MCD - McDonald's Corporation (MCD) 2023 Investor Update (Transcript)

2023-12-07 16:21:08 ET

McDonald’s Corporation (MCD)

2023 Investor Update

December 6, 2023 10:30 AM ET

Company Participants

Mike Cieplak - IR

Chris Kempczinski - President and CEO

Jill McDonald - EVP and President, International Operated Markets

Jo Sempels - President, International Developmental Licensed Markets

Joe Erlinger - President of McDonald’s USA

Manu Steijaert - EVP and Chief Customer Officer

Jon Banner - Global Chief Impact Officer

Brian Rice - Global Chief Information Officer

Ian Borden - Chief Financial Officer

Morgan Flatley - Chief Global Marketing Officer and Head of New Business Ventures

Phyllis Cheung - Managing Director of China

Skye Anderson - President, Global Business Services

Conference Call Participants

John Ivankoe - JP Morgan

David Tarantino - Baird

Dennis Geiger - UBS

Jeff Bernstein - Barclays

Brian Bittner - Oppenheimer

Dave Palmer - Evercore ISI

Andrew Charles - Cowen & Company

Nick Setyan - Wedbush

Jake Bartlett - Truist Securities

Katherine Griffin - Bank of America

Lauren Silberman - Deutsche Bank

Presentation

Operator

Please welcome McDonald, Senior Vice President, Treasurer and Investor Relations Officer, Mike Cieplak.

Mike Cieplak

Hello, everyone, and good morning. Welcome to McDonald’s 2023 Investor Update. Thank you to everyone for joining us, both all of you on the live stream and all of you gathered here with us today in McDonald’s headquarters in Chicago, or MHQ,as we like to call it.

It’s a real privilege to be with all of you today, and we are excited about the day ahead. Just a few housekeeping points before we jump in. As many of you are aware, we issued a press release this morning summarizing highlights from today’s presentation, and we’ll also post key slides from this meeting on our website.

Now over the next 90 minutes, the McDonald’s senior leadership team will bring you through how we’re evolving our Accelerating the Arches strategy to drive growth both in the near and long term. Then we’ll take a break from the live stream for lunch and rotations here in Chicago. We’ll regroup around 1:30 PM Central Time to bring you through our reimagining our future before we close with the Q&A session.

We have so much to share with you today on how we’ll continue to grow the business and provide more personalized and convenient experiences for our customers.

Now before we get started, let’s take a minute to reflect on our past.

[Audio/Video Presentation]

Operator

Please welcome McDonald’s President and Chief Executive Officer, Chris Kempczinski.

Chris Kempczinski

Good morning, everybody. On behalf of the entire global senior leadership team at McDonald’s, welcome to our investor update. Last time we came together in November of 2020, I said we were at the start of something new for McDonald’s.

While our business was performing well, we believed we could do even better, and we announced our Accelerating the Arches growth strategy. We were building from a position of strength back then and our fidelity toward Accelerating the Arches strategy has further strengthened our business. Accelerating the Arches encompassed all aspects of our business including purpose, values and our MCD growth pillars, that built on our inherent competitive advantages M stood for maximize our marketing and the world-class culturally relevant creative to reignite our brand and drive growth. C stood for commit to our core and the power of iconic favorites to drive customer demand while simplifying operations. And D stood for doubling down on what we called at the time, the 3 Ds of drive thru, digital and delivery.

Since 2020, we’ve grown these 3 channels across our top markets and now have the largest individual drive thru, digital and delivery businesses in the restaurant industry by a wide margin. These channels are as relevant today, confirming our belief that off-premise would be the preferred customer order experience. In fact, we have even more opportunity to build on our leadership on each of these 3 Ds. And as you heard earlier this year, we have now added a fourth D, accelerating new restaurant development. I know you’re all interested to hear more details on this one, and we look forward to sharing more today.

Before we look ahead at how we’re reimagining our future and evolving Accelerating the Arches, I want to remind everybody on where we are today and how we got here. It’s been four years since I stepped into the CEO role and 3 years since our last investor update. I want to acknowledge the contributions of those who have stepped up to make the story we’re telling today possible.

First, I’m grateful to my senior leadership team, whose talents and values-based leadership enable us to set our ambitions even higher. I’d also like to thank our Board of Directors, their expertise, dedication to McDonald’s. All of that contributes to the strength of our system, and I’m grateful for their thoughtful counsel.

Finally, I’d like to recognize and thank the franchisees, suppliers and employees whose passion and dedication is central to bringing the McDonald’s experience to life for our customers each and every day. McDonald’s unique three legged stool continues to be the bedrock of our system.

Despite a challenging and unpredictable operating environment, McDonald’s has continued to deliver. In 2019, we reached $100 billion in system-wide sales. This year, we expect to reach nearly $130 billion in system-wide sales. I’ll let you do the math on how many of our competitors’ entire businesses it would take to add up to $30 billion worth of dollar growth in our system-wide sales. But spoiler alert, it is a lot. McDonald’s unmatched size and scale gives us competitive advantage that no one else can match and in our rapidly evolving industry, I believe that the benefits of scale will become only more pronounced. Scale matters and will matter a lot more.

Every year, we buy over $50 billion of food packaging and services. Our buying scale means that McDonald’s has the lowest cost and best quality in the industry, enabling us to offer customers superior value at attractive margins for our franchisees.

McDonald’s invest over $4 billion every year marketing our brand, 3x to 4x more than our nearest branded competitor. Our marketing scale ensures that our brand maintains high top-of-mind awareness, which drives customer affinity and frequency.

With a $50 billion balance sheet and blue-chip credit rating, our financing scale means that McDonald’s and our franchisees have the lowest borrowing costs in the industry. This allows our system to maintain a modern restaurant estate while continuing to aggressively invest in growth opportunities. And today, there is no bigger growth opportunity than the one that we see in digital and technology.

As all of you know, digital and tech are inherently a scale game. McDonald’s superior scale means that we can build capabilities at a pace and cost that no one else in our industry can match. And as more and more customers literally hundreds of millions join our digital ecosystem,our pricing tools get sharper, our AI models get smarter, our restaurants become easier to operate, and most importantly, the overall customer experience improves. The network effects from digital and tech are real and they favor McDonald’s. Together, these accumulated benefits of McDonald’s superior scale allow us to offer compelling returns to investors and franchisees alike.

Beyond our incremental $30 billion of system-wide sales growth, there are several other strong signs of progress. We’ve gained share across most of our major markets. We’re retracting and retaining top talent that are passionate about the McDonald’s brand. And our restaurant teams are executing at a high level and customer satisfaction is increasing.

While there have been many contributors to our success, I’d like to highlight 2 key decisions that we made that I think helped turbocharge our system. The first is that we modernized our company values and made our commitment to them as the backbone of our Accelerating the Arches business strategy. McDonald’s has always been a values-driven company but we lack a common vocabulary. And as a result, while we all felt the company’s values, we often didn’t talk about the company’s values.

Now some of you might say that values aren’t a real business driver. Not something you can put in a model. They’re not something you can see. But I firmly believe we would not have navigated the last several years as effectively as we did without them.

Whether in the ways that we showed up for our restaurant teams, local communities and system throughout the COVID-19 pandemic to the ways we stood by our people and communities through the periods of social unrest across the U.S. to how we approached and carried out the difficult decision to exit Russia.

With our values at our center, we continue to broaden our impact in markets around the world across all 3 legs of the stool.

The second key decision we made was to put the right value-based leaders in the right structure to support our teams to become faster, more innovative and more efficient. In 2021, I created a role of Chief Customer Officer to lead the new customer experience team. McDonald’s is a true omnichannel business. We needed someone who could take an end-to-end look at the customer experience across both the physical and digital worlds.

Today, you’ll see some exciting new ideas that have come from this approach. There were other changes on my senior leadership team since our last investor update, I’ve sought to ensure that we maintain a good combination of longtime McDonald’s talent along with external hires. I feel great about my senior team. And today, you’ll get to see them in action and ask questions and I think you too will be impressed.

And as we announced earlier this year, we made some meaningful changes to our structure and ways of working with our Accelerating the Organization initiative. We’ve removed layers between our people and the restaurants, enabling us to identify One McDonald’s Waysolutions that we are quickly scaling. With this new structure now firmly in place, I can confidently say that our organization is fit for purpose. As you’ve heard several times on our quarterly earnings call, I don’t think there’s ever been a better time to be part of the McDonald’s system. Our McDonald’s brand is 1 of the top 5 most valuable brands in the world a globally recognized icon that is part of, and in some cases, defined culture.

We’ve accumulated one of the largest branded restaurant footprint in our industry with over 40,000 locations giving us a comparable reach in the physical world. And in the digital world, our app is the gateway into the McDonald’s experience. Across 50 of our largest markets, we have had over 100 million customer registrations on our mobile app during just the last 12 months, exceeding all other restaurant brands.

We have built one of the largest loyalty programs in the world. Today, we have 150 million users that have been active in the last 90 days across our top 50 markets with 70 million in China alone. This provides us with scalable data to serve each of our customers in unique and engaging ways.

Our purpose-built technology has propelled this momentum. It represents a continuation of McDonald’s heritage to continue to reimagine the customer experience. This powerful triad of physical presence, digital ecosystem and our brand has positioned us as a leader. And we’re not done yet. There is significant growth potential within our Accelerating the Arches strategy. And over the next few years, we’ll continue to leverage our MCDs to drive continued growth.

Ray Kroc said, when we are very much alive and growing, it’s impossible to stand still. Today, we’re excited about our longer-term ambitions. We’ll talk about how our brand together with our physical and digital competitive advantages, position us not only to extend our leadership in QSR, but more ambitiously cement McDonald’s position as one of the leading consumer-facing companies in the world, period.

To support this ambition, we’re introducing 3 new platforms, which will become part of our Accelerating the Arches strategy. The first is our consumer platform. We are building one of the largest consumer platforms in the world that will bring together the best of our brand, physical and digital competitive advantages to accelerate growth in our loyalty program and drive valuable loyalty customers to visit more frequently.

The second platform is our restaurant platform. We are building the most productive restaurant operating platform that will enable our franchisees to run restaurants more efficiently and we’ll put the latest technology in the hands of our crew to make their jobs easier.

And the third platform is our company platform. We are building an operating chassis for McDonald’s that will enable our people to move with speed and innovate in support of our customers and franchisees.

While each of these platforms is distinct, they are highly integrated, enabled by our scalable data and digital capabilities. As we look ahead to the next 5 to 10 years, we believe these platforms can create a step change in our sales and margin trajectory. Slowly at first, but with increasing speed and impact. We are incredibly excited about the future of McDonald’s.

I am certain that by the end of our investor update, you will come away with 2 strong conclusions. One, that McDonald’s is poised to extend its leadership as the premier restaurant company in the world, while continuing our legacy of innovation. And two, that our full long-term potential is best measured against the leading consumer-facing companies in the world, full stop.

We’ve organized our days as follows in just a minute. I’ll invite members of my senior leadership team to talk about the new opportunities to leverage our MCDs to drive market share outperformance around the world in the near term.

You’ll hear about our continued efforts to lead with our values and positively impact the communities we serve. We’ll then talk to you about our technology and how that will enable our plans, followed by a look at our financial outlook.

After that, those of us in the building today will head to a series of rotations that go deeper on our opportunities for growth in the next few years. Following rotations, we’ll pick up with all of you in the room and those watching on live stream to discuss the ways in which we’re reimagining our longer-term future. And of course, we’ll close with a Q&A.

To get us started and speak more about how we will maximize our marketing, I’ll now turn it over to Jill McDonald, our President of our International Owned Operated Markets. Jill?

Jill McDonald

Thank you, Chris, and it’s great to be here today with all of you. As Chris mentioned, I am the President of our International Operated Markets segment, which represents nearly 35% of McDonald’s total system-wide sales, nearly 50% of revenues and over 40% of operating income. The IOM segment spans 19 countries with over 10,000 restaurants, and it includes some of our largest markets, France, UK, Canada, Australia and Germany as well as some smaller markets like the Netherlands, Slovakia and Switzerland.

Now as some of you may know, I’m actually a McDonald’s Boomerang. Earlier in my career, I ran McDonald’s UK business and was also President of Northern Europe. I returned to the company in September 2022 after serving as the CEO of Costa Coffee. And I’m often asked what’s different about the McDonald’s of today from the one I knew a decade ago and a few things really stand out for me.

First, I’ve been blown away by the strength of the talent that exists across the system. As well as within the senior leadership team you’ll hear from today.

Second, I’m reminded of the sheer size and scale of the McDonald’s system company, suppliers and franchisees, which has only gotten stronger with time.

And last is the company’s refreshed approach to marketing. As a former CMO myself, I can tell you that McDonald’s approach is far more rigorous and connected to culture than it has been in its history.

Across the company, we now share a strong belief backed by data that great marketing creative drives outsized comp sales performance. It’s been a big unlock, having the entire global organization rally behind the power of creativity and the importance of putting our brand in culture.

I’m excited to highlight the progress we’ve made over the last few years building the McDonald’s brand. Show you how that’s driven business performance and then outline why maximizing our marketing remains a meaningful growth opportunity. Let’s start here.

As you heard Chris say, McDonald’s is one of the world’s most recognized, most beloved brands. Now it may not be new news that McDonald’s is one of the world’s most valuable brands but the privilege of being a cultural icon, decade after decade is certainly not inevitable even for McDonald’s. And there were days not too long ago when our creativity seemingly slid into focusing on short-term transactional promotions about what we were selling to the exclusion of what people are feeling and the love they have for the brand. And we knew we could do better, bringing emotion back to our creative was the impetus was standing up McDonald’s creative effectiveness programs. Its goal is to unify marketers and agencies in over 100 countries under a shared culture of feel good marketing.

Over the last several years, McDonald’s has launched multiple campaigns in many markets. They connect our brand to customers and culture in really disruptive ways that have driven huge growth and momentum for the business and the world took notice. The authentic and organic relationships we’ve built with customers around the world are driving remarkable engagement with the brand. And as a result, since 2019, we’ve quadrupled social media engagement across platforms like Facebook and Instagram. This simply would not have been possible in the McDonald’s of yesterday.

Before we talk about how we got here, let’s take a look at how we’ve been engaging with fans around the world.

[Audio/Video Presentation]

As you can see, McDonald’s is elevating its marketing game. But while we’re proud of our progress in markets like the U.S. and the UK,if we’re honest, we still have room to get even better. The quality of our marketing is still inconsistent across markets, and we have an opportunity to improve consistency of execution.

To guide the continued evolution of our marketing model, we’ve developed a McDonald’s marketing playbook. And the playbook has 3 key parts: First, establishing One McDonald’s Way for creative excellence; second, maximizing the returns on our marketing investment; and third, implementing a more personalized approach to value.

One McDonald’s Way for creative excellence starts within building -- embedding a common language, tools and measurement around creativity. So we all can objectively recognize and define what great looks like. From there, we can build a culture of bold creative, one that leans into the magic of our brand, whilst taking big creative swings to drive cultural relevance and more meaningful connection with our fans all around the world. For example, we’ve created a consistent approach for identifying fan truth, like fighting for the last fry at the bottom of the bag or looking the gooey egg McMuffin cheese that sticks to the wrapper. We’re tapping into those moments, memories, rituals and behaviors that people have with our brand while shining a light on what fans love about McDonald’s.

No other restaurant brand invokes these rituals and memories quite like McDonald’s. Central to One McDonald’s Way for creative excellence is our ability to share and scale world-class creative ideas quickly across markets and to spot the ideas that can have global scale to help them grow. We’re now being more intentional about putting processes in place to set up singular ideas to drive massive global impact.

For example, Raise your Arches was originally developed in our UK market, it rooted in the fan truth, that invitation to grab a McDonald’s is so universal. It can be extended without words, just raise your eyebrows, which actually is harder to do than it actually looks.

The global truth behind the work immediately sparked interest when our UK CMO shared it across the global marketing community. But curiosity alone isn’t enough for fellow CMOs to commit, objective testing and a common framework for analyzing success is what sealed the deal to prove that this simple gesture would resonate across borders.

Quickly, we brought the campaign to more than 35 markets around the world, and we also adapted versions for the Middle East, Asia, Italy and more. This represents One McDonald’s Way for sharing and scaling at its best. Critical acclaim followed as Raise your Arches was awarded with advertising prestigious Cannes Lions. The same goes for Famous Orders. It started as one bold, culturally relevant idea in the U.S., and it has since traveled the globe with markets localizing to feature their favorite talent, from Kid Laroi in Australia to our global Famous Order featuring BTS. The singular idea that everyone has a go-to McDonald’s order has been scaled across the system whilst putting the brand at the center of our marketing.

The second chapter of our McDonald’s marketing playbook includes an intentional focus on return on marketing investment. We’ve introduced new testing methodologies to objectively measure and assess the impact of our creative. In the U.S., this has already shown strong correlation to business outcomes far surpassing any of the tools that we’ve used in the past. This is helping our marketers learn much more quickly what works from McDonald’s so that they can drive an even higher ROI every single time.

The final way that we are maximizing our marketing is through a more personalized approach to value. McDonald’s has always stood for great value. And today, our customers rate us as the #1 brand in QSR on both value for money and affordability in our top markets. Despite significant inflation over the past 2 years, our approach to strategic menu pricing, the strength of the McDonald’s brand and the overall value proposition we provide enables our ability to evolve our pricing structure and maintain our value leadership position.

We also recognize that the meaning of right price and value varies by customers. Some are more price-sensitive than others. And there has long been an opportunity for McDonald’s to get more targeted in its pricing.

Over the last several years, we’ve significantly improved our pricing capabilities, building a talented internal team along with a suite of proprietary pricing tools and creating what we believe is a competitive advantage for the company. With the strategy rooted in customer behaviors and insights, we’re evaluating the pricing opportunity as an individual restaurant and menu item level, optimizing price and limiting customer resistance.

When we follow our pricing tools, our ability to price at a level that the consumer will accept is significantly better than when we don’t, which maximizes the flow-through rate of our price increases to sales. Franchisees see the value in this and adoption rates for our pricing strategy are high.

As we continue to learn more about our loyalty customers gathering data on how they visit us and what they buy will leverage machine learning at scale and get even smarter with our pricing methodology. This will enable us to personalize with even greater precision by looking at thousands of customer cohorts, where we used to have less than 10. We plan to make our digital offers even more targeted meaning discounting is less broad-based and more personalized with a greater expected return on the investment in discounting.

So taken altogether, this is the future of McDonald’s value. Central to our customers’ love of the brand is our food and in particular, our core menu.And to tell you more about how we’re making our fans favorites even more enticing, I’ll now turn it over to the President of our International Developmental Licensed Markets segment Jo Sempels. Thank you

Jo Sempels

Thank you, Jill. I’m delighted to be here with all of you today, and I’m going to talk with you about our second growth pillar the C in our MCDs, our delicious core menu.

Now before I do that, let give me a quick overview of our IDL business. The segment is comprised of a diverse group of markets owned by more than 48 developmental licensees. It has a footprint of covering nearly 65% of global population and representing over 40% of our global estate.

IDL accounts for around 25% of McDonald’s total system-wide sales, roughly 10% of revenues and nearly 15% of operating income and we have been the unit growth engine of the system. We are currently opening about 1,500 restaurants per year. And to put that in perspective, that’s roughly 80% of our global openings.

Now around the world in IDL markets, we also have hundreds of local favorite menu items. They are designed to provide new experience for our customers, play on regional flavors and meet the taste and expectations of our fans right where they are.

Now whether it’s the McAloo Tikki burger in India, the McFalafel in Egypt or the Spicy McWings in China,yes, I am the lucky person who can say, "I have tried them all." So I also must say they are truly delicious. Now obviously, while these prominent favorites are critical to our brand’s local relevance, the heart of McDonald’s global appeal is our core menu. In 2022, this hugely popular core equities made up more than $75 billion in system-wide sales across the globe, which is nearly 65%.And our core menu has grown significantly over the past few years. We’ve added over $13 billion of additional system-wide sales since 2019 and are growing at about 7% per year.

Now what’s more? Our core menu has grown over twice as fast as the rest of our menu. And that is the power of these fan favorites. And one thing you will notice about the McDonald’s menu, we don’t just sell products. We sell brands. In fact, McDonald’s menu now features an incredible $17 billion brands, rivaling the world’s largest consumer companies. Now most of these billion-dollar brands are on our core menu, as you can imagine. This includes global brand items like the McMuffin, the McFlurry, Quarter Pounder with Cheese, Big Mac, Chicken McNuggets and of course, our world famous French Fries, just to name a few.

These brands have superior pricing power above any otherand because for our consumers, there is no comparable situation and no comparable substitute. This also means they drive greater profitability. And what’s more, our core menu items are significantly more efficient for our entire system that is from the start of our supply chain, all the way through the prep line for our crew.

And through our Accelerating the Arches strategy, we made a conscious commitment to our core menu to further elevate these billion-dollar equities and create even greater brand relevance for our customers. So we focused on our media investment, improved restaurant execution, enhanced quality and taste of our core favorites and got more nimble on innovation.

We’ve introduced new equities and line extensions to create added fun fact and to give our customers new reasons to revisit their favorites. These changes are clearly resonating with our customers. They’re driving significant increases in perception scores. And since 2019, more of our customers are now saying great tasting food and great quality food. And these are the two most important drivers of customer visits at McDonald’s.

And we continue to see even more potential with our core beef, chicken and coffee brands. In beef, we’ve maintained our market leadership over the past few years and grew our share of value of servings. But as usual, we are not resting on our past success. With initiatives like Best Burger, we’re making small changes that are adding up to big differences that our customers are really noticing. By the end of this year, we expect Best Burger to be in 70 markets across the globe. And by the end of 2026, we expect it to be deployed in nearly all of our markets.

In addition to Best Burger, we’ve also identified an unmet customer need with a significant opportunity to drive future growth in beef, and that is the large beef burger category. We’ve listened to our customers and we understand their desire for larger, high-quality burgers that fill you up and are delivered in a convenient and affordable way between the centralMcDonald’s way. And of course, we’re taking a One McDonald’s Way approach to this innovation. Our goal is to solve this problem once, test and learn in a few markets first and then quickly scale across the globe.

Now if that approach sounds familiar to you, it’s because we followed exactly the same playbook with the launch of our McCrispy Chicken Sandwich. It started as an unmet demand an unmet customer need for a globally consistent high-quality, large chicken sandwich and since then has quickly evolved to a $1 billion brand across more than 30 markets driving additional sales for us. And globally, the chicken category is nearly twice the size of beef and growing faster. And when we launched Accelerating the Arches in 2020, they were really intentional about putting chicken at the heart of our growth strategy. And since then, we’ve made tremendous progress in chicken. Chicken now represents $25 billion in annual system-wide sales, which is actually on par with our beef business.

Now with 4 chicken equities, that are billion-dollar brands in their own right, we have made impressive strides against our goal of developing a reputation for great chicken and that success is purely even higher ambitions. By the end of 2025, we plan to further expand our McCrispy equity to nearly all markets around the world. And we’ve also identified an opportunity to broaden our McCrispy offering into reps and tenders. And with these new offerings, we see the potential to add another point of chicken share by 2026.

You’ll hear more about this later in the rotation this afternoon. Now finally, we have continue to bring excitement to our sizable Chicken McNuggets business, a core equity with more than $10 billion in annual system-wide sales and the business that has also grown more than 10% annually since 2019. And thanks to a stronger core marketing focus, successful line extensions like Spicy McNuggets and of course, exciting sauces innovation.

So we’ve touched on our leadership in beef, we’ve highlighted our growing share in chicken, now let’s dive into the last of our core menu focus areas, which is coffee.

As you know, coffee is a very attractive category. It is large, highly profitable growing quickly and obviously, with strong habitual behavior. 30 years ago, we have launched McCafé in Melbourne, Australia. Since then, we’ve built a sizable coffee business and we now sell nearly 8 million cups of coffee per day. And that makes McDonald’s obviously the #2 coffee player globally.

Now while we’ve had success with our McCafé business across the globe, in markets like Australia, Canada, the UK and Middle East, we still haven’t realized our full global potential. And our customers already trust us to deliver hot, fresh and delicious food, and that trust grants us the opportunity to deliver exactly the same through McCafé.

However, over the last 30 years, our business has been highly fragmented in our coffee area. It has led us to create disparate solutions within each market. Now with our global footprint, leading breakfast share and strong value credentials, we can grow our coffee business by offering the promise of a delicious, high-quality coffee product at an affordable price delivered with the speed and consistency of McDonald’s.

And by leading with food and addressing known gaps in consistency across markets, we firmly believe we will create a winning formula that will set us up to accelerate coffee share moving forward. And we’ll do that by adopting a One McDonald’s Way approach for McCafé around the world more effectively using our scale advantages.

First and foremost, we’ll establish McCafé as part of our core menu offering, and as our only brand for coffee at McDonald’s. Next, we plan to address the inconsistency and availability experience and taste across the system by reducing the use of over 100 types of equipment for coffee to a smaller list of only 5 global suppliers. This will ensure gold standard execution around the world while still giving markets the flexibility to address local tastes and preferences.

And finally, of course, we’ll also address the growing space of cold coffee. We’re developing a plan on how to best adapt and execute against cold coffee beverages. And that plan will provide convenience value and high-quality test synonymous with McDonald’s to our customers across all markets across the globe. Now as you understand, while we’re giving our customers even more reasons to visit McDonald’s. We’re also going to make it easier for them to get their favorites.

Now to take us through the details of our third growth driver, the Ds in MCD, let me turn it over to President of McDonald’s USA, Joe Erlinger. Thank you.

Joe Erlinger

Thanks,Jo, and good morning, everyone. It’s my great pleasure to update you on the 3Ds of drive thru, delivery and digital that we introduced as part of the Accelerating the Arches in 2020. And then I’ll be joined later by Manu Steijaert, who will take you through our fourth D, development, that we introduced in early 2023 as an enhancement to that strategy.

Within our 4Ds, we’re taking the things our customers love about McDonald’s from convenience to value to personal connections with our brand and making them even better. That’s certainly the story in the U.S. Now I know you’re all quite familiar with our U.S. business, but I want to highlight why this segment is so well positioned to continue taking market share. Our strong performance over the past few years is the result of many strategic long-term decisions and not because of any one action we took during a 4-week marketing window or a single quarter.

Since the last time we met, we now have a fully modernized restaurant estate, a simplified menu that focuses on our core and a significantly larger digital and delivery business. We’re also continuing to focus on the fundamentals of delivering an outstanding and seamless customer and crew experience with a commitment to our world famous standards of excellence.

This past year, that excellence took another step forward with the U.S. launch of our global performance and customer excellence initiative known as operations pace. Operations pace the restaurant grading and performance consulting program. It’s designed to uphold McDonald’s standards and ensure that customers enjoy the best possible service every single day.

Since implementation, we’ve made significant operational enhancements and continue to see improved customer satisfaction scores. And we have room to do even better. We know there’s a strong correlation between high levels of operational performance and increased sales and guest count growth. In fact, there’s almost a 5-point gap in the top line performance between the restaurants at the highest and the lowest operation scores. I’ve worked in many places around the world and can tell you that every market has a similar gap to close. This is a big opportunity.

Beyond our work improving restaurant operations, we’ve also made updates to our franchising terms. While the franchising decisions were difficult ones, we believe we’re now going to be able to elevate performance and position ourselves for long-term growth with the industry’s best franchisees. All the individual changes we’ve made to the McDonald’s U.S. business are having a multiplier effect. In fact, we anticipate the U.S. business will surpass $50 billion in system-wide sales this year, growing more than 30% when compared to 2019. So that’s the big picture on the U.S. business.

Now let’s talk a little more closely at each of our 3Ds, starting with the first D, drive thru. McDonald’s invented the drive thru, and we’ve been refining it for the last 50 years,since we opened our very first one in Sierra Vista, Arizona. We know better than anyone what drive thru customers care about. We’ve been a first mover in locking down the best locations, the majority of which we own at very attractive prices. That gives us a long-term structural advantage, and we really saw that play out during the pandemic. Drive thru became a huge competitive advantage that could not be replicated quickly or at scale by anyone else.

We are, by far, the largest drive thru player in the world with more than 27,000 drive thru locations, providing unmatched scale and convenience. We see big opportunities to improve speed, capacity and order accuracy, all of which are highly correlated to guest count growth.

A significant lever for growth is improving the physical layout of the drive thru, which can increase both speed and capacity. In your basic drive thru lane, which I’m sure you all know, there’s one lane. The customer orders proceeds to the first window to pay and then picks up their food at the second window. It’s the classic layout, but it has multiple potential bottlenecks that can really slow us down. What we found is that we can reduce pain points by adding a second lane for order taking and a third window where we can park customers with more complicated orders.

In the U.S., over 70% of drive thrus have dual lanes, and many of those also have a third window. In our International Operated Markets segment, though, the number of restaurants with dual lanes and a third window is lower. even as we see more customers shifting to use drive thru in places like Western Europe.

So let’s take Germany as an example. In Germany today, just about 4% of our restaurants have a second drive thru lane. Over the next years, the market will expand this capability to more than half of their restaurant footprint. So not only do we believe that these enhancements can make the drive thru quicker and more efficient, we know that this will add more transactions. As our franchisees know well, Drive Thru enhancements are some of the highest returning capital investments that are available to them. And for Drive Thru to work best for customers, it also needs to work for our crew. And that’s where our Chief Restaurant Officers come in. These are new roles that we created as part of our accelerating the organization initiative. Our Chief Restaurant Officers are working through strategies to enhance staffing models that improve both speed and accuracy, while reducing complexity for our crew and increasing convenience for our customers.

While the Drive Thru will continue to be a competitive differentiator, we are also making it easier for customers to get their favorite McDonald’s orders from their couch or the office or even the soccer field, which brings me to our second D, Delivery.

At this very moment, there are approximately 55,000 McDelivery orders being prepared or on their way to customers around the world. At our last and personal investor update in 2017, we had a delivery presence in Asia, and we had just begun testing delivery in a couple of hundred restaurants in the U.S. At that point, delivery represented about $1 billion in annual global system-wide sales. Today, that figure has grown to more than $16 billion. McDonald’s is now #1 in QSR delivery orders around the world, and we continue to grow share faster than our competitors.

We are confident that we will continue to see share growth in delivery, because we believe we have structural advantages that none of our competitors can match. We think there is three of them to be specific: One, with over 40,000 locations and growing, we are closer to customers than any other brand, that allows us to deliver food to our customers faster, and faster also means hotter. Two, because of our industry-leading delivery volumes, we attract more drivers or couriers to our restaurants, which means better driver availability. And three, we have negotiated better rates with our third-party ordering providers. That means, we can offer lower prices when compared to products from our competitors.

Our U.S. market has set a new delivery sales record every year since 2017. That is a powerful example of the results that our structural advantages produce. Even as industry traffic in the U.S. was flat to negative in the first half of 2023, our delivery guest counts grew over 15%. And the next frontier for delivery is integrated delivery. That is a feature that allows customers to seamlessly order within the McDonald’s app, while enjoying all the benefits of our loyalty program. With integrated delivery orders, we are able to capture customer data within our digital ecosystem, enabling us to provide more personalized experiences. Today, this feature is available in five of our top markets, and we intend to expand to all other markets. And by 2027, we expect that 30% of our delivery orders will come through integrated delivery.

Our confidence in driving the growth of integrated delivery comes from our overwhelming success in driving digital adoption. It also comes from the many ways we are making the McDonald’s experience better and more convenient for our loyalty customers, which brings us directly to our third D, Digital.

As we have scaled our loyalty program, we have increased customer adoption of our global mobile app by delivering additional value to our customers. Over the last 3 years, our active loyalty user base has grown from millions to tens of millions of active users across our top 6 markets alone. But we’ve grown our loyalty program well beyond our top 6 markets, to more than 50 of our markets around the world. As you heard from Chris earlier, with 150 million active users across those markets, we now have the largest loyalty program in the restaurant industry and one of the largest in the world in any industry. This bears repeating in any industry.

In fact, our loyalty system wide sales have more than tripled in the last 3 years to over $20 billion. By keeping our customers at the heart of our digital strategy by delivering value, however and whenever they decide to order and enjoy their McDonald’s favorites, we expect to grow our active loyalty user base to 250 million by 2027. And by deepening our relationships with these customers, we’ll build further engagement and expect to more than double our annual loyalty sales to $45 billion.

Now historically, the number of our locations was our competitive advantage at McDonald’s. In the future, data will sit alongside restaurant locations has another significant competitive advantage. It will fuel a virtuous cycle of improvements to the customer experience. And as you heard from Jill earlier today, loyalty provides us with the data to serve customers in a personalized and uniquely McDonald’s Web.

Even as we’re just starting to build out our personalization capabilities, we’re already seeing loyalty customers in the U.S. visit with 15% greater frequency and in markets like the U.S. and Canada spend nearly twice as much on average as non-loyalty customers. Looking forward, we’ll continue to build a digital ecosystem and enhance our ability to more deeply connect with our customers throughout their McDonald’s journey from personalized offers to discovering our latest menu additions, from loyalty members access to exclusive swag to McDonald’s only gamified experiences or exclusive media content. And of course, as a restaurant business, delivering fast, accurate, hot and delicious food will sit at the heart of every experience.

Of all our ordering channels, mobile ordering is the fastest growing with our customers. We saw hundreds of millions of mobile orders in the third quarter of this year. And to that objective, earlier this year, we launched Ready On Arrival or ROA in the United States. ROA integrates geofencing technology into our mobile app.

Geofencing notifies the restaurant when customers are approaching and prompts the crew to start preparing the order. It allows for more efficient and effective restaurant operations, getting our customers the food they love while reducing customer wait times. In fact, we’ve seen a 62nd reduction in wait times for customers that pick up via curbside or in the restaurant. As a result of delivering hotter, fresher food to our customers, we’ve seen significantly higher customer satisfaction score in these transactions which we know in turn drives frequency.

As we deploy ROA technology across our top 6 markets over the next 18 months, we expect continued growth of mobile ordering will drive loyalty adoption and order frequency and help deliver on the loyalty growth ambition I spoke about just moments ago. So I can sum up why we are so confident with just a few simple words, drive thru, delivery and digital.

And now to talk about that fourth D,development, let me turn it over to Global Chief Customer Officer, Manu Steijaert. Thank you.

Manu Steijaert

Thanks, Joe. As the Global Chief Customer Officer, I’m responsible for how we optimize the customer experience across both the physical and digital worlds. This is a responsibility that is near and dear to my heart because my McDonald’s story began in 1978, and my parents became franchisees in Belgium. And at the age of 16, I worked in the restaurants as a crew member.

I joined the company in 2001, also in Belgium, and have held several roles across the Netherlands, France and our International Operated Markets segment. And whether working at my parent’s restaurants or in corporate roles, the same rule applies. There is only one way to grow our business sustainably, and that is customer by customer. And no matter how the customer chooses to order our ability to serve them with the convenience they expect relies on our physical locations.

The 3D that Joe outlined have been central to bringing in more customers more often. So much so that demand is outpacing the capacity of our existing restaurants. And that’s what makes me so excited to talk about our fourth D development. So over the last decade, McDonald’s has added about 5,000 restaurants system-wide, and that’s an impressive number. But as you start to look closer, you’ll see that many of our new units we’re in markets like China and Brazil. We focused on building new units in our IDL markets, while modernizing our existing units in oil markets across the U.S. and IOM.

And it actually enabled us to enhance customer experience, improve our speed of service and grow average unit volumes significantly. Now we’ve learned over the years that it’s best to grow our footprint from a position of strength. And I think you’d all agree, our strong performance, our fully modernized estates. We’ve actually earned us the right to expand our footprint in the U.S. and IOM in a way we’ve never had before. And at the same time, there remains a significant opportunity in our IDL segment, which we will continue to work with our partners to expand in those markets as well.

Now with our current size and scale, some in this room might be questioning whether there is truly more space to grow. And I’m here to tell you, we see an incredible opportunity to grow the business by building more locations, getting us even closer to our customers. So over the past year, we’ve been on a journey to evaluate the opportunity. And we have taken a market level, rigorous and data driven approach to power our entire development strategy in the U.S. and IOM. So we’re assessing the landscape from the top-down and the bottom-up complementing high-level population forecasting with a hyper local understanding of customer demand and access to world class tools and data.

So for example, in our U.S. market, our store counts have grown much slower than the population in the fastest growing areas of the country. We do have a significant opportunity to right-size our ratio. And you’ll hear and see a lot more about this work and where we see our greatest opportunities in our development rotation a bit later.

So what does this all translate to? Today, we have over 40,000 restaurants across the globe. Over the past four years, we’ve added nearly $30 billion in system-wide sales to that same footprint. And by the end of 2027, we will expand our footprint to 50,000 McDonald’s restaurants across the world. That will drive growth in system-wide sales with strong contributions to the bottom line as we open more restaurants across the U.S. and IOM.

To put our development ambition into perspective, this period of restaurant expansion will be the fastest growth in the history of McDonald’s. So let me walk you through the numbers for context.

It actually took us 33 years to reach our first 10,000 restaurants. It took us eight years to reach 20,000 restaurants. It took us seven years to reach 30,000 restaurants, but we actually reached 40,000 restaurants after 18 years in 2021. By the end of 2027, four years from now, we expect to reach 50,000 restaurants. And I’d even give more details on our development targets a little later, but hopefully, you can feel the confidence we have in McDonald’s development potential over the next four years and beyond.

And moving forward, across the 4Ds, we will use our size and scale for the greatest impact. That’s the power of the McDonald’s system, and it’s critical to driving future growth. But of course, for customers, how we grow is as important as where we grow.

So here to talk about the work we’re doing around the world to advance sustainability and build brand trust is our Global Chief Impact Officer, Jon Banner

Jon Banner

Thanks, Manu, and good morning, everyone. In my role, I have the privilege of guiding how communications, sustainability, government relations, public policy and Ronald McDonald House Charities come together to support responsible and sustainable business growth.

When accelerating the Arches was launched in 2020, we said there were two powerful truths coming into focus. The first was that the needs of our increasingly digital consumers were changing. The second was that people were expecting more from corporations today and that customers were more likely to choose brands that were a force for good in the world. As Chris said then, none of us have the luxury of sitting on the sidelines anymore. That changing expectation meant embracing a bigger, more holistic vision, one that put our values and purpose to feed and foster community at the very center of our growth strategy.

Three years later, as our communities and supply chains continue to experience unprecedented pressures, our values and purpose have been essential to our work to grow sustainably, drive trust and maintain our position of strength. And our customers have noticed, our brand trust score, which is the measure of whether customers can count on us to do what we say has risen. And that is an invitation to build on our progress.

Together with our system partners, we’re focused on growing more responsibly and more sustainably. We are investing in environmental and social actions that improve the long-term resiliency of our supply chains and restaurant operations. Our actions are guided by our updated net zero target. That target was recently validated by the science-based target initiative. Let me now share a few examples of environmental actions we’re taking to safeguard our business.

The first centers around our work to tackle climate change and transform our food system. For decades, we’ve been industry leaders in sustainable sourcing and promoting sustainable agriculture, and we continue to lead through action and advocacy as the global landscape evolves. After all, our core menu and the strength of it depends on. To protect and enhance critical supply chains, we are working with suppliers, farmers and scientific advisers to implement regenerative agriculture practices. In tandem through our work with the sustainable markets initiative, we are developing a financial blueprint for farmers to derisk the financial burden as they transition to regenerative farming.

Trials to implement this blueprint will soon begin in the U.K. in partnership with one of our suppliers, McCain Foods. To further this work, we’re using our influence to advocate for frameworks that support farming and ranching communities ongoing efforts to sequester carbon. Undoubtedly, the transformation of our food system depends on collaboration. Here in the U.S., one way that comes to life, it’s through our work with cargo, the Walmart Foundation and the World Wildlife Fund. Together, we are supporting cattle ranchers across the Northern great Plains in their efforts to embrace regenerative agriculture.

Through technical expertise, training and tools, this program is making an impact across 80 branches and about 800,000 acres of grass lands. Secondly, we’re increasing access to and the use of renewable energy around the world. Since 2019, McDonald’s has signed 14 virtual power purchase agreements in the U.S. We’ve added new large-scale renewable energy to the grid that builds on significant sourcing efforts in our European markets.

Additionally, we’re building prototypes to embed energy-efficient equipment and sustainable materials into our design features. In fact, our newest design restaurant design is focused on overall decor circularity. It will debut later this month in France. And through what we hope to learn how to get more responsible materials into more restaurants faster and more affordably over time.

Lastly, we’ve been highly focused on sustainable packaging solutions for years. Today, more than 80% of our primary guest packaging comes from renewable recycled or certified sustainable sources. In regions such as Europe, that reaches close to 95%. Our ambition is that the packaging materials we use remain part of the circular economy rather than becoming waste. We are working on this in a variety of ways across the business.

Poland is a recent success story. There, we’ve had a two-year campaign to increase recycling in our restaurants, and it’s produced incredible results. It’s making customers more willing to segregate their trash while building awareness for ways we care about the environment. Let me bring this to life by sharing a video from Poland’s campaign, and it will include subtitles for clarity.

[Audio/Video Presentation]

You’ve heard a lot today about the power of our brand. We can even make circularity fun. By aligning our long-term business strategy and impact strategies, we are ensuring that our business and our partners have the resilience not just to survive, but to thrive in the face of change over the decades to come. We will continue to bring greater visibility, sustainability and accountability across everything we do. Ultimately, McDonald’s will be remembered not just from whether we grew, but for how we grew and how we served.

I’d like to now hand it off to our Global Chief Information Officer, Brian Rice, who will discuss our technology strategy, another area that touches every part of our business.

Brian Rice

Thanks, Jon, and good morning. You’ve heard a lot today about the impact technology will have on every aspect of our business moving forward. It’s extremely exciting. But the reality is somebody actually has to build it, and that’s me and my organization. This is my third CIO role, and I’m often asked to compare my experience as CIO at McDonald’s to other companies where I’ve worked. The thing that has stood out to me the most is our scale.

The combination of the power of our brand, our expansive global footprint and our customer reach uniquely positions us for many things. I believe one of those things is our ability to leverage our scale to drive significant value through technology, much more than any of our competitors are able. And while Accelerating the Arches is working we’re not yet leveraging the full potential of technology nor are we leveraging the full potential of our scale, at least not yet, but soon we will.

McDonald’s significant global expansion over the years was fueled by a decentralized model. As we grew our technology became more fragmented. And as a result, our current landscape is very complex. We have an inconsistent digital experience in hundreds of different systems to manage. But as the world changes, we know how important it is to more quickly anticipate our customer needs and expectations. By priding ourselves and meeting our customers where they are, even before they get there, we will continue to be a leader in the industry.

You heard Chris share earlier that McDonald’s is building three new platforms, one for customers, one for restaurants and one for the Company. Together, these platforms will enable us to execute against our MCDs in a world that is increasingly digital. So what does the future of technology look like for McDonald’s? And how is technology supporting the ambitions that we’ve outlined today.

Central to our strategy is marrying our greatest strength, our scale to the power of technology to unlock speed and efficiency and power these three new platforms. We are calling this strategy, Digitizing the Arches. What will Digitizing the Arches mean for our customers? To deliver at the speed that our customers expect, we must address key technology challenges, including a fragmented digital experience.

To do that, as part of Digitizing the Arches we are advancing what is already one of the largest consumer platforms in the world. This will be a consistent platform to engage our fans from our mobile app to our loyalty program to web-based ordering to our kiosk and beyond. With a consistent approach, we will be able to deploy innovations with much greater speed and agility.

Let’s take Ready On Arrival as an example of proven technology innovation that Joe mentioned earlier. The reason it will take several months to deploy this to our top six markets as a result of the different market versions of our technology. If we had a consistent digital experience in place today, we would be able to make a single version of Ready On Arrival available to all markets at the same time. This is an example of leveraging our scale. What’s more? This solution will enable us to provide customers with a more reliable and familiar experience regardless of where they go or how they order.

Today, we have different versions of our mobile app within each of our large markets that can’t be used across borders. In the future, customers will no longer have to download a new app if they’re traveling between countries, safe from France to the U.K. And this afternoon, Morgan will share more about how technology will enable our consumer platform, unlocking even more possibilities to grow our business.

Customer expectations of brands continue to evolve in both the digital and physical worlds, and that also impacts how we run restaurants. Today, our restaurant infrastructure is out of sync with our digital future, which can contribute to reliability and stability issues. As part of Digitizing the Arches, we are announcing today a significant partnership with Google to build the most sophisticated and productive restaurant technology platform in the industry. This will equip restaurant teams with advanced technology to deliver amazing hospitality to customers.

As part of the partnership, we will extend Google’s cloud through edge computing into our restaurants in over 100 markets around the world. This is a pioneering initiative that will not only improve stability and help us bring innovation to our restaurants more quickly, but it will enable several important new use cases.

For example as part of our restaurant platform we are developing a new connected restaurant capability that Internet of Things-enabled restaurant equipment will plug into. Think of it as a data highway for our restaurants. This new capability will provide end-to-end visibility of how each of our restaurants are performing, which will unlock cost savings opportunities, improve food quality and enhance our customer and crew experience. and it’s also expected to increase restaurant uptime.

Extending the cloud into our restaurants will also accelerate the use of generative AI into our restaurants. As you may know, McDonald’s has been an early adopter and pioneer in the use of AI. For example, voice ordering is deployed in nearly 100 drive-throughs across the U.S. Through our pilot, we have now tuned the models to provide a high degree of order accuracy, which is driving benefits, including a more consistent customer experience and reducing complexity for our crew.

As we continue to gather learnings from our pilot restaurants, we expect to make a decision on the expansion opportunity by the end of 2024. But we’ve only just gotten started. We believe Gen AI offers another opportunity for McDonald’s to build structural competitive advantage by leveraging our scale. The more data you feed Gen AI models, the better they become. And with a larger scale, Gen AI is exposed to more diverse information, and this diversity allows models to understand a broader range of patterns and nuances, enabling them to make more informed decisions. our scale, again, gives us a unique advantage.

We are very excited about the future of Gen AI and we have several other interesting use cases in process already. and Manu will talk in more detail this afternoon about the benefits that our new restaurant operations platform will unlock for our restaurant teams in serving our customers.

Lastly, the third platform within Digitizing the Arches is our company platform. This platform will enable our global business services vision of transforming how we work as a company and franchise including modernizing technologies at all levels of the organization, and Sky will share more on that vision this afternoon as well.

At our core, our business is about making delicious feel-good moments easy for everyone. So big picture, our ambition through Digitizing the Arches is to create the systems and tools that enable our consumer restaurant and company platforms and make it easier for restaurant teams, franchisees and supplier partners to deliver the McDonald’s experience to customers.

Let me now hand it over to our CFO, Ian Borden, who will bring all of this together from a financial perspective. Ian?

Ian Borden

Thanks, Brian, and good morning, everyone. As many of you know, I stepped into the CFO role a little over a year ago after nearly 30 years with the Company, including 25 years of living and working around the world in market segment and international leadership roles.

And through those 30 years, and in particular in my last role as the President of our International business, I’ve witnessed firsthand how powerful it can be when we combine the scale of the McDonald’s system with a clear strategic plan and a laser focus on exceptional execution.

I had the privilege of overseeing the implementation of our Accelerating the Arches strategy in all of our markets outside of the U.S. And I’m proud to say that I’ve never witnessed more alignment across our system on a common vision.

I’m excited and fully confident about the next -- what’s next and the growth opportunities that lie ahead across our M, C and Ds, the details of which you’ve heard from others this morning. Well, there’s a lot to be proud of as we look at our results over the last few years, it takes visionary leadership to further elevate performance from a position of strength.

So now I’ll take you through how we’re continuing to invest in our business to drive long-term sustainable growth. But before I get there, let me take a minute to ground us. Over the past decade, we’ve evolved our business model significantly, growing from about 80% franchised in 2013 to about 95% franchised today.

We’ve structured our business in a way that enables us to allocate the majority of our time and resources to the areas of the business with the greatest stability, returns and opportunity for growth. That has resulted in a more durable business model that yields a consistently strong and growing TSR algorithm.

Over the past few years, our business has grown significantly despite the challenging operating environment and our decision to exit Russia. It’s actually quite remarkable when you step back and take a look at the numbers. As you heard Chris mention earlier today, by the end of this year, our system-wide sales will have grown $30 billion since 2019.

Total margin dollars have grown significantly during that time with roughly 90% of our restaurant margin dollars now coming through our franchise margins. And we’ve strengthened the efficiency of our operating business and grown our operating margin percent from just over 43% in 2019 to about 47% in 2023. Through all of this, we provided significant shareholder value by delivering consistently strong shareholder return.

We expect that our cash return to shareholders from the end of 2019 through 2023 will be $25 billion through the combination of dividends and share repurchase despite pausing our share repurchase program during COVID.

Looking at our results over the past few years, it’s clear that our Accelerating the Arches strategy has delivered exceptional results. And as you’ve heard from other members of the team this morning, we are confident that this is the right playbook for our business looking forward.

We believe our competitive strengths across the Ms, Cs and Ds and our ability to continue to identify new platforms for growth, put us in the best possible position to maximize the opportunities in our strategic plan for years to come.

In addition to having a clear strategic vision and consistent execution, another factor critical to driving long-term success is our ability to make the right forward-looking investments. To that end, I want to address three critical areas of investment with you today and discuss how they translate into our financial outlook for the next few years.

These three areas are new restaurant openings, technology and digital and our global business services organization and capabilities. As you heard from Manu earlier this morning, we expect new unit development to be a more meaningful driver of growth moving forward. That’s why we’ve added it as our fourth D within the Accelerating the Arches strategy.

Over the next -- last several years, we have invested the majority of our capital to fully modernize our asset base across our own markets including nearly $10 billion of system investment to modernize our restaurants in the U.S. This fully modernized estate has created additional demand within our restaurants. It has contributed to significant growth in average sales volume, and it will continue to be a structural advantage for us moving forward.

With that now behind us and with the current strength of our business, we believe we’re in a unique position to accelerate new unit openings. Manu mentioned that we anticipate growing our total restaurant footprint to 50,000 restaurants by 2027. That equates to accelerating our pace of openings to just over 4% unit growth in 2024 and further ramping up to about 5% by 2027.

This will include opening significantly more restaurants in our own markets, all of which will be at a royalty rate of 5% and against which we will allocate more of our capital. This will drive greater top line growth and overall financial contribution throughout our P&L and will create a compelling value proposition, both for our franchisees and for the Company in the U.S. and IOM.

Let me break down how we expect to reach 50,000 restaurants by segment. By the end of 2027, we plan to open about 900 restaurants in the U.S. and about 1,900 restaurants across our IOM markets. This will achieve a 2027 run rate of about 1,000 gross openings per year in the U.S. and IOM combined. We expect capital expenditures to gradually increase over time with slightly higher investment in 2024 when compared to 2023.

Beyond ‘24, we expect annual increases in capital expenditures of about $300 million to $500 million until we achieve our 2027 run rate, with more of our capital being allocated to new restaurants each year as we move forward.

We expect our developmental licensees will also continue to contribute significantly to our overall growth aspirations. We’ll open about 7,000 new restaurants in IDL by 2027 with over half of these planned openings in China. And our recent announcement to acquire Carlyle’s 28% stake in McDonald’s China enables McDonald’s to further benefit from the long-term growth potential in our second largest and fastest-growing market.

The 50,000 restaurant target results in higher system-wide sales contribution from expansion with a slight uptick in 2024 to nearly 2% and beyond 2024 at about 2.5% growth. Beyond development, we’ll continue to look to invest in areas that deliver against customer needs as well as unlock efficiencies and capabilities for our people and our resources.

It’s clear that we have the financial strength as a system to be able to make these investments and also continue to generate substantial free cash flow. For example, investments in technology and digital, as Brian just discussed, will create a consistent experience across the globe for both customers and crew improving stability, efficiency and unlocking capability.

And Global Business Services, or GBS, will enable us to scale solutions with speed and agility as we unlock further capabilities for our people and resources. With time, we’ll run the business more efficiently by modernizing our systems and tools. We will build richer and more agile data and insight capabilities to make our teams more effective. And ultimately, we will free up resources to invest in the growth areas that the team walked you through this morning. You’ll hear more about GBS this afternoon from Sky Anderson.

As I’ve mentioned before, our strong underlying business momentum and overall financial strength in the ideal position to invest in areas that will drive long-term efficiencies for our people and for our stakeholders. Similar to 2023, we expect 2024 G&A as a percentage of system-wide sales to be about 2.2%, which includes our investments in technology, digital and GBS. We ultimately measure our financial efficiency by our operating margin as it serves as the most comprehensive gauge of our overall operating performance and we will continue to focus on driving efficiencies over the longer term.

As I mentioned earlier, we’ve made great progress in creating leverage in our adjusted operating margin over the past few years. and expect our 2024 operating margin to be in the mid- to high 40% range. Beyond ‘24, we expect our progress in driving growth and creating leverage to continue with greater operating margin expansion.

We believe that the combination of the investments we’re making across our efforts to Digitize the Arches as well as expanding our restaurant footprint will lay the foundation for our future success.

Turning to the balance sheet and capital allocation. I want to reiterate that our overall position of financial strength that is the result of our strong discipline in capital allocation. As we ramp up new unit acceleration and the corresponding investment required, we expect free cash flow dollars to continue to grow sequentially each year with strong free cash flow conversion in the 90% range.

We believe our strong investment credit grade rating is the right one for our business. And over time, we expect to maintain our current debt levels and our capital allocation priorities remain the same.

First, investing in the business to drive growth, this includes both capital expenditures as well as the investments in technology, digital and GBS that I spoke about; second, returning all remaining free cash flow through dividends and share buybacks over time. I’m confident that the plans that we have in place will continue to drive strong financial outcomes for our entire system and our shareholders.

And with that, we’ll thank everyone who has been joining us virtually today. And we’ll pause the live stream coverage. We’ll pick up with all of you virtually at about 1:30 Central Time this afternoon.

[Break]

Chris Kempczinski

All right. Welcome back, everybody. Food coma setting in yet. Anybody? Well, listen, welcome back. As I said in my opening, we believe there’s still significant runway in our Accelerating the Arches strategy. Hopefully, you see the noteworthy opportunities for near-term growth after hearing from the leadership team and walking through each of our rotations.

As we look to the future, we’re thinking about the proper long-term ambitions for this business, and we’re setting our ambitions even higher, just as our founder, Ray Kroc did and as we continue to do ever since. When asked about the future of McDonald’s in 1970, Ray said, "I don’t know what we’ll be selling in the year 2000, but I know that we’ll be selling more of it than anybody else." He was right.

And his words ring true even beyond our menu. Just think, 50 years ago, when we introduced the concept to drive through, who would have imagined that we have more drive-throughs than anyone else in the world or that today, our drive-through would continue to be a competitive advantage for us. Six years ago, we decided to scale delivery globally, and we are now the largest delivery player in the QSR and have the largest delivery business in the world. Three years ago, we began the expansion of loyalty globally, and we now have the largest loyalty program in the industry.

This ability to identify white space, quickly innovate and then implement and adopt new ways to delight our customers and grow the business at unmatched scale is inherently McDonald’s. And when you think about this in the context of our current position, there really is no limit to what we can achieve. Today, our MCD growth pillars have put us in an advantageous position. With the power and relevancy of our marketing strength of our core menu equities and the reach of our digital delivery and drive-through, we have, without a doubt, built the foundation for one of the largest consumer platforms globally.

So just imagine, if alongside this, we can unlock even greater productivity in our restaurants, improve experiences for our customers and crew alike, drive efficiencies and accelerate our speed to market, all of which will widen our competitive moat. That’s exactly what I challenged my senior leadership team and myself to uncover how can we continuously build upon our MCD growth pillars? And how do we use this dynamic foundation to further the reach and power of our brand and show up for our customers in new and powerful ways.

Now to talk more about this vision, I’ll turn things over to Morgan, Manu and Sky. Morgan will tell you more about how we’re building one of the largest consumer platforms and offer some examples of how that might play out at McDonald’s in the future. Manu will detail what it means to have the easiest and most efficient restaurant operations platform and how we think it can unlock more productivity in our restaurants and improve the experience for our crew. And Sky will detail the modern company platform we’re building for McDonald’s that will drive efficiencies and accelerate our speed to market.

Over now to our Chief Global Marketing Officer and Head of New Business Ventures, Morgan Flatley. Morgan?

Morgan Flatley

Thanks, Chris. So today, you all have heard us talk about our ambition to build one of the largest consumer platforms in the world. You all might be wondering exactly what this means. I’m going to bring to life what this could look like and how it will strengthen our business. Now throughout the morning, you heard from my colleagues about the competitive advantages of three distinct parts of McDonald’s, our brand, our physical presence and our digital ecosystem.

Now each one of these is world-class in its own, but together, at the intersection of all three they create a consumer engine that we believe is unmatched across industries. First, as Jill shared earlier, our brand is one of the most loved and recognized brands in the world. In the Kantar Brands 2023 rankings of the most valuable global brands, McDonald’s rose to the number five spot behind Apple, Google and Amazon and Microsoft.

Put another way, McDonald’s is the most valuable non-tech brand in the world. And it’s no longer just us talking about McDonald’s. Our fans are recreating the brand they love on their own every single day. Whether it’s the excitement they feel when the phenomenon of the McRib returns to the restaurants or fans on TikTok turning the Grimace shake into a murder mystery that generates over 3 billion hits, the fandom for McDonald’s is unmatched.

We also have leading physical advantages in over 100 markets across the world. In our largest markets, roughly 80% of the population visits us at least once a year. And most lives just minutes away. As we’ve shared throughout the day, we’re accelerating development to get even closer to our customers. When we combine the fandom of our brand alongside the number of locations, it’s easy to understand how our restaurants are at the heart of the communities we serve.

There are places where we have the power to bring people together to create experiences and shared memories. Whether that’s enjoying a favorite menu item with friends or delighting in the go-to McDonald’s order of a superstar, we offer moments of joy and escape for our fans. After all, what other company in the world has the physical presence with the strength of our brand and our fans.

As Joe mentioned earlier today, we’re also building a presence in our customers’ digital lives with over 150 million loyalty users that have been active in the last 90 days. But our digital ambition doesn’t end here. The size of our total loyalty base is 250 million. This includes those who have been active at least once in the last 12 months. This makes us the largest loyalty or subscription program in the world.

What’s also interesting is only a few of these brands like Nike and Disney are true consumer brands that drive engagement and fandom. We believe the passion our customers have for our brand is a differentiator as we continue to grow our loyalty program. Now when we look at our strengths across brand, physical presence in digital, it’s clear that the power of our competitive advantages go well beyond QSR. We’re playing in the same space as the world’s largest brands across all industries.

Our position is one of the leading consumer-facing companies in the world unlocks possibilities not only to bring more customers more often for their favorite meal but to engage customers in a McDonald’s universe that offers unique experiences, build tandem and gross frequency. Take, for example, our loyalty program, which as you heard, we are enhancing, in addition to earning and using points for food, imagine if we offered limited time subscriptions to music or video streaming apps, exclusive merch to create a McDonald’s themed birthday party or first access to limited edition sauces, that would bring in even more customers more often.

Now imagine if we leverage data and insights from those customers to further deepen our engagement with them. Today, we have over $20 billion in annual systemwide sales from loyalty customers. This means we know their go-to order, when they like to visit, what they buy full margin and the offers that trigger additional visits. Think of the possibilities when we grow loyalty system-wide sales to $45 billion or if we grow even further to $65 billion and the possibility when millions of loyalty customers are purchasing their quarter pounders with cheese through a digital wallet that is linked to loyalty and stored value.

This would enable customers to seamlessly pay with points in cash and transfer loyalty points between family and friends, further deepening their engagement with McDonald’s. Not only we’ll be able to provide more personalized and convenient experiences that drive frequency, but we’d also be able to future-proof our marketing approach. We all know that a cookie less marketing world is fast approaching.

In this new world, we believe we are better equipped to reach our millions of customers through the multiple channels we own. We can feature the food they prefer and nudge them at the right time to place an order or add an additional item. And when we connect our first-party data to our paid media ecosystem, we can reach customers with the right message and the right offer at the right moment, creating much, much greater impact. This is a tremendous competitive advantage that will increase the power of the billions of dollars we invest in paid media.

Now beyond deepening how we’ll personalize the experience with our customers, we’re also exploring what it could look like to leverage our massive customer engine to build our brand and equities across our restaurant estate and our digital channels in compelling new ways that will also grow the business. As we look towards the future, we continue to visualize different ways to deepen our engagement with customers, and I’ll tell you the possibilities are endless. Let me give you a quick peek behind the curtain with some hypothetical examples of where and how we can play.

Now one thing most people don’t know is that McDonald’s is one of the largest book in toy distributors, thanks to our Happy Meal program. Imagine if we leverage the strength of our Happy Meal brand equity to commission a book series, that engages and inspires children who the beloved happy meal promotions. We could use our physical restaurant estate to talk about the books that we can use our digital channels to distribute podcasts or audio versions of the books.

We could even develop the characters from the books into programming that reaches millions of families via our app or Think again about the star of the biggest fan-created social media phenomenon earlier this year, Grimes. We’re not used to letting our brand be crowd-sourced. But when we let consumers come in play, it goes viral. Just imagine, if we were to create a murder mystery series around Grimace. We could use screens in our restaurants to tease the series and hold sneak peek preview launch events.

The invite customers into our restaurants and locations for Grimes Shake, we could even invite Grimace fans to submit stories each month via the app with the best ones getting featured and published while earning rewards. Think about the level of engagement and sticky behavior we can bring to our business or take one of the most iconic moments in sports, the FIFA World Cup Final. In 2022, it was the most viewed sporting event ever with a global audience of 1.5 billion viewers. Let’s take a quick look.

[Audio/Video Presentation]

Morgan Flatley

As we saw in the video, McDonald’s has a long history with the World Cup. We’ve been a partner since the tournament first came to the U.S. in 1994. In 2026, the tournament returns to North America. With just over 1/3 of our global restaurants located in the three host countries, imagine if we supercharge this cultural phenomenon like never before. We could turn 104 matches into 104 exclusive loyalty member viewing parties and restaurants to delight fans, or 104 moments to enjoy MIC delivery around the world, or 104 opportunities for fans to engage each other and digital soccer matches on our app to earn loyalty points.

Then imagine if we could offer our fans the opportunity to redeem those points for a once-in-a-lifetime experience to see their heroes compete in the world’s most coveted price. We could also integrate our Wanna Go to McDonald’s World Cup platform into our loyalty program and serve up personalized offers based on when your team is playing, the score of the match and your favorite item. A tough loss could be softened by constellation fries gifted by a friend or a gloating rival delivered through a digital wallet.

McDonald’s is part of the culture today in a way that few others can match, and that’s just the starting point for where we’re going next, just the largest restaurant company in the world, but when we’re the largest global omnichannel retailer that combines the power of our brand, our physical footprint and our digital ecosystem to unlock the power of a world-class consumer platform.

So we’re truly at the start of something new, not just for McDonald’s, but for our fans everywhere, and we’re really looking forward to the journey. Key to providing the experience our customers expect from one of the largest consumer platforms in the world is setting up our restaurant teams to deliver exceptional service.

Here to talk more’s that about, I would like to once again welcome Manu Steijaert.

Manu Steijaert

Thanks, Morgan. As you’ve heard throughout today, we are confident in our plans to build more integrated and personalized customer journeys. Now I know firsthand from working in our restaurants that the experience you have as a crew member impacts the experience that we deliver to our customers.

At the heart of the McDonald’s system is the restaurant and the heartbeat of every restaurant is our crew. Today, more than 2 million people work in McDonald’s restaurants around the world. And I’m excited to talk about the opportunity we see to build the most sophisticated and productive restaurant operations platform.

It’s one that builds on our heritage of operational excellence. One that leverages the latest technologies to empower our crew to deliver on our time’s evolving expectations. Because when we are at our best, our restaurants are fully staffed. Our crew properly trained. Every piece of equipment is fully operational, and our supply chain has delivered the right food and packaging to meet our customers every need.

When we are at our best, we are happy and productive. And our customers are delighted by the experience we provide 65 million times a day, experience where hub-delicious food is served fast and accurate every time by a crew who always demonstrates world-class hospitality.

In other words, and as Chris has said, when we created the McDonald’s customer experience function, a customer shouldn’t see our org chart reflected in their experience. Now reality is that complexity has peaked for our crew and restaurant manager. As we’ve grown our business and added ways for our customers to order and receive their favorite food, the crew experience has gotten harder. And this complexity is not a consequence of the size of the menu, but it’s driven by the new omnichannel reality, which is actually here to stay.

When I worked in the restaurants in the 1980s, there were actually two options to order: drive-through and front counter. Today, those two channels have expanded into 12 different ways customers to order and enjoy their favorite McDonald’s food. And in the omnichannel reality we live in today, the single biggest driver of competitive advantage is the customer experience.

As we look ahead, our Chief Restaurant Officer and I have been asking ourselves that question, how can we support our restaurant crew and teams to achieve our objectives, and we believe that new technologies, including Gen AI, automation, voice ordering, computer, predictive analytics and the Internet of Things all offer the potential for the future of restaurant operations at McDonald’s.

Now some of these technologies are already in use in our restaurants today. So for example, over 19,000 restaurants around the world are using a system called e-production, which uses predictive analytics to provide forecasts to crew on what they need to cook when based on expected demand. And this system leads to hotter and fresher food being delivered to our customers while reducing complexity for our crew.

Additionally, in some of our largest IOM markets, we deploy scales that use AI technology to help, to confirm the accuracy of delivery orders before they leave our restaurants. This also results in a better customer and courier experience. I was just getting started. Digitizing the arches that Brian announced this morning will provide restaurants with a stable and consistent platform which all these systems and even more sophisticated technologies can run. And it would also future-proof our restaurants with the ability to integrate robotics when there’s a compelling business.

And by levering Internet of things at the restaurant level, we will be able to fully connect our supply chain ecosystem to create real-time visibility into product-level inventory data. This insight will allow us to remain agile, reduce waste and decrease complexity, adopting these technologies at scale, alongside our operations, DNA and commitment to continuous improvement can revolutionalize how restaurant teams deliver unique and personalized experience to our customers while delivering a better experience for our crew.

It’s really exciting to imagine all of the possibilities, a world where more of our loyalty customers use mobile to pay to order before reaching the restaurant, or a world where we’re already on arrival technology, Joe mentioned, gives the right information to the right person in the restaurant at the right time to deliver food faster, hotter and in a more personalized way. A world where restaurant managers can get text alerts on their phones based on real-time data from the fryer for preventive maintenance, repairs before the equipment breaks down.

A world where kitchen systems automatically optimized product routing based on order size, crew availability and also double check for accuracy. A world where sales planning, inventory, scheduling systems are integrated fully automated to give managers and restaurant teams more time to focus on customers instead of administrative tasks. And a world where being able to ask an app on their phones how can I improve drive-through order accuracy the Edelen shower with gen AI offering actionable suggestions based on real-time data.

So much of our systems may seem like it’s years away, but we’ve actually seen what is possible from our teams in China. And here to tell you more is our Managing Director of China, Phyllis Cheung.

Phyllis, over to you.

Phyllis Cheung

Thanks, Manu, and hello, everyone. McDonald’s China has grown rapidly. By the end of this year, there will be nearly 6,000 restaurants throughout China, which is on track to meet our goal of 10,000 restaurants by 2028.

While we pride ourselves in this incredible progress, the reality is as we grow, we can run restaurant even more efficiently, enhance productivity and improve the crew experience. In doing so, McDonald’s China deployed restaurant general manager, business operating service system or better known as RGM Boss across all restaurants.

Our restaurant General Manager, Apple, will show you how it works.

[Audio/Video Presentation]

Phyllis Cheung

Thanks, Apple, we are proud to say that RGM Boss has improved overall restaurant efficiency with 30 basis point margin improvement, and over 95% of our restaurant management team said the job experience has become more enjoyable because of it. It’s simply remarkable to imagine all the possibilities that are for us in the future. And I think these are just a few AI-enabled solutions that benefit our crew today.

Now I will turn it back to you, Manu.

Manu Steijaert

Thanks so much, Phyllis. It’s actually inspiring to see the impact of that program, and it represents just some of the innovation happening across the enterprise that we’ll continue to explore. And as we’ve often said, the future of McDonald’s is always happening somewhere in our system. We just need to find it and scale it.

And we can use our scale and leadership role in the industry to accelerate automation efforts by equipment manufacturers and expected pace of automation in our restaurant drinks. Let me now hand it over to Skye Anderson, who will take you through our company platform and how we are building modern systems and tools that will actually enable our people to unlock speed innovation.

Skye Anderson

Thank you, Manu, and good afternoon, everyone. I’m Sky Anderson, President of the newest segment of the business, which is Global Business Services, or GBS, as we’re more commonly known. This is my 23rd year at McDonald’s. In 2000, I celebrated the new Millennium by joining Donald’s as a corporate accountant in my home country of Australia. And it’s been quite the ride ever since.

I’ve seen a lot in my roles in Australia, the U.S. and now part of the global team. Throughout my McDonald’s tenure, I’ve developed a deep understanding of how our system works globally, the importance of collaboration, scaling ideas and working efficiently to serve our customers. It can’t be understated. As McDonald’s grew over the years, our business has become more complex and more siloed. Our systems and processes in areas like human resources and finance decentralized, which leads efficiencies.

Simply put, it can be hard for our people to get things done. We’re building GBS to be the engine that will power McDonald’s ability to unleash the full strength of our global scale where it counts so that we can optimize our operations and run the business more efficiently, to improve the employee experience and be a better franchise or to our franchisees and suppliers. Not only will we put systems, processes and tools in place to run the business more effectively, we’ll also free up resources to invest in growth areas that we’ve highlighted here today. Through our efforts in GBS, we’ll enable company employees to operate with efficiency and speed in support of our customers in all three legs of the stool.

So, where do we begin? The first phase of GBS will establish a One McDonald’s Way for data and analytics. Using modern technologies we’ll arm our people with better information to drive even greater value across the business. To do that, we’ll integrate hundreds of disparate systems that store data into one integrated solution. In that one solution, data sets from across the enterprise, everything from supply chain to marketing to operations will be easily accessible to our people through the click of a button.

And what does this mean in practice? Currently, in the U.S. market, our field operations teams spend about 30% of their time consulting with franchisees and about 70% of their time preparing for those meetings. That preparation time is spent shifting trough silo data sources, dashboards and spreadsheets to get the information they need to consult to franchisees on growing their businesses. Streamlining our data will enable us to build convenient tools that provide real-time analytics and integrated dashboards to guide decision-making. Importantly, we’ll free our field operations teams from administrative tasks, giving them more time to bring their talents to bear as strategic consultants, and it doesn’t stop there. We’ll also be able to leverage gen AI to make it easier to access the data.

Imagine, a field consultant is preparing for a visit with a franchisee and they can type in a questions such as what is the correlation between the number of loyalty transactions and restaurant cash flow and instantly have that information at their fingertips. The value of these insights will enable our teams to bring forward solutions that enable our franchisees to both enhance productivity and attract more customers.

So, as we move forward on this journey, we know we need a GBS strategy that will allow us to continue to build on our ambitions. We will relentlessly drive transformation with the goal of becoming a world-class GBS organization. And we’ll leverage our size and scale to further increase our competitive advantage in the market and drive the long-term success of the system.

I look forward to sharing more on this journey as we progress. I’ll now hand it back to Chris to close.

Chris Kempczinski

Okay. Thank you, Skye.

So, I think it’s clear, there has never been a better time to be part brand McDonald’s. And we’ve only scratched the surface of the potential from our Accelerating the Arches strategy.

Today, we’ve shared with you the additional opportunities we see with our MCD growth pillars. We’ve showcased the platforms we’re building that extend our competitive advantages, and unlock new growth opportunities and efficiencies for our business. The truth is that there are very few brands that have reinvented the customer experience time and time again as much as McDonald’s. Our success tomorrow has always depended on our ability to stay ahead of our customers’ changing needs while reimagining what a restaurant can be.

This sense of relentless ambition and innovation has defined our personality and has been part of McDonald’s DNA from the very start. In that spirit, before I close, there is one more thing, CosMc’s, I thought so. As you’ve heard throughout the day, McDonald’s is operating from a position of strength. Customer love for our brand is stronger than any time in our history. This gives us permission to stretch the reach of the valuable McDonald’s brand into new areas to grow the business. One area of focus has been identifying ways for McDonald’s to participate in attractive and fast-growing categories in IEO. We’ve honed in on specialty beverages and coffee, which played predominantly in the afternoon beverage pick-me-up occasion, where we are under indexed. In our top six markets, this is a $100 billion category, that’s growing faster than the rest of IEO and with superior margins. And it’s a space that we believe we have the right to win.

We can’t capitalize this in our existing restaurants, because of the complexity that customized beverages would bring to our kitchens. So, a little over a year ago, we began to evaluate some potential concepts to break this compromise. We had a few key success criteria for the concept. First, we had to have a differentiated idea. We needed to be confident that the concept could bring a product or experience that’s unique and compelling to customers. Second, it had to have global appeal. McDonald’s doesn’t do hobbies well. It’s not worth our time to develop an idea that will only work in one market. We need big ideas that have global appeal and could work across multiple markets. Third is economics. The unit economics need to work. The potential to offer strong returns and be highly incremental are critical to the adoption and execution of any future expansion of the concept.

These criteria ultimately led us to CosMc’s, or what would happen if a McDonald’s character from the 1980s that was part alien, part surfer, part robot, what would happen if this character were to open a restaurant in 2023? CosMc’s is a small format concept with all the DNA of McDonald’s but its own unique personality. Its menu includes new customizable drinks, sweet and savory treats and familiar favorites such as the Egg McMuffin.

Here’s a sneak peak from our first test site that we’ll be opening this week. So, take a look.

[Audio/Video Presentation]

Chris Kempczinski

So, CosMc’s will be a 10-store test with one location in the Chicago land area and the rest in Texas. We plan to open our pilot sites through the first half of 2024 and read results for at least one year. And guys, please let me emphasize again, we’re talking about 10 stores, okay? So, let’s not get too excited about it. It’s 10 stores. The big story isn’t about CosMc’s per se. The big story is what it says about McDonald’s and our potential.

To think, a little over a year ago, this was just an idea. And this week, we’re opening the first test site. We’re innovating testing and learning with speed. And we’ll continue to explore other ideas that can take advantage of our unique combination of assets, opening new growth opportunities and extending our brand into new areas. Imagine the possibilities if McDonald’s then connected these great innovations to one of the largest consumer platforms in the restaurant industry, enabled by the industry’s best restaurant operations platform and modern systems and tools that unlock speed and innovation across the company.

Based on everything that you’ve heard today, I hope you can agree that McDonald’s is not just the leading restaurant brand in the world. We are one of the leading consumer-facing companies in the world, period. And we’re just getting started. I’m confident this leadership team working together with the best franchisees and suppliers in our industry will keep McDonald’s green and growing, while driving long-term value for all stakeholders.

At McDonald’s, when we mobilize the best of our innovation, collaboration and execution across the system and when we use our size and scale to our advantage, we can do things that absolutely no one else can do. Like transforming the QSR space, time and again with innovations like drive-thru and delivery. We’re accruing one of the largest loyalty followings around the world in just a few years. We’re building the best consumer restaurant and operating platforms across the QSR industry and beyond.

This is the magic of McDonald’s. This is the root of our potential. This is the sort of ambition that we’ll continue to emphasize and drive across our entire system. And this is how we will reimagine our future together.

With that, we will take questions. I think Mike, you’ll come up onto the stage along with Ian. Thank you very much.

Question-and-Answer Session

A - Mike Cieplak

Thank you, Chris. Hello again, everybody. We’re going to take some Q&A now from the group. We have the full SLT, as you can see on the screen, and here with us in the first couple of rows. And like I said, we’ll take some questions. We have a closing video before we move on for the day. And we have mic runners around, just getting right there and just kind of right down here. We’ll go to, Heather, number three over here.

John Ivankoe

Hi. Thank you. It’s John Ivankoe, JP Morgan. Thank you so much for today. It was great. Obviously, this is a very future-focused company, but I know very much the heritage of your past. And the question is, lessons, quite frankly, that we’ve learned from the past. I can remember my time with this company, it’s been some time now. ‘95, ‘96 U.S. rate of expansion, very aggressive ‘98 to 2001 in Europe, very aggressive, even the uptick in the U.S., again, ‘12 to ‘14. Those didn’t particularly end well. In fact, you could say the breaks had to be put on in all three cases, and then the focus was on same-store sales and kind of recreating and restoring the unit level economics of what was already built.

So, very data-driven company, future-focused company. This is a very different organization than the ones that I’m referencing in several areas before you. So, what lessons have we learned from the past that we can apply to the future? And just your overall certainty, as we do talk about reaccelerating the arches specifically through unit development that will be entering a lower risk phase while achieving high returns?

Chris Kempczinski

Sure. Great question. I think the first thing is you’ve got a new building off a strong foundation. So, if you’re trying to drive unit growth and the foundation is not rock solid, it’s not going to end well. And the fact that our business is performing the way it’s performing right now. I think it’s a great foundation.

The second thing for is you don’t want to be compromising unit growth for remodels and keeping your restaurant estate. We did a lot -- as all of you know, we’ve done the heavy lifting to get the restaurant estate fully modernized. We’re north of 95% fully modernized right now, which for us is a tremendous advantage. And I think the other thing is we’ve learned the lessons of quantity over quality. You’ve got to be focused on quality openings. And so, it’s why quite honestly, we talked about at the very beginning of this year, we shared with you the ambition around development, but we didn’t share with you the targets and what we thought could be accomplished. And that’s because we’ve spent the last year country by country, literally city by city, making sure we were confident about where we saw the growth opportunities and how we could actually have the teams out in the field to be able to go execute it.

So I think those things, building off a strong foundation, making sure that you’re not compromising remodels for going after unit growth and then making sure you’re focused on quality openings, not just on quantity. All of those are things that, as you said, we’ve learned lesson the painful way a few different times and we’re very confident we’re not going to be relearning at this time.

Ian Borden

Maybe I can just talk on that, John, because I think there are a couple of things just to build on what Chris said that are really -- I mean, the power of data and analytics today and the ability for us, and if you were with Joe and his -- the breakout today, you would have just seen how granular we’re able to get to really identify the opportunity, community by community, the capital discipline that we put in place in the organization, which to me is about you have to earn the right to get capital. We feel really good about the discipline.

And then, you go back to what we’ve tried to drive with accelerating the organization that you’ve heard Chris talk about in this One McDonald’s Way. We’re going after this with a common mindset. We’re approaching the opportunity completely consistently across our markets with a global lens, and we’re going to bring it to life in a very, very consistent way, which I think is really important to what Chris said.

Chris Kempczinski

We’re opening 1,000 restaurants a year in China. You learn a lot by opening 1,000 restaurants a year.

Mike Cieplak

David Tarantino, I think then Dennis and I saw David Palmer’s hand, work my way this way then.

David Tarantino

Hello. It’s David Tarantino from Baird. So I guess my question is for Ian, a couple part question about some of the guidance you laid out today. First, on the operating margin for next year, mid-40s to high-40s. I guess, can you just maybe clarify on what that means relative to the 47% you are targeting for this year? Is it up or down or flat, or I guess, how would you characterize that? And then, the real question I have is, really related to the top and bottom-line growth you think can translate out of some of the metrics you gave us today. Is there some sort of annual framework you’d like us to think about in terms of earnings growth or total shareholder return?

Ian Borden

Yes. Thanks, David. Well, here’s how I think about ‘24 and beyond. I mean I think our focus is on, and you have obviously seen that today for what we’ve talked about with Accelerating the Arches and all the levers that we still think we have ahead of us, is continuing to really grow the top-line in a strong way as we move forward. And now obviously, we are going to be able to add to that the accelerated openings and layer on that non-comp growth as we kind of build our acceleration as we go forward.

As we are able to do that, and I would always go back to fact, because I think fact is probably the best thing I can kind of orientate you to. You go back to what I talked about today, we were at about 43% op margin in 2020 -- sorry, 2019. We’ll be at about 47% this year. We certainly believe we’re going to be able to continue to grow op margin from an expansion standpoint as we work forward and continue to focus on how we can drive, leverage and run the business more efficiently. You herd a bit about that from Skye and Manu and how we are going to get more efficient on a restaurant basis, but also how we are running business. So, that’s how I would think about it from an op margin perspective.

I think you layer on -- you look back again from an EPS or TSR perspective, I think we’ve done a pretty good job over the last several years in growing both EPS and TSR. And you link back, I think the ability to drive strong top-line growth, the op margin expansion over time as we can continue to do that with our capital allocation philosophy, which is going to make sure we put capital into the greatest areas of opportunity, I think continue to be very consistent in how we approach the dividend and over time, ensure that that dividend grows inline with our earnings growth. And then obviously, any remaining free cash flow we have beyond that, we are going to use to give back to shareholders through share repurchase.

I think that then obviously comes together along with, I think we certainly believe our pretty consistent level of debt over the next couple of years. I think we are at about $37 billion at the end of quarter three from a debt level. Certainly believe that the investment-grade credit rating we have today is the right one, and we are going to certainly look to maintain that. So that’s how I would kind of think about the future algorithm as we go forward.

Mike Cieplak

Dennis?

Dennis Geiger

Dennis Geiger, UBS. And thanks to the team for a great event. Another one on development, if I could. Wondering if you could talk a little bit more about the returns on new restaurants or the payback periods, U.S. and maybe key markets globally, however you want to frame it up. And maybe it’s high-level where you have been, how it’s trended, where you are going? Anything on that that you could provide? Thank you.

Ian Borden

Sure. Happy to take that. I think part of our confidence in our ability to accelerate goes back to, I think, discipline we put in place and making sure we identify the right sites, which is obviously a combination of getting the right location, getting an accurate view of what you think that location is going to do and obviously being able to build the site inline with your expectations. And if we look across our wholly-owned markets, our level of return has been incredibly consistent and I think incredibly stable. And I would say we start those first year returns at the low to mid teen first year ROI. When you’re looking at drive-thrus, I think what’s really important to remember is they kind of build their sweet spot over time because you have to establish that trading area. And so those returns continue to build, I would say, over the first 3 to 5 years.

And obviously, as you heard Joe talk about earlier this morning, we’re going to continue to ensure that we purchase a significant amount of the real estate as we go forward, which is incredibly important to our business model because it locks the cost and it locks the future equity that we build in that location. And I think it’s critical to allow us to continue to grow returns over time.

So, we feel really good about that. We also feel really good about the fact that we’ve got strong discipline in place that is going to make sure that we monitor how we’re doing. And we’re seeing that I think pretty consistently globally that first year starting point of sales is pretty close to the average sales volume of the existing base, and that’s also another, I think, factor that’s really important from a quality standpoint.

Mike Cieplak

I think you got Jeff Bernstein, then I got Brian Bittner, Palmer and Andrew Charles, trying to keep track of all you guys in the hands up.

Jeff Bernstein

Thank you. Jeff Bernstein from Barclays. Just a question on the -- I guess, the category of QSR more broadly. Just in the U.S. at least, there’s been negative traffic for the industry. Just wondering your thoughts as an industry in terms of reversing that trend in ‘24. And maybe you can just layer in the degree of competitive discounting you’re seeing, promotional activity. It just seems like the category is perhaps getting more aggressive. And just because you are 100-plus markets, how does that compare to international? Do you think of the QSR category similarly in international in terms of the competitive convergence and discounting and whatnot, or maybe is it something different in the other markets the way you think of it versus the U.S.?

Chris Kempczinski

I’ll maybe start it off, and then Ian can pick it up, and we’ve got the benefit of Joe and Jill here as well to chime in with any additional texture. But our focus is always on growing market share. Whether it’s boom economy or recession, our expectation, our focus is on growing market share with that. And you heard today what we consider to be the growth pillars that are consistent with being able to grow market share.

I would say, if you remember back where I was talking about in Q4 last year, I was saying, "Hey, we think the U.S. is going to have a mild recession. We think it’s going to be a deeper recession in Europe." And here we are a year later, and boy, was I wrong. It’s not exactly what we saw at all. So, I’m a little bit leery to make any predictions about next year, because I think we’re continuing to see that the consumer has been very resilient.

That said, as I referenced on our last call, there is pressure with the lower income households. I think no surprise you’re hearing this from others, not just in QSR, but you’re hearing it from Walmart and others who have visibility to that consumer. But our focus is all about how do we continue to drive market share. And over time, that’s been our formula. But Ian, anything else you’d add to that?

Ian Borden

Yes. Maybe I’ll just add a couple of bills to that. I mean I think, as Chris said, we’ve talked pretty consistently over the last few quarters, just about the macro challenges that we expected to see. I think we’ve seen a bit of that as we work through the back half of this year. I think, obviously, higher interest rates, all the inflation level that’s passing back through to the consumer and the pressure that’s putting on purchasing power, sentiment, I think savings of, obviously, through COVID, we’ve all heard have been eroded. So you’ve got all of that.

I think it’s certainly possible as you look into -- I think we certainly think we’re going to work through some headwinds in 2024. I think Europe, for sure, I think, is going to be a region more broadly where there are some market or macro challenges that we’re going to have to navigate. And I think, as Chris said, our focus, and I kind of guide us back again to 2019. If you look across top markets in almost every case across our top markets, we’ve taken share since 2019. And that’s how we’re going to measure success.

I think we may see some of our larger markets internationally where we’re going to get in ‘24 perhaps a market contraction. What I mean market contraction, broader IEOs and formal eating out sector, or at least more sluggish growth on the back of these macro pressures. We’re focused on how are we doing versus the competitive set, knowing obviously, we can’t control the broader context. And are we continuing to take share? And I think based on what we’ve taken you through today, we feel really well about how we’re positioned to continue to have advantage against the rest of the competitive set as we work through those challenges.

I think the other more macro or broad thing I just would mention is I think unsurprisingly, if you look to the Middle East, I mean, we are seeing an impact on our business across a number of the markets in the Middle East and a limited number of markets outside of the Middle East with the conflict that’s going on, obviously, which is tragic. And I think the societal pressures that have come out of that conflict in the Middle East. I think one of the benefits of our business is our size, our scale and our geographic diversity, and the breadth of our business, which means we have an incredible amount of resilience as a system. And I think you would -- if you look back over the last couple of years and everything we’ve worked through as a business and how successfully I certainly feel we’ve managed through that. I think that’s evidence of that.

The other benefit, obviously, is when you’re a company that does business in 115 countries around the world, you’ve worked through, obviously, many different challenges over the last 60 plus years. And it’s obviously never easy when you’re working through an individual challenge such as this one in the Middle East. But we’re going to continue to stay focused on, obviously, supporting our people, supporting the communities we do business with and working incredibly closely as we have been with our DL partners in the region to get through this.

Chris Kempczinski

Maybe let’s just take advantage of Joe and Jill, if you would, just offer any additional perspective on the U.S. and then IOM.

Joe Erlinger

Sure. Specifically in the U.S., we believe we have a business and a business model that’s built to last. And like Ian shared, I mean, we’ve been able to navigate things as dramatic as COVID and hyperinflation just over the last few years. So, whatever happens next year with the consumer, we have a strong ongoing position all the investments that we’ve made. Obviously, we have an industry-leading value, and the brand still has a significant gap versus our nearest competitors around both our affordability and our value perception. We also have tremendous pricing tools that have guided us well through this hyperinflationary period. And I think it will guide us well through maybe a period of challenge for consumers where they need more value. So, we enter 2024 knowing that we can succeed in any environment and with all the right tools and capabilities to do just that.

Jill McDonald

Thanks. Just one small build on that because, obviously, everything that Joe said, it’s pretty applicable to the IOM markets as well. I think one of the things that we’re finding through kind of the new ways of working and the One McDonald’s Way, which you’ll have heard referenced a couple of times through the day is we’re getting so much learning that we’re much more able to share across markets. So the recipe for creating those value for money experiences for our customers, the affordability, what -- we know the tactics and the strategies that are working because we are able to have much more visibility with much more openmindedness about taking the practices and scaling them.

So I think that’s another component that is really helping us kind of try and stay in tune with customers. They are feeling the pressure. Interest rates and mortgages particularly in many parts of Europe giving our consumers pressure. So having that gap on against the competition, on affordability so that we can continue to grow guest counts because if we are not able to get customers into the stores, you are not going to be able to get them to hopefully spend a little bit more with us. So, focusing on guest counts, offering value and affordability and ensuring that we are taking the best ideas from around the system and scaling at pace.

Ian Borden

I might just add on to Jill there. And we have talked about this a fair bit, Chris and I on the calls. But we -- again, across our top markets, value for money, affordability always critical for us, obviously, even more critical when you are dealing with any period of uncertainty as you look forward, number one position across the majority of our top markets. And I think Jill’s segment is a great example of -- that doesn’t just mean you sit back and relax. We are making sure, I think we are being consumer-led understanding the needs of consumers as they work through their different context. We’ve got great examples in Germany where we’ve introduced a menu called McSmart, which is a value-oriented meal menu, in the UK a savers menu. And that is all about making sure we stay agile. We understand how consumers’ needs are evolving. And we maintain that leadership mindset of we are going to win and fight hard, I think, for every visit, no matter what the context around us is.

Mike Cieplak

We’ll go to Heather’s microphone with Brian and David, and then we’ll hop over here.

Brian Bittner

Brian Bittner from Oppenheimer. Thanks for the presentations and for taking our questions today. I wanted to ask about the step-up in the CapEx guidance that you laid out today. I think you said $300 million to $500 million incremental every year after ‘24. Can you just unpack that a little more? How much of that is solely because of accelerating unit growth versus maybe accelerating investments in other areas? And I think that comes out to be about $3.6 billion, $3.7 billion of run rate CapEx in 2027. Maybe you could help us understand how that breaks down? Is there another remodel cycle coming or something like that? Anything else you can help us with?

Ian Borden

Sure, Brian. So let me just kind of start with the starting point, I think. So this year, we’ll be about $2.2 billion to $2.4 billion. Next year, we said we’d be about $2.5 billion. And then after ‘24, we said we’ll inch up at about $300 million to $500 million a year until ‘27 when we hit our run rate of 1,000 gross openings across our wholly-owned markets, U.S. and IOM. And I would think our CapEx probably plateaus roughly at that ‘27 point and beyond. I think if you look -- and it goes back to what Chris said earlier, we are almost 100% modernized today. Now, that obviously doesn’t mean you never do that again. But we are in such a current position that I think we expect certainly over the next couple of years that the reinvestment level that we are spending today is going to stay pretty constant over the next several years. So, that $300 million to $500 million is really all going towards new restaurant growth and spend.

Mike Cieplak

Number three, microphone three, please.

Dave Palmer

Hi. Dave Palmer, Evercore ISI. Thanks for the day. I have two quick ones. One on CosMc and one on Digital. CosMc brand strategy, you are having a new concept here, has some elements of McDonald’s brand in it, some of the -- even the items from McDonald’s are in there. What is your thought about that with the big brand? Eventually, could you imagine CosMc being a sub-brand within existing McDonald’s? So, that’s my first one.

And my second one is on digital. You talked about loyalty today a good bit. And you’ve also, in the past, given some digital percent numbers, like 30% in the U.S., 40% in the big 6 or whatever it is. 17%, I think, was the loyalty going to 27% or so by ‘27? I’m wondering how does that interact with the digital mix. And in the U.S., the drive-thru doesn’t really work that great with digital. In other words, it’s a bit of a retardant to a digital interaction. So, where do you see that going? I mean, 27% seems kind of low. Maybe you have some bigger solves for that. I’d love to get your thoughts about maybe a step change beyond that and what would make that happen.

Chris Kempczinski

Let me start with the easy one, CosMc’s. I think we’re in test, which means we’re open to learning all sorts of things. And I think we’ll see based on what we learned in that, how it does or doesn’t work with the master brand, as you say. So time will tell on that.

To your point on or your question on digital, I guess, I would start with I wouldn’t agree that digital doesn’t work well in the drive-thru. And as evidence of that, we’re at 150 million loyalty members. And in markets like China, 90% of consumers are ordering digital. I do think what you’re hearing from us today is counting digital is almost too easy because our digital number is going to continue to grow. And by the way, everybody’s digital number is going to continue to grow because consumers are getting to be more and more digital. What really matters is how many of these digital transactions are actually turning into loyalty transactions. Because if you go back to the data that we showed, what drives the business is actually loyalty membership, much more so than digital. And so for us, the key is about driving loyalty at the number that if I’m all with you guys and what we’re going to be reporting ourselves against is loyalty number because that is going to be the one that’s going to be most closely tied to, is it driving the business. And then if you were in loyalty, you can imagine all sorts of ways that is quite complementary with the drive-thru experience.

So for us, we don’t look and say drive-thru is impediment to what we can do with loyalty. We look at it as drive-thru is another great asset that we have, and I wouldn’t trade us having drive-thru for anybody else who has less drive-thru. So, it’s about how do we take that advantage and make even more out of it. And that’s why when you see -- what we think we can do with loyalty, we think we can get to 250 over the next several years, because we’re going to continue to find ways to make the loyalty program more and more valuable, where quite honestly, you won’t -- it won’t make sense to be a McDonald’s customer and not be in loyalty.

Mike Cieplak

Microphone two, Andrew Charles, Nick and then Jake.

Andrew Charles

Andrew Charles, TD Cowen. The guidance for 900 U.S. net restaurant openings over the medium term is just confidence on U.S. store level cash flow growth for the foreseeable future. And curious, looking beyond traffic, what are the medium-term opportunities and levers to find efficiencies to improve U.S. margins industry backdrop, where pricing is likely going to throttle back and value activity is going to step up. And in particular, I’m looking to know if voice AI of the drive-thru fits into this because it seems like the industry is approaching a tipping point with this.

Ian Borden

So maybe just one correction, Andrew, and then I might ask Joe to join me on the U.S. bit of your question. I mean it’s 900 gross openings. I can help you guys a little bit with the math on that just because I’m sure there are some other questions. So I think we said between now and end of 2027, 900 gross openings in the U.S., 1,900 in IOM, 7,000 in IDL. Obviously, we’ve got closings as a normal course of business across each of the segments. So the way I would think about the end state by end of 2027, it’s just over 14,000 restaurants in the U.S., just over 12,000 restaurants in IOM and about 24,000 restaurants in IDL, just to kind of help you with the math.

And I’ll start on the U.S. but obviously Joe can give you a lot more texture. I mean, we are -- Jill touched on this. We’re a volume business at the end of the day. So our goal is always to drive more volumes through the restaurants. It goes back a little bit to what Chris was talking about when we talked about why we’ve added the fourth D is. We’ve earned the right over the last few years because we’ve driven significant volume through the existing business, which has opened up the opportunity, I think, both from a brand penetration and expansion standpoint for us to grow at a more significant pace. So of course, the way we grow margin sustainably as we grow volume. That’s always the focus.

And at the same time, I think we’ve talked a fair bit in some of the calls, just about, I think the capability we’ve built around pricing and some of the advantages that gives us -- and even if we get into a more normalized environment from a pricing standpoint, how we’re pricing, right, to get that minimal consumer resistance, to get the maximum flow through, is certainly a lever that we think we’re going to able to continue to pull smartly.

In addition, as you kind of get down to personalized value, which then you really get on a one-to-one basis over time, right, where you’re really able to maximize the value for the consumer and the value for us from a business standpoint, I think those are the types of things in addition to driving volume, which is obviously core to what we do on how we’re going to focus to continue to drive margin as we go forward. But I think Joe can build on that.

Joe Erlinger

I mean Ian nailed much of what I generally talk about with our franchisees. Our franchisee cash flows are strong. They’ve grown significantly this year. So they find themselves in a very advantageous position, obviously, as they close out the year.

Ian hit it that -- I mean our contribution margin on incremental sales is incredibly strong. And so growing the top line is still the greatest opportunity they have to those cash flow. Our pricing capabilities like Ian also said, are incredibly strong, have been helpful as we’ve navigated the last several years. And then what I always say to franchisees, is the greatest opportunity for efficiency is in everyone’s pocket. And it is the digital consumer is much easier and more efficient for us to serve than the non-digital consumer because that digital consumer, obviously does the order taking as well as does the cash step. And so ultimately, we believe long-term, the digital consumer can be accretive to margins at the restaurant level.

Mike Cieplak

G to number two again. Nick?

Nick Setyan

Thank you. Nick Setyan from Wedbush. A follow-up to Andrew’s question. How should we think about that build in terms of the U.S. and IOM unit growth? Is it a pretty linear build ‘24, ‘25, ‘26, ‘27? And then, you guys have to mention pricing power a few times throughout the presentation obviously, versus 2019, the average check is up over 30% or approximately 30%. How do you think about pricing going forward, particularly relative to grocery? Thank you.

Chris Kempczinski

Well, I’ll take the pricing and then I’ll let Ian do the more detailed breakdown. But I think you hit it on the head, which is we have talked about our pricing power. And our ability to actually push through the pricing because of the inflation, we would credit to the fact that we’ve got tremendous equities on our brand, the focus on our core menu equities. As Joe talked about, there is no substitute for Big Mac. There is no substitute McDonald’s french fries, a McFlurry, et cetera. So it gives us pricing ability in that, and we look really closely all the time at flow through, which is basically how much of the pricing drops through to the bottom-line, this elasticity of pricing. And we’ve seen -- despite a lot of the pricing that we’ve pushed through, we’re seeing that flow-through is still holding up.

Now, we’re of course, mindful about our pricing is always considered from a consumer standpoint relative to what else is out there, whether that’s restaurant competitors or to grocery, et cetera. And so, we continue to look at that very closely. One of the great things about digital is now you can scrape pricing around a restaurant far more easily. So, you’ve got incredible visibility to all the pricing that exists around restaurants in our developed markets these days, which has given us a great capability to make sure that we don’t get offsides on that.

And then the other thing that we’re doing is we continually monitor affordability and value-for-money ratings and getting consumers’ subjective assessment of how are we standing in those areas. And those continue -- we continue to lead in almost every market around the world on value and affordability. So, all of that together kind of goes into our pricing strategy. It’s why we feel like we’ve been able to push through the pricing that we’ve done. But at the end of the day, the McDonald’s brand is built on being able to deliver customers great value. And so that’s going to be our focus going forward. Maybe I’ll let you handle the second part of that.

Ian Borden

Sure. So just on the opening acceleration, I mean the endpoint, as you said, is 1,000 per year in the wholly-owned markets from a run rate perspective. We’ve got about a 24 to 36-month lead time knowing that the vast majority of our new sites are going to be freestanding drive-thru sites. And so I would think of it as a gradual acceleration between now and getting to that 1,000-unit run rate in 2027.

Mike Cieplak

Go to number one here and then four in the back next.

Jake Bartlett

Jake Bartlett, Truist Securities. My question is about the control you have over that unit growth. And in typical franchise systems, you kind of want the franchisees to open, but you’re not sure if they’re going to -- you’re unique and that you own the properties and have involvement there. So how much visibility do you have on the growth? Are you putting incentives in place or anything else that’s kind of driving growth going forward that we hadn’t seen in recent years?

Chris Kempczinski

Sure. I’ll answer that. So, we feel very confident that there’s going to be good franchisee excitement about the growth opportunity. And one of the things, when you meet with franchisees and you talk about investments, there’s always investment for new restaurant opportunities. It’s usually more of why didn’t I get more restaurants to open than the ones that you’re letting me open. I think the other thing is, our franchisees, particularly relative to our competitors, they’re in a great financial position. If you look at our U.S. franchisees, the firepower that they have on their own organization balance sheet, combined with the ability through McDonald’s to get preferred rates from lenders, there’s no lack of access to capital at all. So, I think for us, it’s about really making sure that we’re focused on quality openings because when you get the quality openings, that builds franchisee confidence in going after the next one and the next one.

So I think we’ve done the homework. We’ve had conversations with franchisees at a high level on this. And I think through history, it’s shown when we have real growth opportunities, our system is willing to go after it. And certainly, we’re able, whether it’s through what we do with franchisees or there may be McOpCo growth that we do along the way as well. Not looking to change the overall mix, but we always have McOpCo as a lever to bridge a gap that may exist in the market.

Mike Cieplak

We’ll go to number four in the back.

Katherine Griffin

Thank you. Katherine Griffin from Bank of America. The gap between restaurant growth and its contribution to system sales implies a mix shift towards lower volume markets. In that context, could you talk about the profitability of the China market specifically, as you think about taking a bigger ownership stake in the China business, the contribution to revenue will be higher. But what are the implications for contributions to profits? And is there an opportunity to improve the profitability of that market?

And then, as a follow-up, I was curious if you could talk specifically about Canada as one of your top six markets and how you think about opportunities for growth there. Thank you.

Chris Kempczinski

Well, I’ll take the China question, and then I’ll have Jill handle Canada. So, we’re very confident and excited about the opportunity in China. There’s three things that for us, give us a lot of excitement about what’s possible there. The first is the potential for new restaurants, and we’re approaching 6,000 restaurants in China today. We talked about earlier, when we announced our purchase of Carlyle stake getting to 10,000 restaurants by 2028. But honestly, if you look at our typical development penetration and compare it to other markets, whether it’s 2 per 100,000, 3 per 100,000, 4 per 100,000, and there’s no reason why China can’t be a 20,000 to 25,000 store market for us, which would be the largest market for us around the world.

The other thing that we know is we know that unit volumes are correlated to household incomes. So, if you just take a look at GDP growth in China and assume mid-single-digit household income growth correlated with GDP, it says that we’re going to continue to see nice growth in unit volumes, which is comp sales. And then, the last piece that you touched on is margins. And we see no reason why China can’t have restaurant margins that are on par with what we see in other developed markets for us.

So you take all those things together, we think the opportunity in China is massive, which is why we stepped in and increased our participation as you saw fit. Jill, I’ll hand it over to you to talk about Canada.

Jill McDonald

Sure. Thanks. Yes, Canada is one of my top performing markets at the moment, actually. It’s performing extremely well, growing share. And in fact, Chris and I were there a few months ago in Alberta and looking at the shift in some of the population that’s going on, we definitely see significant opportunities in Canada across the country, actually. And I think, certainly, given the performance of the market, it’s, when I go and ask Ian for capital, I think it will be one that we certainly see opportunity investing in.

Ian Borden

And maybe just to come back because I think there was a question in there just about the mix shift. I mean you go back to the numbers I gave, so you still got over the next years out to ‘27, 70% of our openings coming in IDL. And yes, in markets like China, we have average -- lower average unit volumes. And obviously, we collect at different percentage because we’re just collecting a royalty. I think, I would say a couple of things. Just to build on Chris’s China comments, we’re getting strong first year returns and overall returns in China because they’ve reengineered the business model for the context in the environment.

You saw a little bit today from Phyllis and team just in terms of what they’re doing to digitize the organization and the efficiencies that’s driving. I think that’s what’s been so important about the partnership we’ve had to date and the things that it’s brought to life. The benefit, obviously, of what we’re doing with openings is the acceleration in the wholly owned, right? I mean, we’re going to be 2.5 times the rate of opening as we get to that 1,000 openings per year. And obviously, we get a much different share of the mix in much higher volume locations, which is obviously why that is going to be really attractive and beneficial, not just for us but obviously for the franchisees that will be in those restaurants as well.

Chris Kempczinski

Just one other thing. Think about, we’ve got 70 million loyalty members in China with less than 6,000 restaurants. And it’s because 90% of transactions in China are digital. So, when you think about the number of loyalty customers you could have in China, 10,000 restaurants, 20,000 restaurants, it’s massive. And all the benefits that come from that would be driving the business as well.

Mike Cieplak

We’ll go to number three with Lauren Silberman. And we have time for one more after that.

Lauren Silberman

Thank you. My question is on menu innovation. Can you expand on how you’re thinking about innovation next year? What’s the appetite to bring back item like the snack wrap to lean a little bit more into value and industry trends? And then on the flip side, you talked about bigger burgers today. Is this reflective of the strategy to further lean into the premium side of the menu and just what you’re seeing there? Thanks.

Chris Kempczinski

Morgan, why don’t you talk about how we think about menu innovation broadly? And then Jill, I’ll let you answer the question of are we bringing snack wraps to the U.S.

Jill McDonald

You’re not even going to start? Leave it on me?

Chris Kempczinski

You’ve got it completely on hand. I have total confidence.

Jill McDonald

Yes. So I’ll start with your question about menu innovation, in particular, large burger. It’s actually really grounded in opportunity space that we see based on the customer. So we spend a lot of time. We’ve talked a lot today about data and research, really understanding where there is meaningful opportunity space for our customer globally. And the one that we’ve identified that Jo talked about this morning is what we call large burger. And what we’ve seen is that’s a sizable space. It’s growing, and we’re actually significantly under-shared in that space. So it’s less about chasing premium, and it’s much more about kind of identifying where the customer is and where we have kind of a big growth opportunities. So, thank you.

Morgan Flatley

I’m shocked and surprised by the question, but thank you. I think Jo also summed it up very well when he talked about obviously the fact that we’re in and within the chicken space. If you think about it in the U.S. business, we have three really strong chicken brands between McChicken, Chicken McNuggets and obviously, McCrispy. But McCrispy, we’re in the early days really of building that brand. And so, as we sort of look forward, will we eventually have a McCrispy tender? Yes. And will that allow us to eventually have a McCrispy snack wrap? Yes. But we’re still in the early days of doing that. And some of you have heard me talk about the importance of sequencing in our business.

Around the world, I’ve seen we get sequencing wrong on something. You can have the effect where 1 plus 1 plus 1 equals 2. Whereas when you get the sequencing right, you can have an effect where 1 plus 1 plus 1 equals 5. And I think our thoughts around our chicken portfolio and how we are going to build the chicken portfolio in the U.S. are such that we want to make sure we get it right, so that 1 plus 1 plus 1 equals 5.

Mike Cieplak

I think we have time for one more. We’ll go to the guy with the red Crocs in the back.

Unidentified Analyst

I had just a clarification and then a question. Ian, your comment on the debt being stable the next several years, is that leverage or is that absolute dollars of debt? And then my question is maybe for Chris, on the Global Business Services, I think this year, a lot of what changed was you took finance functions and HR functions in from some of the regions. As we go the next two or three years, what are some of the key areas you think either pull out of the regions or technology changes? Just any more clarity on what is actually happening at the ground level. Thaks.

Chris Kempczinski

I’ll let you start with the easy one.

Ian Borden

Yes. Absolute dollars on debt.

Chris Kempczinski

So on GBS, the thing on GBS, we’re starting with the opportunity in finance and people. And this is going to be something that takes us the next couple of years to be able to get the leverage that we need. You’ve heard us talk about, but in finance, we have something like 600 different finance systems. In HR, we have something like 200 different HR systems. We’re going to be getting to one finance system. We’re going to be getting to one HR system. That’s going to give us much better visibility into the business. It’s going to give us efficiencies in the business. It’s going to have all sorts of benefits attached to that. As you think out beyond that, there is opportunities to extend GBS. You’ve seen it with a number of other companies. You could certainly imagine it can extend into legal where things like, for example contract use, that might be able to be something that’s done through a GBS service. Pricing technology and a pricing model, that could be done as a global shared service. So development is another one. In terms of site identification, development could be run as a global shared service.

So, I think there’s lots of things that for us, we see the potential to bring in some capabilities and just do it once around the world. But we’re starting with the two big ones being finance and HR.

So with that, I think we are done with questions. Am I right, Mike?

Mike Cieplak

Yes. We’ll wrap up Q&A.

Chris Kempczinski

All right. Just I want to thank everybody. Hopefully, you found today useful. I know it was a big commitment out of your time to come here. But I think just being in our headquarters as well, you hopefully got a little bit of a vibe for McDonald’s and got a chance to see the team as well. We are going to be upstairs, I know, in a few minutes and continue the conversation. But again, thank you for your interest in McDonald’s and appreciate it.

Mike Cieplak

Thanks, Chris. Thanks, Ian. Thanks to all of you. We are going to close with a video, so just sit tight and bear with us for one minute, and then I’ll give instructions on where we go from there. Thank you all.

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McDonald's Corporation (MCD) 2023 Investor Update (Transcript)