App was downloaded over 40 million times in the U.S., greater than the total downloads of the second, third, and fourth brands combined. Through our loyalty program, which we've expanded to over 50 markets and counting, customers are feeling more connected to McDonald's, which in turn increases visits and frequency. As we closed the year, we had almost 50 million active loyalty users in our top six markets.

The success of Accelerating the Arches has put McDonald's in an advantage position. Since the start of the pandemic, we've grown systemwide sales nearly $20 billion despite closing over 800 restaurants in Russia. Our brand is clearly in the strongest position it's been in years, attributable in part to our best-in-class marketing engine, and service times and customer satisfaction are both improving, a testament to the dedication of our restaurant teams. Our success is fueling even greater ambitions.

While we feel good about our strategy and the growth potential in each of our M, C, D pillars, we've been asking ourselves two questions: is there anything we should add to Accelerating the Arches? And is there anything that could get in the way of the success of Accelerating the Arches? The answers to these two questions led us to evolve our Accelerating the Arches strategy, which we announced a few weeks ago. We'll continue to double down on our M, C, Ds, while adding a fourth D, Restaurant Development to our 3 D's growth pillar. Our strong comp and brand performance has given us the right to build new units at a faster rate than we have historically.

We also announced Accelerating the Organization, an effort to modernize the way we work so that we're faster, more innovative, and more efficient. Work is now underway to further build out these initiatives and quantify their contribution to our long-term financial algorithm. We'll share more details with all of you at an investor update in Chicago sometime in late 2023.

To expand further on how Accelerating the Arches drove success in 2022, I'll now turn it over to Ian.

Ian Borden
Executive Vice President and Chief Financial Officer at McDonald's

Thanks, Chris. By putting our customers at the center of Accelerating the Arches, we're driving top line momentum and broad-based global strength for our brand. Global comparable sales were up double digits for the fourth quarter, and we continue to gain share across most of our major markets. Our performance is a direct result of executing against our strategy, making it clear that we're operating from a position of strength and proving once again that our business remains resilient despite the dynamic macroenvironment.

In our international operated markets, we leveraged our digital channels and highlighted our core menu, delivering comp sales growth of nearly 13% for the quarter. As our big five international operated markets continued to recover from COVID throughout the year, we consistently created delicious feel-good moments for our customers, achieving strong performance across each of these markets.

The U.K. continued their focus on chicken with an early fourth quarter launch of the McCrispy Chicken Sandwich. This emerging global equity builds on iconic core favorites like Chicken McNuggets and drove a meaningful lift to the chicken category. The U.K. market also leaned into the power of our brand, with the popular Reindeer Ready holiday campaign returning for the sixth consecutive year. The fourth quarter also brought the return of McDonald's Monopoly to the Canadian market, but this time utilizing our app to elevate the experience.

We leveraged learnings from recent U.K. and Australia activations where we combined the nostalgic peel-off game pieces with the option to digitally scan and track progress on our app, which helped accelerate top line momentum and sales through our digital channels. Fueling digital growth was also central to Germany's strong performance with the market's first My McDonald's branded affordability campaign. This promotion featured daily offers alongside mobile order messaging to derive full digital platform engagement. It was followed by the launch of digital Monopoly in the market, which helped grow digital to over 60% of total sales. It's examples like this that once again highlight the power of the McDonald's System allowing us to tap into proven successes in one market and then scale those ideas.

In Australia, we continued to leverage the strength of our McCafe brand with an iced coffee promotion in the summer months. This campaign built upon our coffee leadership in the market as we continued to drive share gains. And we maintained our market leadership in France with always-on family messaging and a fully integrated chicken campaign highlighting our iconic Chicken McNuggets paired with unique and trendy sauces.

Moving to the U.S., comp sales were up over 10% for the quarter, a testament to our work together with franchisees over the last several years, which has created a strong foundation. The collective decisions to put brand at the center of our marketing along with simplifying our menus, strengthening our digital business, and recommitting to our core have resonated with consumers and are continuing to drive growth. Strategic calendar planning, from marketing to restaurant execution, has enabled our teams to stay laser focused on what truly matters most for our customers. Higher average check, supported by strategic price increases, as well as positive guest counts contributed to our performance this quarter. Memorable marketing campaigns, including our collaboration with Cactus Plant Flea Market, Boo Buckets, and McRib brought nostalgia to our customers, fueling top line momentum with limited added complexity in our restaurants.

Turning to our international developmental license markets, comp sales were up over 16% for the quarter with strong sales growth across all geographies in the segment. Japan achieved an impressive 29th consecutive quarter of positive comp sales with continued strength at the dinner daypart. A focus on driving digital affordability helped increase the frequency of our most loyal digital customers. Recovery in China, however, remained challenging as COVID-related government restrictions were still in place for a majority of the fourth quarter, resulting in some temporary closures and limited operations. While comp sales in China were negative, we focused on showcasing our strength in beef with the Big Mac Best Burger [Phonetic] launch and continued to gain traffic share in a shrinking QSR market. And despite the ongoing operating challenges, we opened over 700 new restaurants last year, which is an all-time high.

Turning to our P&L. Company-operated margins were just over 15% for the quarter, reflecting the continued pressure from elevated commodities, wages, as well as higher energy costs. Foreign currency translation negatively impacted fourth quarter results by $0.16 per share, with earnings per share of $2.59 for the quarter. For the full year, adjusted operating margin was nearly 45%, reflecting higher restaurant margin dollars across all segments. Despite the significant P&L pressures that we've discussed, top line results generated restaurant margin dollars of over $13 billion for the year, an increase of nearly $1.5 billion in constant currency. Franchise restaurants, which now represent 95% of our global portfolio, contributed nearly 90% of our total restaurant margins, reflecting the stability of our business model.

Lastly, before I hand it back over to Chris, I want to touch briefly on our capital expenditures and free cash flow profile. Our capex spend for the year was approximately $1.9 billion, which included remaining reinvestment to substantially complete our experience of the future efforts in the U.S. market. Over the last few years, we've invested billions of dollars in modernizing our estate, and it's clear in our results that these investments are paying off. After reinvesting in the business, our free cash flow conversion was nearly 90% for the year.

And with that, let me pass it back over to Chris.

Chris Kempczinski
President and Chief Executive Officer at McDonald's

Thanks, Ian. As we look ahead to 2023, macroeconomic uncertainties will persist, and we expect to continue to face headwinds. Our base case for a mild-to-moderate recession in the U.S. and one that will be a little deeper and longer in Europe is unchanged from what we shared on our Q3 earnings call. We also expect inflationary costs to continue to pressure our margins, which Ian will discuss in greater detail.

In this environment, we must maintain our disciplined approach to pricing. We need to balance passing through our pricing on our menus, while maintaining our strong position on value with our customers. Our positive guest count performance in 2022 demonstrates our success so far in balancing these competing demands, and we need to remain judicious with pricing actions.

Ongoing communication with our franchisees regarding the magnitude and pace of pricing will remain essential. Our franchisees are focused on the long term and time and again that approach has been rewarded. As long as we continue to do the right things for the customer, we can always work through short-term challenges.

McDonald's understands that customers' perception on value is made up of more than just the price of our food. It's also about the experience we provide. Our modernization efforts have had a significant impact on improving our customers' experience, and this is also improving how our customers think of our brand. Now that we are nearly fully modernized, our attention is turned to being laser focused on our operations and running great restaurants.

In 2022, we reengaged most of our system on maintaining operational excellence in our restaurants through our performance and customer excellence program, also known as PACE. This restaurant assessment and consulting tool, which is currently deployed in 30 markets, was suspended during COVID. Along with providing new tools, this represents a new way of working for our field teams that helps markets target organizational and restaurant support for key growth drivers. This renewed focus will help protect McDonald's brand standards for an outstanding customer experience every single day.

Restarting PACE in 2022 led to strong operational improvements in several key markets as a result of a more dedicated consulting and coaching time to support lower-performing restaurants. For example, the U.K. saw improved customer satisfaction, speed of service, and overall experience for these restaurants. In Spain, restaurants that had the lowest customer satisfaction scores in the drive-thru improved to be at the same level as top-performing restaurants by the end of 2022. Additionally, as a result of this program, France saw increases of 30% in customer satisfaction scores at locations with the lowest scores. PACE clearly drives operational improvements which provides a better customer experience that in turn drives business performance. This month the U.S. also restarted PACE, and we expect to see similar operational benefits in our largest market in 2023.

I'll now turn it back to Ian to talk in more detail about our 2023 outlook.

Ian Borden
Executive Vice President and Chief Financial Officer at McDonald's

As Chris just discussed and as I talked about last quarter, we continue to operate in an extremely dynamic environment. Looking ahead to this year, we anticipate macro-related pressures will continue to weigh on both our consumers and our business.

With significant inflationary headwinds across commodities, labor, and utilities, our company-operated margin percent will be hampered in the near term, and we expect full year 2023 company-operated margin percent will be slightly lower than our quarter four results. This elevated cost environment is also impacting restaurant cash flow for our franchisees, particularly in our European markets. As we've previously mentioned, our financial strength and scale gives us the ability to provide temporary and targeted support, ultimately keeping our entire system aligned on proactively investing to drive long-term growth. We estimate that these efforts will have an impact of between $100 million to $150 million in 2023.

Turning to G&A. The digital and technology investments that we've made over the past few years have been strong contributors to our top line growth. Moving forward, focusing on our evolution of Accelerating the Arches and in particular Accelerating the Organization will enable us to work more efficiently and effectively harnessing our scale and reallocating resources to drive growth in the future. In 2023, we expect G&A to be between 2.2% and 2.3% of systemwide sales.

Despite the cost pressures throughout the P&L in 2023, we anticipate an operating margin of about 45% driven primarily by strong top line growth and franchise margin performance. We're projecting interest expense this year to increase between 10% and 12% compared to 2022, primarily due to higher average rates on our debt balances. And we expect our effective tax rate for the year to be between 20% and 22%. We anticipate currency translation will negatively impact earnings per share between $0.07 and $0.09 in the first quarter. As of now, we expect currency translation to be a slight tailwind for the full year. But as you have seen, currency rates have been fluctuating quite a bit recently, so we'll continue to keep you posted on the anticipated impact to our results.

Transitioning to capital expenditures. We plan to spend between $2.2 billion and $2.4 billion this year, about half of which will be dedicated to new unit openings. Globally, we plan to open about 1,900 restaurants with more than 400 of these openings in our U.S. and IOM segments where we continue to see strong returns. The remaining 1,500 or so new restaurants, including about 900 in China, will be across our IDL markets. As a reminder, our strategic partners provide the capital for these restaurant openings. Overall, we anticipate almost 4% unit growth from the about 1,500 net restaurant additions in 2023. We expect this will contribute, along with restaurants opened in 2022, nearly 1.5% to systemwide sales growth.

As Chris mentioned, work is underway on our fourth D, restaurant development, within Accelerating the Arches. We'll have more details to share later this year, but we're excited about the opportunity to accelerate the pace of our new unit openings moving forward. And finally, we expect to generate strong cash flow in 2023, enabling us once again to convert more than 90% of our net income to free cash flow.

Going forward, our capital allocation priorities remain unchanged. First, to invest in new units and opportunities to grow the business, along with reinvesting in existing restaurants. Second, to continue growing our dividend. And third, to repurchase shares. It's times like these that highlight the strength and scale of our McDonald's System. Although 2023 will bring short-term pressures, I'm confident that the resilience of our business and our strategy will continue to deliver long-term growth for our system and our shareholders.

Now let me turn it back over to Chris to close.

Chris Kempczinski
President and Chief Executive Officer at McDonald's

The McDonald's global system is executing at a high level, and I'm optimistic that our Accelerating the Arches strategy offers us a long runway of growth despite the headwinds that we've discussed on this call. The McDonald's brand is in great shape, and yet there's so much more we can do.

In my travels throughout our global system, I sometimes like to ask our people, what exactly does McDonald's Corporation sell? As you might imagine, this usually prompts a lot of puzzled looks, and a brave soul or two will raise their hand and say, well, we sell great-tasting food, or we sell burgers and fries. Of course, that's technically true. But as a largely franchised business, ultimately McDonald's Corporation is in the business of selling a brand so that others can sell burgers and fries. And while some may see it as a trivial distinction, I see it as fundamental. As goes the McDonald's brand, so goes the health and economic value of our company and system.

Our Accelerating the Arches strategy is designed to build our brand to make McDonald's more relevant to more people, more often. Our M, C, D growth pillars are driving systemwide sales and the recently announced Accelerating the Organization initiative will help us unlock further growth by enabling our system to be even faster, more innovative, and more efficient. Through Accelerating the Organization we'll sharpen our priorities and increase our investments against our biggest opportunities.

I want to congratulate the McDonald's System on a terrific 2022 and thank all three legs of the stool: our franchisees, our suppliers, and our company employees for their dedication and passion for our business. Despite [Phonetic] a global pandemic, record-breaking inflation, a war in Europe, the McDonald's System continues to execute and deliver no matter the challenge, and I'm excited to continue our success into 2023.

With that, I'll turn it over to Mike to begin the Q&A.

Questions and Answers


[Operator Instructions]

Mike Cieplak
Senior Vice President, Treasury and Investor Relations at McDonald's

Our first question is from David Palmer with Evercore.

David Palmer
Analyst at Evercore ISI International

Thank you. A big picture question tied into some of the stuff you're talking about in the U.S. It's been fascinating to see how McDonald's traffic in the U.S. has largely declined most years at least even as you've added about $1 million in sales per unit. And your customer satisfaction scores and the external stuff that we see, it's been stubbornly and surprisingly low. It's almost like the consumers being more honest with his or her spending rather than these surveys. So I'm wondering, in your work, where do you see the customer satisfaction opportunity in the U.S., whether that's in convenience and speed or food or other. And do you think the U.S. will have a different same-store traffic outcome over the next year or decade based on some of the stuff that you're doing? Thank you.

Chris Kempczinski
President and Chief Executive Officer at McDonald's

Hey, David, it's Chris. Thanks for the question. Well, I think starting with we've talked about on a number of calls over the last several years that guest count is a very imprecise measure. And it's imprecise because of what we've seen with delivery, but also what we've seen with digital where we're now getting multiple orders. And so while it's important for us to always be attentive to guest count, I think also recognize that the complexion of how customers are experiencing the restaurant has changed.

So from that vantage point, we look at things from a relative perspective, and we feel very good about our relative performance on that as evidenced by our strong traffic growth that we had in the U.S. this year. I think your larger question about the health of the brand, there are lots of different surveys. Ultimately for us, we have our own internal surveys, and customer satisfaction with McDonald's is strong. I think our brand clearly is resonating as you've seen in our marketing communication. The fact that we have a modernized restaurant estate I think has been huge for us in terms of improving customer perception of the brand. And so I feel very good about that.

But for us, going forward, the opportunity for us to continue to make our brand more and more beloved is going to be on this digital opportunity. And as I mentioned in the opening comments there, digital gives us such an unlock to get more tailored in the experience, the offer, the products that we're delivering to our customers. So I think, for us, if we can get there on digital that's going to be a big opportunity. And we've made a lot of progress. As you heard in the opening comments, about 35%, I think it's 36%, in Q4, were digital transactions and oh, by the way, half of those digital transactions are known digital transactions where we know the customer. Imagine if that number, I'll just use as one outlier, close to 90% of our transactions in China are digital transactions and imagine if most of those are known transactions, you can start to imagine what that could mean for the brand in the long term. So I'm optimistic about where we're at.

Mike Cieplak
Senior Vice President, Treasury and Investor Relations at McDonald's

All right. Next question is from David Tarantino with Baird.

David Tarantino
Analyst at Robert W. Baird & Co., Inc.

Hi, good morning. I had a question about the investments you're making in the franchisee system. I think, Ian, you mentioned it was $100 million to $150 million for this year. I'm just wondering if you could elaborate on why that was necessary given the strength you're seeing in the top line, or the franchisees presumably are seeing in the top line and also some signs that maybe the cost environment has not been as bad as feared.

And then maybe as part of that question, if you could just comment on where franchisee-level cash flows are today versus maybe where they were a year ago, that would be helpful. Thanks.

Chris Kempczinski
President and Chief Executive Officer at McDonald's

Great. Good morning, David. Thanks for the question. I think as you've heard us and particularly me speak to, I think particularly in Europe, we're seeing quite strong headwinds due to the levels of inflation on things like commodity costs, energy prices and, of course, labor. And I think the pace and scale of inflation mean that those headwinds are creating relatively significant levels of short-term impact to our margins and then, of course, to our franchisee cash flows.

And I think one of the competitive advantages that we have as a global franchisor with our size, our scale, and our brand strength is that we're able to provide that temporary and targeted support for our franchisees, which we always, of course, direct to where it's most needed. I would use the U.K. as a bit of an example in Europe. I think, obviously, we've seen significant levels of food inflation, significant levels of energy inflation, even though energy maybe hasn't gotten to the peak of where some were predicting because Europe's had a warmer or milder winter so far, still significantly above where it was 12 to 18 months ago.

And I think, again, just the pace and scale of that impact is creating quite a bit of pressure on margins and cash flow as I said. Our size and scale, as I said, just allows us -- puts us in a position to provide that support, direct it to where it's most needed. Honestly, that's nothing new for McDonald's. It occurs from time to time around the world when conditions warrant. It's just a little bit more significant now just due to the broader nature and scale of some of those short-term impacts that we're seeing.

And if you remember during COVID, we did provide support to our system. It was critically important because it allowed all of our system to stay focused on our plans and was really fundamental to the accelerated momentum that we saw through and then coming out of the pandemic. This is a very similar situation. Our system is highly aligned, it's confident, and it's focused on our strategic plans, and is continuing to proactively invest against the opportunity areas that we have. So I think it's this that's really going to help us stay focused on the category-leading momentum we have and make sure that as we get out of these headwinds, we're in the strongest possible position.

Mike Cieplak
Senior Vice President, Treasury and Investor Relations at McDonald's

Our next question is from Eric Gonzalez with KeyBanc.

Eric Gonzalez
Analyst at KeyBanc Capital Markets

Hey. Thanks for the question. If I can ask one about unit growth, if I can. I'm not sure where you finished '22 on a gross basis, but I'm guessing based on the year-end capex number that it was maybe slightly below your expectations. And then this year you're expecting development to be bigger focus and an uptick in unit openings to about 1,900. So maybe if you can comment on where you're starting to see maybe some improvement in the construction and permit timing and also what you're seeing in terms of buildout costs, perhaps directionally the unit economics given those higher costs and presumably the lower margins that you're signaling with your guidance? Thanks.

Chris Kempczinski
President and Chief Executive Officer at McDonald's

Morning, Eric. Yeah. Thanks for that. I think for sure in '22 we had some impact just from that -- coming out of COVID, some of the impacts on just getting permits approved. As you've heard us talk about in our outlook for '23, we think we're going to open on a growth basis about 1,900 locations, about 1,500 on a net basis. If you look specifically at the U.S. and IOM segments, we're planning about 400 openings there. That's up about 25% from where we landed on in 2022. So I think that's a sign of the confidence we have and the opportunity that we've got in those segments to begin to start accelerating openings as we've talked about adding that fourth D, development.

For sure, I think there's certainly some inflation on the construction and development costs like we're seeing across almost every sector today, but we also know we've got opportunity, I think, to be more efficient and effective in our investments that we're making in some of the restaurant formats and how we can get more efficient and effective as we bring those formats up. And so we feel really good about the returns that we're continuing to generate, particularly in the U.S. and our IOM segments and feel confident in the opportunity we've got to add more units as we go forward.

Ian Borden
Executive Vice President and Chief Financial Officer at McDonald's

Yeah, I would just add a couple things. Think about the U.S. for a moment, we haven't added new unit to the U.S. in eight years. 2014 was the last year that we actually grew restaurants in the U.S. So we we've had eight years where we have been focused largely on a remodel program. And in that same period of time, I think everybody would agree, our U.S. business is in a significantly better shape today than it was back then. And so you look at our three-year stack, our three-year stack in the U.S. is 25%. Our global three-year stack is also around 25%. We've grown the business to a great degree. And what we haven't done is we haven't kept up with the new unit pace particularly in our own markets, U.S. and IOM. And so we're spending the time right now to get a very granular look at where we would build, at what pace, and what types of restaurants, and that's what we plan on sharing with you at the end of 2023.

Mike Cieplak
Senior Vice President, Treasury and Investor Relations at McDonald's

Our next question is from Jeff Bernstein with Barclays.

Jeffrey A. Bernstein
Analyst at Barclays Bank

Great. Thank you very much. I just had a question on the U.S. and Europe, clearly strong double-digit comp performance. Just wondering as you look beneath the top line, any sign of slowing macro impact in the consumer or perhaps any concern of consumer pushback on the outsized menu pricing. Or maybe just looking more broadly, any color on McDonald's versus the industry in terms of market share in key markets since we know everyone's being more aggressive on price. Any kind of color you could provide would be great. Thank you.

Chris Kempczinski
President and Chief Executive Officer at McDonald's

I think overall we're still seeing the consumer is resilient, and it plays to our strengths as a system in terms of being well positioned on value. We lead in every market around the world on affordability and value for money. And so that puts McDonald's in a strong position. We've talked about on prior calls, there is a little bit of a decrease in units per transaction that we're seeing. We're seeing a little bit of trade down, but I got to say these are probably on the margin that we're seeing this. Overall, the consumer, whether it's in Europe or the U.S., is actually holding up better than what we would have probably expected or maybe what I would have expected a year ago or six months ago.

So I think the question is, as we go into 2023, there is going to continue to be inflation. The environment is going to continue to be challenging I think from a macro standpoint. And so do you reach a point where maybe it does start to materialize around the consumer? Certainly, consumer sentiment out there remains depressed in many markets, but we're not seeing it right now. I think this goes back to what I said in the opening note. We have to be very judicious. And our franchisees have been great about the pace of pricing where we're just making sure that we're keeping the customer engaged and coming into our restaurants as we're working through the menu pricing, and we're today still seeing flow through on pricing in line with our historical numbers, so not seeing any big resistance right now.

Ian Borden
Executive Vice President and Chief Financial Officer at McDonald's

Maybe I'll just hook on to that a little bit, because I think as Chris touched on, we're laser focused on those two consumer-facing metrics of value for money and making sure we've got those affordable choices across our menu. And I think, as Chris said, we're in a leadership position across the majority of our top markets in both of those metrics. And we know that even though those metrics have probably come down a little bit over the last 12 months or so on the back of higher pricing, the gap to the competitive set that we have has remained consistent. And so, as Chris talked about, I think we've had a good discipline around pricing and making sure we keep that strong value for money in place.

I think the other thing that's important to highlight is we know that we're continuing to gain share across all of those key markets. And so another proof point of I think how we're navigating and continue to resonate with consumers. I think, at the end of the day, value for money is about the experience we deliver over the price we charge. And I think it goes back to what Chris touched on earlier that we've made a lot of investments over the last couple of years in the experience. We've got a fully modernized estate. I think we've upped our game in terms of our marketing, creativity, and execution. We've invested a lot in our digital capabilities and interaction with consumers. And I think all of those strengths are coming together now. And I think our focus, as we head into 2023, is really on making sure that each and every time consumers choose to come into one of our restaurants, we deliver them a great experience and continue to ensure that we earn those visits each and every time.

Mike Cieplak
Senior Vice President, Treasury and Investor Relations at McDonald's

Our next question is from Brian Harbour with Morgan Stanley. Yes, thank you. Good morning. Maybe I'll just ask about the 45% operating margin outlook for the year and the components of that. Do you think that as a result of the Accelerating the Organization strategy that there will be some savings in G&A over time? Or is this just perhaps a reallocation? Would you expect to continue to see some leverage on the franchise margin side, for example? I guess I'm just trying to think through some of the drivers of that.

Ian Borden
Executive Vice President and Chief Financial Officer at McDonald's

Morning, Brian. Yeah. Thanks for the question. Well, let me talk about, I guess, a couple of the pieces. When you think about operating margin, for sure, there are a couple of specific pressures that we're working through that we believe are short term in nature. Obviously, we've got that pressure on our company-operated margins from the inflationary pressures that we're working through, and so that's an impact. Obviously, we've got the incremental support we're providing to franchisees which is an impact focused on 2023, so we'll have both of those pressures to work through this year.

I think in regards to G&A and ATO, as you heard in my opening comments, we expect G&A for the year to be between 2.2% and 2.3%. Any kind of outcomes -- and just a reminder on ATO is it's really focused on our ways of working, which the output is how do we get more efficient, how do we reallocate resource against innovation and growth, and how do we make sure we're moving faster as an organization. So any of the outputs of ATO are included in our 2023 guidance for G&A.

I think certainly the best way to work through any short-term pressures is to continue to make sure we're driving strong top line momentum, which I think our quarter four results reflect. And that's certainly our focus for 2023. And as we get through these short-term pressures, we, certainly, believe that that strong top line momentum will mean that we're beginning to drive greater leverage in operating margin and anything that's dependent on sales as we go forward like G&A. And so I think we certainly expect to see that beyond '23.

Mike Cieplak
Senior Vice President, Treasury and Investor Relations at McDonald's

Our next question is from Lauren Silberman with Credit Suisse.

Lauren Silberman
Analyst at Credit Suisse Group

Thank you very much. So, obviously, very strong U.S. comps. Can you talk about specifically what you saw with traffic and average check in the quarter and performance across dayparts, if there's anything notable there? And then just as it relates to share gains, what are you seeing with the lower-income consumer versus the high-income consumer? Thank you.

Chris Kempczinski
President and Chief Executive Officer at McDonald's

Yeah. So focusing just on the U.S., I think what we saw from a performance standpoint was very balanced growth across the dayparts. So nothing particularly noteworthy there. Late night for us continues to be the opportunity just because of some changes that we've made around operating hours due to the staffing environment. But around our core dayparts that's been very strong. We're also seeing strong growth on our core menu, particularly on chicken where we've been gaining share -- quite a bit of share on chicken. We've gained about a point of share on chicken in the last year. And then if you think about beef, we're also continuing to grow our share in beef despite having a very strong presence in that already. So nice balanced growth with the U.S. digital and delivery, of course, are driving outsized growth. So digital -- if you look at digital transactions, up close to 40% in the U.S. which is above obviously the 25% or the 10% rather growth that we saw in Q4.

And then on the low-income consumer, I'd say the only thing that is probably noteworthy there is while the units per transaction is maybe down slightly, we're seeing a little bit of an uptick in frequency of visits. And so I think that's maybe something where the customer is coming in being a little bit more cautious about how much they're ordering. They're probably spending to an absolute dollar amount, but we're seeing a little bit of an improvement around frequency with that low income consumer.

Ian Borden
Executive Vice President and Chief Financial Officer at McDonald's

Maybe just I'll hook on a couple of additional pieces of texture. I think if you look at the full year in the U.S., we were up about 10% from an average pricing standpoint. And as Chris talked about a little bit earlier, a couple of partial offsets to that: one is we continue to see this reversion of order channels more to the pre-COVID behavior. So, of course, while delivery is still elevated, it's come back a little bit as customers revert to more typical ordering channels.

And then, as Chris also touched on, you've got maybe that more value-conscious discerning choice making that consumers are making. I think two things that are really important, value for money and affordability, which we've already talked to. We know we're in a really strong leadership position in the U.S. business. And I think the second thing is that on a comp basis, we continue to gain share. And I think those are both strong proof points of the fact that we're well positioned and the fact that we are in a position to ensure that we are affordable and accessible for our consumers despite their individual circumstances as we go forward.

Mike Cieplak
Senior Vice President, Treasury and Investor Relations at McDonald's

Our next question is from Dennis Geiger with UBS.

Dennis Geiger
Analyst at UBS Investment Bank

Thank you. Chris, following all the momentum in 2022 and really in recent years, could you talk a bit more about the biggest opportunities that you see as it relates to continuing to drive that guest count momentum in '23 and perhaps beyond? I don't know if it's the same in the U.S. as key global markets, but just curious how you'd think about or rank-order some of the opportunities that you've spoken to on the call. Thank you.

Chris Kempczinski
President and Chief Executive Officer at McDonald's

Yeah. It really just goes back to the pillars that we have in our strategy. It's marketing, core menu, and now the four Ds. I think each of those still has quite a bit of runway of growth. I'm encouraged by what we're doing from a brand standpoint, but there's a lot more we can and will be doing on that to continue to strengthen our brand and marketing excellence, and we're still not as good as we could be around lifting and shifting great ideas around the world. And so we're going to get better at that through this Accelerating the Organization effort.

On core menu, chicken for us is a big opportunity as is coffee. I think on burgers, we're very well developed, but chicken and coffee in particular offer us I think a good growth opportunity, and we're going to be focused on that with some very specific products as opposed to having that maybe be something in the past that was a little bit more left to individual markets to chart their course.

And then on the four Ds, I think all of those for us have growth, so it's not a different playbook than what we're talking about with Accelerating the Arches. It's very much the same playbook. And what we're adding into the U.S. this year, as I mentioned in my comments in the opening is on the operational side with PACE restarting. I've been very encouraged to see how PACE has been driving customer satisfaction when we put that in, and we're seeing improvement around service time. So you take all of the top line driving initiatives related to the M, C, Ds, and you overlay on top of that improved operations or improved execution at the restaurant, and that gives me confidence in the outlook.

Mike Cieplak
Senior Vice President, Treasury and Investor Relations at McDonald's

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

Sara Senatore
Analyst at BofA Securities

Thank you. I wanted to just ask about some of these initiatives in the context of McDonald's history, which is to say when you mentioned, Chris, that it's been since 2014 since you had unit growth in U.S. As I recall unit growth had picked up a few years before then, but same-store sales slowed. And so historically it seems like there's maybe a tradeoff there. So that was one piece that I wanted to ask about and how you think about that balance.

And then related. Chris, when you joined, there was an initiative I think around reducing some of the management layers and really streamlining and making the lines of communication clear between the markets and the headquarters. I guess what's happened since then or it feels like it's maybe a renewed initiative to do that. So if you could just compare perhaps where you were to what you're doing now and where the reinvestments might be this time versus last time? Thank you.

Chris Kempczinski
President and Chief Executive Officer at McDonald's

Sure. I think on your first point around unit growth versus comp growth, we have to walk and chew gum. It's not one or the other, it's the two of them in combination. And I think the big difference is when you want to be growing units is when you've got strong comp sales because that reflects the underlying health of the business. I'm always very leery when I see someone out there putting a strong unit growth number without strong underlying comp sales because that's historically not been a good recipe in our industry. And so, for us, I think we've got, as you've seen in our results, strong comp sales. I feel very good about the outlook. And so that now gives, to me, permission to put on top of that some unit growth. But we need to be very smart about where and how we do that. And I think sometimes in the past we were looking at just putting units and looking at an absolute number and not maybe looking at the quality of the site. And so that's why we want to take some time this year to make sure we feel confident about the exact number, the pacing, the quality of the sites, so that when we do roll that out that we've got the ability to continue to drive both comp sales as well as unit growth.

And then your question about the organization. There's maybe some similarities but differences. I think if you go back to what was done in, I think it was 2016 or thereabouts, that was savings that largely came about through refranchising a big chunk of our restaurants. And so that was, as we took McOpCo percentage down, and we moved more of that to the franchise side. That gave us some benefits from G&A standpoint. There were some changes that happened in terms of delayering at the senior level.

But what that effort was not about is ways of working. That was much more what I would say are just business model approaches as opposed to ways of working. And what I've seen in my time in this job and also what I've seen in the U.S. when I was in that role is that we have a lot of opportunities to get faster, more innovative, more efficient and it's because we have historically been very decentralized in some areas where we reinvent the wheel way too often. And I think the other thing that we've seen is we haven't been as sharp around our global priorities. And so there's been proliferation of priorities that sometimes happen at the market level.

I would just give you an example. As we're going through this ATO exercise and learning about where we have the opportunities, we're uncovering all sorts of interesting things, like, for example, one market that has 300 priorities. Well, of course, you can't have 300 priorities and you can't resource 300 priorities. And so as we discover and learn these things, this is all going to be about making us better. So the difference of today versus what we did maybe back in 2016, I think that was much more of a structural change related to our franchising model with some delayering at the senior level. This is much more fundamental about changing ways of working that I think ultimately are going to make us better both on the top line, but I think are also going to give us efficiencies that flow through, as Ian was talking about, with G&A leverage.

Mike Cieplak
Senior Vice President, Treasury and Investor Relations at McDonald's

Our next question is from Jon Tower with Citi.

Jon Tower
Analyst at Citigroup Global Markets

Great. Thanks for taking the question. Just curious, I know we've spoken quite a bit about some of the cost inflation and stuff like that running through the business across the globe in '23. Curious if you can give us an indication or your thoughts regarding pricing versus the inflation expectations for the full year and how you're working with your franchisees across the globe to address that?

And then second, if you could talk about the quarter to date industry data, particularly in the U.S., has been quite strong to start the year. Curious to know some of the strength that McDonald's saw in the fourth quarter has carried over into the first quarter. Thank you.

Ian Borden
Executive Vice President and Chief Financial Officer at McDonald's

Morning, Jon. Let me let me start on that one, and maybe just to give a bit of texture to my answer, I'll talk about it in a couple of pieces. I'll start with the U.S. and then talk a little bit about IOM, but maybe with a focus on Europe. I think in the U.S. we would say we're past the inflation peak and heading on that downward slope. But certainly, we had high inflation mid-teens in '22 from a food and paper perspective. I think in '23 we think our food and paper inflation is going to be mid-to-high single digits. So still, obviously, very elevated from where it's been for a long time. And so in combination with that, you've also got energy prices that are up and interest rates and things like that that are impacting us.

I think if you move to IOM with a focus on Europe, I think we're still working through the peak period of inflation. I don't think -- we think inflation in Europe will start to ease probably until mid-2023. In fact, we'll see some markets in Europe with higher levels of inflation in '23 than we saw in 2022. And so I would say on an IOM basis for '23, we probably expect food and paper inflation to be in that mid-teens, not substantially lower than what we saw in '22.

So I think that gives you an indication of the level of the inflationary pressure. Of course, energy prices in Europe maybe while they haven't hit the peak, as I was talking about earlier, because we've had a warmer winter in Europe so far, the underlying tensions aren't fully resolved yet and inflation levels and energy prices are certainly up significantly where they were 12 months or so ago. And so I think from a pricing perspective, what we're trying to do is be very disciplined and be very consumer led in our thinking. You may have heard me talk in the third quarter call just a little bit about the investments we've made over the last couple years to really improve the tools, the data, and the analytics that our advisors use to provide recommendations to the business.

Of course, as always, our franchisees make their own pricing decisions, but I think, as Chris talked about, we feel good that we're being very disciplined around the pricing. We're taking -- we're using a long-term mindset knowing that what we want to continue to do is drive strong top line momentum so that we have that momentum through these pressures and then, of course, out of the pressures and begin to recover margins and gain leverage as we go forward. And we think our system has done a really good job on that because when we look at our value-for-money and affordability scores, we continue to maintain those leadership positions.

And so I think '23 is a moment in time where we're seeing the peaks of those pressures but feel really good as we get out of '23 that the momentum that we're going to continue to drive will keep us in a really strong position to start gaining leverage again.

Chris Kempczinski
President and Chief Executive Officer at McDonald's

Yeah, I just would add, I've seen some of the industry reports on the momentum heading into 2023, and we feel good about how our business is performing. But I think Ian touched on one thing. Just keep in mind, we've got Omicron that's a tailwind. We've got good weather, not just in Europe, but there's favorable weather in the U.S. So there are some things there that are helping, I think, industrywide, but we feel very good about the momentum we're starting the year off with.

Mike Cieplak
Senior Vice President, Treasury and Investor Relations at McDonald's

Our next question is from Andrew Charles with Cowen.

Andrew M. Charles
Analyst at Cowen and Company, LLC

Great, thanks. Chris, you expressed the same macro concerns in Europe as last quarter, but within IOM strong 4Q comps. The U.K., France, and Germany you called out really standout performers. And so you spoke about a few country-specific operating highlights, but could you talk about the degree that Europe is benefiting from trade-down from higher price dining, and how you're positioning the business to sharpen the focus on value in 2023 while recognizing franchisee profitability in Europe is seeing the greatest challenge.

And if I can just squeeze in one quick housekeeping question. How would the $100 million to $150 million of 2023 franchise release show up in the income statement? And if you anticipate that would be front half or back half weighted or spread evenly throughout the year would be helpful. Thanks.

Chris Kempczinski
President and Chief Executive Officer at McDonald's

Why don't I have Ian cover the housekeeping item and then I'll get to your broader question about Europe and the consumer?

Ian Borden
Executive Vice President and Chief Financial Officer at McDonald's

Yeah. Hi, Andrew. So just on the $100 million to 150 million, that obviously is directed to support franchisees and so would show up through our franchisee revenue in the income statement as we work through that. And I'll give it back to Chris for the rest.

Chris Kempczinski
President and Chief Executive Officer at McDonald's

Yeah. And to the question about trade-down and the benefits of that, we're seeing good balanced growth in Europe and in our IOM market. So I wouldn't say that we are disproportionately benefiting from some trade-down. To the degree that we have visibility at the different strata of the consumer, we're continuing to see that hold up well across all consumer segments.

Mike Cieplak
Senior Vice President, Treasury and Investor Relations at McDonald's

We have time for one last question from John Ivankoe with JP Morgan.

John Ivankoe
Analyst at J.P. Morgan Securities

Hi. Thank you so much for that question. The question is on capex and just overall capital needs of the business. Certainly, appreciate the guide for fiscal '23 at $2.2 billion to $2.4 billion, but that includes new units on 400 IOM and U.S. units. So I guess there's a couple different parts to this. Do you think, is that 400 number is the right number to think about in these developed markets going forward, or could that number necessarily increase, I guess is the first part.

Secondly, you did mention the completion of EOTF in the U.S. largely in '22 and I'm wondering if there's another large project, specifically I guess in the IOM markets that may take up for existing unit capex?

And finally, in the release I think this has been a really important thing for McDonald's is 90% cash conversion, I suppose you mean of earnings -- of your net earnings. Is that the right ratio that you expect to hit on an annual basis going forward, maybe getting a little bit of a preview of what you will talk about later this year at your analyst meeting? Thanks.

Ian Borden
Executive Vice President and Chief Financial Officer at McDonald's

Yeah. Morning, John. Thanks for all that. So I think on the 400 openings, as Chris said, we'll have more to say on that later in the year. But I think what we've done well over the last couple years is really build demand for the brand by investing in the brand, I think in doing a good job to resonate with consumers. And so certainly feel there's opportunity ahead I think from a quantification standpoint. We'll talk about that, as I said, more later in the year.

On '23, the $2.2 billion to $2.4 billion of capex, about half of that is going to go towards new unit growth. I would say one of the things, as we worked through COVID and dealt with consumer shifts in behavior was we certainly understood there was an opportunity for us to deal. Obviously, we've got a lot more ordering channels coming into the restaurants. I think that's certainly -- and with the demand and volume that we've created, has created some challenges just in managing the capacity and the volume of customers we're dealing with in some of our restaurants across our owned markets.

And so some of that reinvestment capex is just going to us working through these new ordering channels like delivery and digital, and just enabling our restaurants to be better set up to deal with the volume of business that they're handling, and to make sure that they can continue to grow volume by having more capacity available as we go forward, and so some of that capital is going there.

I think on the 90%, I think you should feel good that that's something that we feel will be in place going forward as we've talked about in 93% [Phonetic] in terms of converting our net income to free cash flow.

Mike Cieplak
Senior Vice President, Treasury and Investor Relations at McDonald's

Okay. Thank you, Chris. Thanks, Ian. Thanks everyone for joining. Have a great day.


[Operator Closing Remarks]

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