McDonald’s Corporation (NYSE:MCD) Q1 2024 Earnings Call Transcript

McDonald’s Corporation (NYSE:MCD) Q1 2024 Earnings Call Transcript April 30, 2024

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Operator: Hello, and welcome to McDonald’s First Quarter 2024 Investor Conference Call. At the request of McDonald’s Corporation, this conference is being recorded. Following today’s presentation there will be a question-and-answer session for investors. [Operator Instructions]. I would now like to turn the conference over to Mr. Mike Cieplak, Investor Relations Officer for McDonald’s Corporation. Mr. Cieplak, you may begin.

Mike Cieplak: 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 re-enter the queue for any additional questions. Today’s conference call is being webcast and is also being recorded for replay via our website. And now, I turn it over to Chris.

Chris Kempczinski: Thanks Mike and good morning everyone. I join you today inspired from our recent worldwide convention, a time when McDonald’s comes together to celebrate the success of our system. The relevance of our brand, power of our Accelerating the Arches strategy and the collective strength of our system, we are on full display as we welcomed our global McDonald’s franchisees, restaurant teams, suppliers, and company employees to Barcelona. For the first time in our nearly 70-year history, we held this biannual reunion outside of North America, a testament to the global power of our brand. And we are joined by more than 15,000 attendees from nearly 100 markets to discuss how we are reimagining the future across our three-legged stool.

It is clear that McDonald’s continues to operate from a position of strength across nearly all areas of the business as we focus on executing the day to day at a high level and establishing strong platforms for long-term sustained growth. The first quarter of 2024 marks our 13th consecutive quarter of positive comparable sales growth with 30% growth over the last four years. This success was built by establishing a strong foundation with a strategic plan basing consumer insights and focused on creating relevant marketing campaigns with our brand connected to culture. At the same time, we are maximizing the strength of our core menu equities and building an industry leading royalty base. Combined with our modernized restaurant estate, strong franchisee alignment, engage restaurant employees, and strong restaurant level unit economics, McDonald’s is well positioned.

This winning formula continues to drive results and our customers visiting our restaurants today can easily see our commitment to providing them with a great experience evident through our strong customer satisfaction scores. As I reflect on the first quarter of the year it is clear that broad based consumer pressures persist around the world. Consumers continue to be even more discriminating with every dollar that they spend as they faced elevated prices in their day to day spending which is putting pressure on the QSR industry. It is worth noting the in Q1 industry traffic was flat to declining in the U.S., Australia, Canada, Germany, Japan, and the UK. And across almost all major markets industry traffic is slowing. In the context of a difficult macro environment for the industry, we know our customers are looking for reliable everyday value now more than ever.

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Q&A Session

That has always been our promise to deliver delicious feel good moments at an affordable price each and every day. Staying on the side of the consumer and executing against our plan is our model for driving long-term growth regardless of the broader landscape. This was the case nearly 70 years ago when Ray Kroc opened the very first McDonald’s and this remains just as true to this day. As consumer pressures have mounted we have reacted with agility to proactively meet evolving customer needs. For example, over the past year, we’ve launched everyday value menus across many of our international markets, including all five of our big IOM markets. Featuring value bundles at various price points, these new offerings provide smaller, more affordable meals to our customers.

In Germany, our McSmart menu has continued its strong performance with record units sold during the first quarter. And in other markets like Spain, our Everyday Value menu features a convenient bundle for every price point, which continues to drive results. I recently spent time with our market team in Poland and experienced firsthand their renewed focus on value in an environment where significant inflation has created challenging consumer dynamics. In light of these challenges, I was impressed by the market’s ability to quickly identify an opportunity in their everyday value offerings to implement a new entry-level value platform, which is driving traffic back into our restaurants. And in France, a market which I flagged last quarter, I’ve been impressed by the speed with which our team and franchisees have moved to address their opportunities.

The market now has established their own McSmart value menu with high consumer awareness, which is driving encouraging progress in their business trends. It’s clear that McDonald’s offers delicious food at a great value and customers continue to tell us this through our survey work. That said, we must be laser-focused on affordability, which means good entry-level price points available every day. In the markets where we’re doing this well, the business is outperforming. In some markets, however, it’s clear we still have opportunities to strengthen our proposition. As we continue to take the one McDonald’s approach to solving problems, the unique size and scale of the McDonald’s system gives us the ability to learn from each other, and it’s examples like our success with the McSmart Value menu construct that we will look to replicate further.

McDonald’s has a long history of being the go-to destination for value and it’s imperative that we continue to keep affordability at the forefront for our customers. We literally wrote the playbook on value, and we are committed to upholding our leadership within the industry. As we’ve done for the last 70 years, our teams in those markets are working closely with our local franchisees to balance menu pricing decisions with the right affordability strategy in place and where needed, get more aggressive with our value offerings. Despite the elevated cost environment, we’ve navigated over the past couple of years, average franchising cash flow and the corresponding margins remained strong. And thanks to the financial strength of our restaurant P&Ls, we have the ability to invest in these traffic-driving initiatives.

Despite these ongoing challenges and pressured consumer spending across our segments, we delivered global comparable sales growth of nearly 2% in the first quarter. And we continue to raise the bar on the customer experience in our restaurants with a focus on strong execution. This is driving improved service times and higher levels of customer satisfaction across our markets. In challenging times, there is significant power in focusing on what’s within our control to maximize the impact of our strategic plan, offering our customers delicious food at unparalleled value and convenience. And it’s exactly this approach that will continue to drive growth. McDonald’s is best positioned to win in the industry because when we combine our strong system alignment with our fully modernized estate, a globally recognized brand, delicious food on our core menu, and the highest level of execution across our 4Ds, no competitor could match us.

As consumer spending remains pressured and macro headwinds continue, we are laser-focused on maintaining our competitive advantages and growing QSR market share. With that, I’ll turn it over to Ian to talk more about our Q1 results.

Ian Borden: Thanks, and good morning, everyone. As Chris mentioned just a few minutes ago, strong execution against our strategic plan delivered global comp sales of nearly 2% for the first quarter, driven by growth across our U.S. and IOM segments. As we’ve said before, as customers continue to be more intentional with the dollars that they spend in a pressured economic landscape, we expect moderated top line growth this year. In our IDL segment, positive comp sales in Japan, Europe, and Latin America were offset by the impact from the ongoing war in the Middle East. We remain proud of the way our system continues to show up for customers every day, and we continue to work closely with our IDL partners to support local communities in the region.

It’s during times like this that I’m once again reminded of the resilience of the entire McDonald’s system, and our ability to deliver delicious feel-good moments to our customers in any environment, which I’ve seen time and again in my 30 years with McDonald’s. We have continued to drive a One McDonald’s Way approach to our creative excellence this quarter combining local cultural relevance with global reach to engage a new generation of McDonald’s fans. In more than 30 markets around the world, including the U.S., we tapped into a new global community with a truly unique brand campaign. While McDonald’s has long been an enduring brand across communities, in anime we’re known as WcDonald’s, a fictional restaurant we brought to life for our fans this quarter.

By featuring our Chicken McNuggets, alongside a new dipping sauce, theme packaging, and bonus gaming content with a mobile app purchase, we created brand excitement and lifted McNuggets category sales. Our fans passion for the McDonald’s brand and for the WcDonald’s universe quickly spread across social media in the U.S. with over 6 billion impressions and nearly 100,000 mentions. Our delicious burgers were also featured across many markets this quarter as we continued to showcase our strength in beef with a consistent approach to improving our fan favorites. Now deployed in over 80% of our restaurants globally, Best Burger was recently introduced in France this quarter, delivering hotter and juicier burgers. Early results were promising, with lifts across our core burger categories and improved customer satisfaction in both our taste and quality scores.

And in the U.S., where we’re now fully deployed across the country, we celebrated the national launch of Best burger with an iconic character at the center of our advertising. Tapping into the nostalgia of the hamburger, the campaign drove a significant lift in the Big Mac category and contributed to record customer satisfaction scores in the market. The progress we’ve made with our core burgers highlights what McDonald’s can achieve when we tap into the full power of our system size and scale. We’ll continue to showcase that small changes can add up to deliver big improvements to both taste and quality by scaling Best Burger to nearly all restaurants by the end of 2026. And as we look to further build on our leadership in beef, our team of chefs from around the world have created a larger satiating burger.

We’ll be testing this burger in a few markets later this year ensuring that it has universal appeal before scaling it across the globe. We also celebrated our menu in the mobile app this quarter, combining the strength of our core equities with new and exciting digital experiences for our customers. Across our top markets, digital penetration is growing as evidenced by our increased loyalty sales and record mobile app orders, leading to greater frequency and increased spend by loyalty customers. We’re also growing digital share as we leverage learnings from across markets in areas like gamification. Australia featured McDonald’s World Famous Fries at the center of a digital campaign and offered customers a chance to win by digitally redeeming their game pieces.

Powered by a seamless digital experience, the campaign resulted in incremental customer acquisition and increased the market’s loyalty sales. The UK market also drove strong loyalty results with the return of their Winning Sips digital experience, encouraging customers to add a drink to their order with a chance to win on every cup. Customer engagement in the mobile app increased with digitally redeemed game pieces, and we drove record growth in 90-day active users in the market. Because of unique digital experiences like Winning Sips, our loyalty members continue to engage more frequently with nearly 75% of our total loyalty user base in the UK active during the last quarter. We know the experience we provide, whether through our mobile app or in our restaurants is a significant driver of how often our customers choose to visit McDonald’s.

But providing our delicious food at the right price is equally critical, especially in today’s environment, where consumers all over the world are paying more for everyday goods and services. As Chris mentioned a few minutes ago, a strong value proposition continued to drive results within several of our markets this quarter. This consumer-centric approach to providing our customers with compelling value at affordable price points continue to drive strong results in markets like Germany, Spain, and Poland and led to QSR market share gains. As we remain agile to meet the needs of our customers around the world, we’ll continue to use our size and scale for the greatest impact, sharing what is working to drive consistency and enable speed. Turning to the P&L, our global top line growth drove adjusted earnings per share of $2.70 for the quarter, an increase over the prior year of about 2% in constant currencies.

Adjusted operating margin for the quarter was nearly 45%. Despite the pressured consumer spending environment we’ve discussed this morning, top line results generated nearly $3.5 billion of restaurant margin for the quarter, an increase of about 4% in constant currency. This was partially offset by higher G&A costs as we continue to invest in our strategic transformation efforts and growth opportunities such as digital, as well as costs associated with our biennial worldwide convention that Chris mentioned. Our adjusted effective tax rate was 19.9% for the quarter. As we’ve talked about before, driving long-term growth requires making the right strategic and forward-looking investments. The resilience of our business and our overall financial strength put us in the ideal position to invest in critical areas that deliver against customer needs as well as unlock efficiencies for our people and our business.

This includes new restaurant development as we look to accelerate the pace of openings and grow our footprint to 50,000 restaurants by the end of 2027. Development for the year is off to a strong start across markets, including in China where we recently opened our 6,000th restaurant, and we are pacing on track against our global plan. In addition to restaurant development, we’re also investing for long-term growth in areas like digital and technology as well as our transformation efforts within our global business services organization. By leveraging the full strength of our global scale, we’ll build new and modern capabilities and ultimately unlock speed and innovation for our entire McDonald’s system. Despite the headwinds that persist, we remain well positioned with the unique strength and scale that only the McDonald’s system can provide.

As Chris talked about upfront, we are focused on how we can further leverage this across our consumer, restaurant, and company platforms. With our system aligned on the right strategies moving forward, along with the financial strength of our franchisees, suppliers, and the company, I remain confident that we will continue to deliver long-term growth for our system and for our shareholders. And with that, let me turn it back over to Chris.

Chris Kempczinski: Thanks, Ian. We would like to say that when culture calls McDonald’s answers, with a brand that is renowned throughout the world and marketing that is resonating in culture and with consumers, it’s no wonder that we’ve been recognized yet again as one of the world’s most effective marketers by work in association with Cannes Lion. We’re elevating our creative excellence, scaling great ideas globally, and building meaningful relationships with the next generation of consumers. Breakthrough campaigns, a great tasting menu, and personalized experiences will drive customers to McDonald’s again and again as they come through the physical doors of our restaurants and the digital door of our mobile app. And in this environment, with pressured QSR traffic, we have an opportunity to get the customers who already visit to visit more often.

As more customers make purchase decisions based on personalized recommendations on their phones, driving frequency means using our digital capabilities like loyalty to know when to serve our customers better than anyone else. With the insights powered by our loyalty members, we will work to deliver the right message at the right time to the right consumer, encouraging those who already love McDonald’s to visit even more. When we shift marketing investment from traditional mass media like television, print and billboard ads, to collective investment in modern and digital capabilities to personalize the experience, we drive profitability. And successfully delivering personalized experiences depends on transforming our restaurants to deliver what customers want, hot fresh orders delivered with convenience and accuracy.

The future restaurant experience is already underway in markets across the world, whether it’s ready on arrival, a dedicated drive-through lane for digital orders in China, or other flexible format concepts. And by building the technology infrastructure to support the long-term platforms we’ve discussed, we will create a more reliable experience and operate more efficiently. We’ve talked about the ways best-in-class marketing and our iconic menu fuel the brand, but there is another component; each and every day, our McDonald’s system strives to fulfill our purpose of feeding and fostering communities locally. And there’s no greater example of our decades-long dedication to driving positive impact than our work with Ronald McDonald House Charities.

This year, we’re celebrating the 50th anniversary of Ronald McDonald House Charities, providing essential services that remove barriers to health care, strengthen families, and promote healing when children need it most. Since that first house opening, the Charity’s global footprint has expanded significantly, and they’ve helped tens of millions of families through the hardest of times. With more than 385 programs running across the world, the organization is providing support for families across 90% of the world’s leading pediatric hospitals and extending care through more than 2 million overnight family stays each year. Before I close, I’d also like to take a moment to recognize Rick Hernandez for his many contributions to the McDonald’s system throughout his 28 years of service on our Board of Directors.

And as I assume the additional role of Chairman following our Annual Shareholders Meeting next month, I look forward to working alongside our new Lead Independent Director, Miles White, and the rest of the entire Board to continue to deliver strong performance united under an aligned company voice. I am confident that the system is focused on the right priorities with Accelerating the Arches as our playbook, evolving to meet the customer needs of tomorrow, and laying the foundation for future growth. With that, we’ll take questions.

Operator: Thank you. [Operator Instructions].

Mike Cieplak: Our first question is from David Tarantino with Baird.

David Tarantino: Hi, good morning. My question is on the comps outlook. I think, Ian, you mentioned on the last call that you had expected comps in the U.S. and IOM to settle to the 3% to 4% range this year. And now I think your commentary suggests you’re operating in a tougher climate than when you gave that guidance. So one, I wanted to ask if that range is still in play in both of those markets in your view? And then secondly, for the U.S. specifically, do you think a more concerted or more aggressive value approach is needed to get there in the current environment? Thanks.

Ian Borden: Hi, good morning David. Thanks for the question. Let me start, and then I think Chris will probably jump in to kind of build out on whatever I say. But look, what I would start with is, as you know well, we don’t typically give comp guidance. I think what we were trying to do as we looked back was to provide a directional perspective on what we felt the industry kind of historical range looked like in more typical years. As you know, we talked about 2024 being a year where we felt top line was going to moderate. I think four months into the year, I think what we can say is, clearly, 2024 isn’t going to be a typical year for the broader industry. I say that because we’re certainly seeing, as you heard in our upfront remarks that the macro headwinds have been more significant than I think we even anticipated coming into the year, and we continue to see those macro headwinds as we have started quarter two.

And frankly, many of our large international markets and the U.S. And I think we expect in the U.S. that we’re going to start the quarter roughly flat from a comp sales perspective from what we can see so far. And so I think what we’re seeing is in many of our largest markets internationally and the U.S. that the industry traffic is either flat or we’re certainly seeing declining trends. And I think as all of that we believe we’re going to likely probably be below that historical range that we had indicated. I think what’s important is, clearly, we don’t control the macro context around us. And so what we’re focused on is always is listening to the needs of consumers, making sure we’re making the appropriate adjustments in our business to deliver against those needs, and of course, is always ensuring that we can do it better than anyone else.

And I think affordability is clearly an area where consumer expectations are heightened. I mean I think consumers are obviously dealing with a lot in the current macro context. Obviously, they’re getting hit. I think across their full basket of goods and services by all the inflationary impacts, I think importantly, we’ve got a really long and strong history of being a leader in both value for money and affordability. We’ve obviously been through these difficult context, many times over time. I say that because I think it’s important that we know what we need to do. I think we know how to do it well and the financial strength of our business puts us in a position to be able to do that better than anyone else. And I think that’s what we’re going to make sure we’re delivering against that each of our large markets is positioned for success against those current consumer expectations.

Chris Kempczinski: And then turning to value in the U.S., I think it’s important to first recognize that there is some great value that our system, our franchisees are offering in the U.S. 90% of our system in U.S. is offering meal bundles for $4 or less. And if you look at digital value, we’ve got some great digital offers out there. I just opened my app while I was waiting to jump on this answer and we’re offering right now a Big Mac for $0.29 when you buy a Big Mac or you could get 30% off Crispy. So there’s a lot of great value out there. But I think the issue that we have in the U.S. is in an environment where everybody is out there with a value message there’s an opportunity for us to drive better awareness of what our value platform is.

And one of the things that’s going on in the U.S. right now is the value message that I was talking about, we’re doing it in 50 different ways with local value. And what we don’t have in the U.S. right now is a national value platform at the same time that our competitors are out there with the national value platform. So the opportunity for us in the U.S., I think, is to get more aligned as a system around a strong national value proposition that we can then use our media scale to drive high consumer awareness on it. So that’s what I know. Joe and the team are focused on the U.S. and as I look at the U.S. compared to other markets where we’re having success, you’ve got to be able to have high awareness and that’s, I think, the big opportunity for us going forward in the U.S. business.

Mike Cieplak: Our next question is from Brian Harbour with Morgan Stanley.

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

Chris Kempczinski: Sure. Well, I think what we’ve seen, if I turn to France, as an example, France, I was talking about last quarter as having a number of areas of opportunity and in my prepared remarks, I noted that, that system in France came together very quickly around a national value program that they then put significant marketing support against and they got to north of 80% awareness in a very short period of time, that’s starting to drive encouraging trends in their business results. I think what that highlights is it’s not about how quickly can you see the business impact when you have a strong marketing support against a compelling value platform, it’s how quickly can your system move and pivot to getting that in place.

And I know that, that’s something that Joe and the U.S. team are talking with U.S. franchisees on. I think, again, there’s lots of great value that we have out there at a local level, but it’s how do we come together in the U.S. around a stronger national value platform that can compete. How long that takes, I think, is going to be up to individual conversations that happen in the market, but it’s clear that once you have that in place, the business could start to respond pretty quickly.

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