McDonald’s Corporation (NYSE:MCD) Q1 2023 Earnings Call Transcript

McDonald’s Corporation (NYSE:MCD) Q1 2023 Earnings Call Transcript April 25, 2023

McDonald’s Corporation beats earnings expectations. Reported EPS is $2.63, expectations were $2.33.

Operator: Hello, and welcome to McDonald’s First Quarter 2023 Investor Conference Call. At the request of McDonald’s Corporation, this conference is being recorded. Following today’s presentation, there will be a question-and-answer session for investors. I would now like to turn the conference over to Mr. Mike Cieplak, Investor Relations Officer for McDonald’s Corporation. Mr. Cieplak, you may begin.

Mike Cieplak: Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Ian Borden. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website as are reconciliations of any non-GAAP financial measures mentioned on today’s call, along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. Today’s conference call is being webcast and is also being recorded for replay via our website. And now I’ll turn it over to Chris.

Chris Kempczinski: Thanks Mike and good morning, everyone. You know ordinarily in a global business like ours, for a quarterly earnings call, you’re prepping to memorize all the different sets of numbers. What’s notable about this earnings call is McDonald’s consistency, consistency in the strength of our numbers, consistency in the powerful drivers of our business, and consistency in the excitement that exists across the system about the opportunities that lie in front of us. Let’s start with the numbers. At the top line, you only need to know one number, 12.6%. US comparable sales, 12.6%, IOM comparable sales, 12.6%, IDL comparable sales, 12.6%, and global comparable sales, you guessed it, 12.6%. These results reflects strong consumer demand for McDonald’s that we are seeing around the world despite a challenging operating environment and historically low consumer sentiment in many markets.

It is clear that our Accelerating the Arches strategy is working and we are operating from a position of strength. Each of our MCD growth pillars is contributing to our strong balanced performance and importantly, what we’ve talked in the past about the noise associated with the guest count metric, it is encouraging to see guest counts grow in every segment. In just the last few months, I have visited with our McDonald’s teams in France, Japan, the Philippines, UAE and Israel. It’s been inspiring to see the dedication of all three legs of the stool. Our teams are proud of what they’ve accomplished and are performing at a high level. For me, it’s been energizing to hear their ideas for how we can do even more to take care of our customers. That’s what I love most about the McDonald’s system, our restless ambition.

While we feel good about our current strategy, our success is driving us to do even more to lay a foundation for the future. Back in January, we announced the evolution of Accelerating the Arches. We’re continuing to double down on our existing growth pillars while advancing two new initiatives. The first is accelerating restaurant development. Our strong performance has earned us the right to open new restaurants at a faster rate than we have historically. We’re focused this year on determining the best path forward to meet customer demand and look forward to sharing more at our Investor Day later this year. The second newer element of our strategy is fundamentally rethinking how we as a company can work better together to become faster, more innovative, and more efficient.

We’re calling this Accelerating the Organization. In March, we convened our Annual Leadership Summit with top leaders from across the globe. Part of this meeting, we discussed three changes to our ways of working that will enable us to leverage our scale more effectively to meet the needs of our system and customers and unlock significant growth potential. The first is implementing horizontal ways of working. For years, our organization like many others was too siloed, whether that be geographically siloed or functionally siloed, and yet our biggest challenges and opportunities are rarely limited to just one market. They can’t be solved by only one function. They require collaborating across the organization to bring the full breadth of McDonald’s skills and experiences to devise the best system solution that can be scaled globally.

In other words, they need to be solved horizontally. With Accelerating the Organization, we’re now structured to work much more seamlessly in a horizontal fashion to solve these problems once and then scale solutions across markets, for example, is our app offering a seamless and personalized user experience. We’re continuing to increase our speed of service. Those are opportunities across every single market and require the expertise of multiple functions. To support our ambition, to scale innovations with greater agility and collaborate more effectively, our second key shift is adopting One McDonalds Way to standardize the common processes we use to drive consistency and enable speed. We’re an innovative entrepreneurial organization, but once a part of our system somewhere has solved a problem or developed a novel idea, we need to stop the work elsewhere.

We don’t need every market to invent its own light bulbs, so to speak. This approach allows us to use our size and scale for the greatest impact. For example, we’re already seeing success in how our marketing teams are implementing common processes to quickly scale great creative such as the Raise Your Arches’ campaign, which Ian will talk more about. Finally, we’re making strategic investments in digitizing our organization and implementing new tools and platforms that make it easier for employees to access information to gain insights and drive performance. Ultimately, this will allow our market teams to spend more time in the restaurants, understanding the needs of customers, franchisees, and crew. Key to operationalizing all three areas of our internal transformation is our Enterprise Global Business Services Organization, also known as GBS.

In 2023, GBS will focus on building a long-term strategy that ultimately provides a better experience for all three legs of the stool. GBS will be a key enabler to digitizing our organization, driving efficiency and providing value back to the business for our people, our franchisees, and our suppliers. Harnessing the power of our scale, our ability to strategically invest and the versatility of our system is the secret sauce that will empower us to provide even more memorable customer experiences for generations to come. To expand further on how we are optimizing the business and our growth strategy. I will now turn it over to Ian.

Ian Borden: Thanks Chris. The first quarter of 2023 was yet another demonstration of McDonald’s at its best. We entered the year with global momentum and remained laser focused on executing against our strategic growth pillars. Though challenging macro dynamics are still evident across many parts of the world, each of our segments and our global comp sales grew nearly 13% for the quarter. This demonstrates that no matter the operating environment, our customers continue to rely on McDonald’s as an affordable destination for the delicious food they love delivered with the great service that they expect. Throughout the quarter, we showcased our iconic core menu equities while further scaling emerging equities across markets. I’ll share a couple of examples of this in our chicken portfolio where we continue to expand and grow market share and an area where there is strong opportunity for growth.

The U.S. leveraged learnings from the U.K., Canada, and Germany by relaunching its Crispy Chicken Sandwich under the McCrispy global equity umbrella. While there was no change to the core product, compelling creative, along with a new flavor offering supported demand, and help drive double-digit sales growth in the market, in fact, we now offer the McCrispy in 10 of our largest markets around the world, adding to our portfolio of billion dollar brands. Another example was in China where in March we featured the McSpicy Chicken Sandwich through a creative campaign that included a partnership with a popular streetwear brand tapping into local cultural relevance. The campaign generated significant social buzz, an increased brand relevancy with a younger generation.

It’s worth noting that China and Hong Kong originally introduced customers to McSpicy nearly 20 years ago, and it’s now part of our core menu in 17 markets reflecting consumers growing preference for spicy across the globe. And while I’m on the topic of China, I want to point out that we saw steady recovery in the market with China posting positive comp sales growth for the quarter. Chicken was also critical to Canada’s strong results. With the successful execution of the Chicken Big Mac promotion, a popular limited time offering that had significant success in the U.K. last year. By creating these fresh takes on our classic menu items, we’ve continued to build affinity and have consistently gained share across our top markets in the growing chicken category over the last few years.

In parallel, we continue to maintain our market share leadership in beef, making our core menu offerings even better through enhanced cooking procedures and other slight changes such as improved buns. Now in over 50 markets around the globe, these improvements are resulting in hotter, juicier and tastier burgers. We’re seeing improved taste perception scores across markets, giving customers yet another reason to eat at McDonald’s. We recently began to introduce these changes to our U.S. customers through a rolling deployment, and the initial reaction has been positive. The Big Mac was also prominently featured across many markets this quarter with strong activations in both Canada and France. While each campaign came to life in its own way, the resulting lift in beef sales across both markets shows that this iconic menu item which became popular more than 50 years ago still resonates with consumers today.

As I’ve mentioned before, rising costs continue to pressure consumer spending across markets. Our ability to meet customer needs in challenging times makes McDonald’s value proposition even more important to highlight. In Germany, for example, the launch of the new McSmart Menu refreshed our everyday value bundles, providing smaller, more affordable meals to our consumers, and contributing to Germany’s eighth consecutive quarter of double-digit comp sales growth. Our marketing excellence was also on full display during the quarter, demonstrating our position as an affordable destination with iconic equities and strong execution. The Raise Your Arches campaign in the U.K. was a prime example of our marketing excellence in action, bringing to life the true power of the McDonald’s brand in a new and unique way.

This campaign did not feature our food or our restaurants. Yet by illustrating a simple gesture, the raising of eyebrows, our customers instantly recognize the semblance of the Golden Arches, and the engagement was remarkable. In fact, within the first weekend alone, Raise Your Arches reached millions of people and our customers reacted on social media more than 30,000 times. As the campaign quickly scaled to more than 30 markets across the globe, Raise Your Arches drove brand affinity around the world and once again proved the true power of the McDonald’s brand. This is an example of how one singular idea can drive impact when shared across our markets. This is the One McDonalds Way that Chris mentioned earlier. MyMcDonald’s Rewards is yet another example of how we’ve tapped into our marketing engine to deploy our loyalty platform throughout the system.

Now in 50 markets, loyalty is building even stronger relationships with our customers, and the results continue to shine. In our top six markets, digital sales now represent almost 40% of system-wide sales, or nearly $7.5 billion growth of more than 30% over the last year. We have nearly 50 million, 90 day active members across these top markets, and our relationship with them continues to grow. We’re learning when they visit, how they visit and what they buy. With more and more of our sales coming through identified channels than ever before, we’re also continuing to improve our customers’ mobile app experience with new initiatives that provide a more seamless interaction. The U.S. market, for example is piloting a new way of ordering through our app.

Using existing location data, it allows our crew to start assembling a customer’s order prior to their arrival at the restaurant, ultimately delivering hot, fresh food when customers arrive to pick up their order. While it’s still early days deploying this new digital enhancement, initial results are already pointing to improve service times and elevated customer satisfaction scores. Australia and Canada enhanced the digital customer experience by officially integrating the ability to order and pay for McDelivery, all within the McDonald’s app. This not only brings added choice and convenience for our customers but also allows them to earn loyalty points while they enjoy McDelivery at their doorstep and ensures that we maintain that direct connection.

Across our digital and marketing initiatives, McDonald’s continues to put the customer at the center of our strategy, driving top line growth and further strengthening the brand. Turning to the P&L. Strong sales performance across each of our segments drove adjusted earnings per share of $2.63 for the quarter, an increase over the prior-year of nearly 20% in constant currencies. This excludes restructuring charges of about $180 million primarily consisting of employee termination benefits and lease termination costs as we look to become faster, more innovative and more efficient as part of Accelerating the Organization. Our company-operated margins remained hampered this quarter by continued pressure from elevated commodities and wages. As we look to the remainder of the year, consistent with the expectations we communicated in January, we expect macro headwinds will continue with the potential for a recessionary environment across both the U.S. and Europe.

Total restaurant margin dollars grew by over $375 million in constant currencies or more than 10% for the quarter driven by higher franchise margin dollars. One of the benefits of our franchise business model is the predictability and stability of our franchise margins particularly in a strong comp sales environment. As expected, strong franchise sales performance across our markets was offset by increased franchisee assistance as elevated cost inflation continued to put significant pressure on restaurant cash flows, particularly for our European franchisees. As I’ve mentioned before, we’re providing targeted and temporary support, investing proactively to maintain focus on driving long-term growth during this challenging time. We still anticipate these efforts will have an impact of between $100 million to $150 million for the year.

G&A for the quarter decreased slightly primarily driven by prior-year costs incurred for our worldwide convention last April, and our adjusted effective tax rate was nearly 21% for the quarter. Adjusted operating margin was 46% for the first quarter, a reflection of the strong top line growth. As we’ve said before, we expect to gain leverage on operating margin over time. And while this will not necessarily be linear based on a strong start to the year, we’re pleased with our operating efficiency in quarter 1. Based on current exchange rates, we expect foreign exchange to reduce both the second quarter and full-year earnings per share by about $0.03 to $0.05. As always, this is directional guidance only as rates will likely change as we move through the year.

Despite the economic uncertainty that may persist, we are well positioned with the unique strength and scale that only the McDonald’s system can provide. As Chris talked about upfront, we are focused on how we can even further leverage this advantage in the future. With our strong underlying momentum and aligned focus on the right strategies moving forward, I remain confident that we will continue to deliver long-term growth for our system and for our shareholders. And with that, let me turn it back over to Chris.

Chris Kempczinski: Thanks, Ian. Our brand has never been more relevant than it is today, a testament to our Accelerating the Arches strategy and the over 2 million people in our system who bring it to life with our franchisees in the restaurants every single day. As part of our Accelerating the Arches strategy, we’ve been particularly focused on revving up our world-class marketing engine with our agency partners and internal teams. We have expectations of what creative excellence should look like, and we’re certainly proud of the progress we’ve made. Others are echoing this sentiment, and the industry is taking notice. Recently, McDonald’s topped The WARC Effective 100 for the fourth year running, a ranking of the world’s most awarded campaigns and companies for effectiveness.

This is in addition to earning the #2 spot on Fast Company’s World’s Most Innovative Companies List of 2023. While we are pleased with where our brand is today, we know there is still more opportunity ahead, particularly as we change our ways of working through Accelerating the Organization, which I discussed at the outset. As I’ve said before, as goes our brands, so goes the economic health of the company and our nearly 5,000 franchisees globally. As Ray Kroc once famously said, we’re not in the hamburger business, we’re in show business. This showcases the importance of marketing our brand, which is more than just the food that we serve. The McDonald’s franchise business model has provided a significant on-ramp for so many to work hard and prosper.

And we want to ensure that the opportunity exists for generations to come. In fact, our franchisees are generating significant returns over the life of their 20-year agreements, far exceeding their cost of capital and relevant benchmarks. At its core, Accelerating the Arches is about us continuing to set up the company and our franchisees to prosper in the long-term. To that end, we’ll continue to marshal the weight of the company’s resources so that the business model endures. Ray Kroc would often say that we cannot grow without trying new things or without taking risks. Together as a system, we have an extraordinary opportunity to lay the foundation for our future to maintain an unwavering bond with customers. We’ll achieve this through continuous innovation, building digital relationships and delivering personalized experiences with ease, no matter how our customers choose to enjoy McDonald’s.

As I told our internal teams earlier this month, as we adapt to our new organization and new ways of working, the most important thing we can do is to keep taking care of our customers, our system and each other. As we face a dynamic operating environment and changing customer demand, I’m confident that Accelerating the Arches is the right playbook, combined with the actions we’re taking to accelerate the organization to keep McDonald’s best positioned to be there for our customers and navigate the next chapter of our growth. I want to acknowledge that the path to continuously improving how we innovate for customers in the system involves difficult decisions, and saying goodbye to valued colleagues is never easy. What gives me confidence in our path forward is how the people in our system time and again have shown up for each other to realize the full potential of the opportunity ahead.

Thanks again to our incredible employees, franchisees and suppliers for your continued dedication and commitment. With that, I’ll now turn to Mike for Q&A.

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Q&A Session

Operator: Thank you. .

Mike Cieplak: Our first question is from Dennis Geiger with UBS.

Dennis Geiger: Thank you very much. Chris, with the robust momentum that the brand continues to see in the U.S., can you talk a bit more about your latest thoughts on the biggest opportunities that you see to continue to drive this guest count strength? I mean, you seem to be clearly executing against core points of focus. You highlighted some newer initiatives in detail today. So just curious if you kind of help loosely rank some of these opportunities for the U.S. business. Thank you.

ChrisKempczinski: Thanks, Dennis. One of the things that I feel very good about is the fact that what’s driving the business is a balance of our three drivers here, marketing excellence, focusing on the core menu and our 3D. So we’re getting good growth from each of those contributing to the success that you’re seeing, not just in the U.S., but you’re seeing globally. I think the other thing that I’m really pleased with is how we’re seeing customer satisfaction scores improve around the world. PACE is one of the ways that we do this. That’s our grading and consulting program that we launched in all of our major markets in 2022 with the exception of the U.S., which just launched. But we’re typically seeing results that our customer satisfaction going up mid- to high single-digits.

And we know that as you improve speed, accuracy, friendliness, quality, all of those metrics are correlated with business performance. And so for us, the fact that we are running better restaurants, our staffing situation is improving in restaurants around the world, combined with our MCD growth pillars, I think all of those things coming together is what’s driving the success that you’re seeing.

Mike Cieplak: Our next question is from Brian Bittner with Oppenheimer.

Brian Bittner: Good morning. Thank you. You talked about how you anticipate a recessionary macro environment to unfold in the U.S. and Europe. And how do you anticipate such a scenario to impact your operating results? Because back in the Great Recession, your same-store sales remained very strong and in some instances, even outpaced analyst expectations. You did have the dollar menu back then, but the model has truly been battle tested. So if you could talk about what your strategy this time around is, and do you see the business as differently positioned now versus 15 years ago?

Chris Kempczinski: Yes. Thanks for the question. Going back to Q3 I think of last year is when we started getting asked questions about our outlook for the macro environment in 2023. And I would say our view remains unchanged, which is our base expectation is for a mild recession in the U.S. In Europe, we expected it to be more challenging. I think things are looking better in Europe than they were certainly back in Q3, but still compared to the U.S., I think more challenging in Europe. So our base expectation from a macro standpoint for 2023 is unchanged. I think how we’re positioned, it goes back to the word I used in my opening, which is consistency. And our job is to make sure that no matter what the environment, whether you’re in a boom cycle or whether you’re in a more challenging macro environment like I think we are in right now, our business has to continue to perform.

And one of the things that I feel really good about is, as you mentioned, in good times or in bad times, McDonald’s tend to do well. I would just add a little color, which is we do see some of the pressures that give us reason to believe that our view on the macro outlook is accurate, which is, one, we are seeing a slight decrease in units per transaction. So things like did someone add fries to their order, how many items are they buying per order, we’re seeing that go down in most of our markets around the world slightly, but it’s still going down. And then the other thing is we continue to monitor very closely the acceptance of our pricing. I’m really proud of how our system has executed pricing in light of the double-digit inflation that we have been experiencing.

But we are seeing, in some places, resistance to pricing, more resistance than we saw at the outset. So I think all of those things are reflective of, again, a more challenging macro environment. But again, McDonald’s, we perform well in good times and in bad. And so that’s what gives us the optimism as we go through the rest of this year.

Ian Borden: Let me maybe just add a couple of things to what Chris talked about. I just think value for money and affordability, I would say, are two things that we’re always laser-focused on, but I think, obviously, even more so in the current context. And I think if you look across our top markets, we have a leadership position in both of those attributes. We know that even as Chris talked to, we’re having to take more price on the back of higher levels of inflation that the competitive gaps that we’re maintaining versus the competitive set have remained consistent. So I think we’re doing that in a very prudent and balanced way to make sure that we are kind of leaning into the needs of our consumers in the different markets around the world.

I think the other thing, Brian, that you highlighted, which I think is important to call out is the business, if you look at the U.S. as an example, is in a much different position than the last time we went through an environment like this because of the strategic investments we’ve made over the last several years. I think about the fact that our entire estate is modernized now. I think as the fact that the channels that we’ve put in place through digital, where we can kind of interact with consumers on a more personal level, and so I think we’ve built a level of, I’ll call it, pricing elasticity in just because of how we’ve continued to invest in the brand and the experience for our customers that puts us in a strategic advantage, I think, versus much of the competitive set around us.

And so again, a period like this is never easy for anyone to work through, but I certainly think we’re really well positioned to navigate the challenges ahead.

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

Sara Senatore: Great. Thank you. Hopefully, you can hear me. I had a quick clarification and a question. The first clarification, I just wanted to make sure I understood. You had such consistent performance across the segments and even quarter-over-quarter. What kind of — did you have consistent pricing? Was the traffic sort of similar? I’m just trying to understand kind of the underlying dynamics because the top line versus similar despite very different operating environments. And then the question is, you talked about value for the money, but obviously, lots of margin pressure on the company-operated stores. Are there limits to what you can do here because of your franchisees? Do you anticipate maybe some of the pressures rolling off and so that makes it easier? Just trying to understand kind of the extent to which you can continue to offer such sharp value when margins are under pretty meaningful pressure. Thank you.

Ian Borden: Good morning, Sara. Thanks for the question. Look, I think — and Chris touched on this upfront, but just I think the consistency of how our strategy is being brought to life across each of our three operating segments is really what’s behind the performance. I mean, obviously the context, the pricing is different across different markets depending on level of inflation, et cetera. But I think if you go back to what Chris talked about upfront is we’re seeing really good consistency from what I’ll call the mix of check and traffic growth. I think we’re seeing a lot of consistency around how we’re positioned from a value for money and affordability standpoint. And if you look at the key parts of our Accelerating the Arches strategy, there’s a lot of consistency and how those are being brought to life for our system.

And we feel really good also, as Chris highlighted, just about the focus on execution, which is coming to life across every part of our business and how that’s translating into a better experience. And we’re seeing really good consistency in that, feedback from our customers and the improvement in the customer satisfaction scores that we’re seeing. And so I think that’s really what’s behind. I think the consistency of results is when our system gets focused on the opportunity ahead of it and brings that to life with a lot of execution and discipline. I think that’s what drives the consistency in our performance.

Chris Kempczinski: The only thing I would add is, certainly, one of the things that gives our system confidence is the top line performance because there’s an understanding that what we’re dealing with right now from an inflation standpoint that, that is going to improve. Certainly, our expectation is it’s going to improve as the year unfolds. And so when you have this kind of strong top line momentum and you’re working your way through inflation, ultimately, you start to see the benefits of that. And one of the things that we’re seeing in the U.S., the U.S. has slipped back to being cash flow positive for our franchisees in quarter 1. 2022 was more challenging for them from a cash flow standpoint. But again, when you have a strong top line and you’re working your way through inflation, you can be pretty confident, you can be very confident that you’re going to get back to the cash flow growth that our system expects.

And so we feel good about that sort of message is what keeps the system aligned for the long-term.