Michael Flores - IR Steve Easterbrook - President and CEO Kevin Ozan - CFO

David Palmer - RBC Brian Bittner - Oppenheimer Andrew Charles - Cowen Sara Senatore - Bernstei Chris O'Cull - Stifel David Tarantino - Baird Jeff Bernstein - Barclays Brett Levy - Deutsche Bank John Glass - Morgan Stanley

Hello, and welcome to McDonald's January 30, 2018, Investor Conference Call. At the request of McDonald's Corporation, this conference is being recorded. Following today's presentation, there will be a question-and-answer session for investors. [Operator Instructions] I would now like to turn the conference over to Mr. Mike Flores, Investor Relations Officer for McDonald's Corporation. Mr. Flores, you may begin.

Hello, everyone, and thank you for joining us. With me on the call today are our President and Chief Executive Officer, Steve Easterbrook; and Chief Financial Officer, Kevin Ozan. Today's conference call is being webcast live and recorded for replay by webcast. Now before I turn it over to Steve, I want to remind everyone that the forward-looking statements in our earnings release and 8-K filing also apply to our comments today. Both documents are available on investor.McDonalds.com, as or any reconciliations of non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures. And now, I'd like to turn it over to Steve.

Thanks, Mike. Good morning, everyone. 2017 was a very strong year of performance for McDonald's. Our results demonstrate we successfully completed the transition from turnaround to growth. Our momentum is broad based across the McDonald's system. There are strong leadership teams in place, our business is fit for purpose and grown platforms underpinning our strategy of residential customers and markets around the world. Our top priority in 2017 was serving more customers more often and we did. We grew cash counts by 1.5% in the fourth quarter and 1.9% in the full year, with all business segments positive. This is our first full year of positive comparable cash count growth since 2012. Comparable sales for the quarter grew 5.5% marking our 10th consecutive quarter of growth. Full year comparable sales increased 5.3%, our best performance in six years. We made significant advances with our franchise strategy in 2017 culminating with our largest developmental licensee transaction China and we reached our target of refranchising 4,000 restaurants per year ahead of schedule. Customers tell us that we are notably enhancing their McDonald's experience by being more attentive to their needs and serving hotter and fresher food. Our overall customer satisfaction surveys scores continue to improve in 2017 with most markets achieving gains across multiple elements of brand perception particularly friendly service and taste and quality of food. As a result, six of our top eight markets grew market share with the UK, Canada and Japan leading the way. We are pleased with our progress but certainly not satisfied. There is more potential in the marketplace and in our plan and we are leveraging our considerable size and scale to unlock it. We are sharper and more focused in the way we organize bank and act and we are confident in our ability to execute with excellence to drive sustainable long-term growth. Kevin will walk you through more details about our financial performance in the fourth quarter and the full-year.

Thanks, Steve. By all measures our strong performance in 2017 shows that we have momentum. Enabling us to drive our business innovate and invest in our growth so we can compete effectively in today's globally marketplace. Our comp sales performance is a significant achievement in soft global markets and on top of strong prior year results. Comp sales in guest counts were positive across all of our operating segments with overall results driven by strong performances in the U.S., the UK, Japan, Canada and China. U.S. comp sales increased 4.5% for the quarter compared with the rest of the QSR sandwich competitor set which was relatively flat. Comp sales for the international lead segment rose 6% with positive results throughout that segment. High growth comp sales increased 4% led by China's strong performance along with positive results across the segments European markets partly offset by some near-term challenges in South Korea. In foundational markets comps were up 8% in addition to Japan's strong performance comps were positive in each of the segment's geographic regions. I also want to mention that starting with fourth quarter 2017 comparable sales in our foundational segments and on a consolidated basis have been adjusted to exclude the impact of Venezuela due to its hyperinflationary status and the significant impact that it had on the fourth quarter. We recap the comp sales for the first three quarters of 2017 to exclude Venezuela and reflected those in the earnings release to provide comparable amount. As we move into 2018 we will continue to direct our efforts and resources towards driving the convenience and menu innovation that will help maintain this topline momentum. On a reported basis earnings per share for the quarter declined 40% to $0.87. These results include a onetime net tax cost of approximately $700 million for the impact of U.S. tax reform. The $700 million net cost consist of 1.2 billion of cost for the deemed repatriation of our undistributed foreign earnings partly offset by a benefit of $500 million for the revaluation of our differed tax assets and liabilities to the lower U.S. tax rate. Excluding the impact of tax reform diluted earnings per share increased 19% to $1.71, reflecting strong comp sales, G&A savings, a reversal of a tax valuation allowance in Japan and a 27% tax rate. This tax rate was lower than expected because of tax law changes in some countries outside the U.S. in the fourth quarter. We ended 2017 with franchise restaurant representing 92% of our total restaurant base, up from 81% three years ago. As a result, franchise margins now comprise more than 80% of our total restaurant margin dollars. For the fourth quarter franchise margin dollars increased across all segments reflecting sales driven performance and the shift to a more heavily franchise system. The franchise margin percent in the U.S. remained flat, due to higher depreciation cost related to our rollout of experience to the future. Our company operated restaurant base now consists of a little over 3,000 locations, spread across the U.S. international lead and high growth segments. The U.S. and international lead markets accounts for about 75% of the company operated margin dollars. For fourth quarter, consolidated company operated margins improved 40 basis points primarily due to our refranchising efforts. Company operated margins in the U.S. declined 150 basis points, due to higher labor costs which reflected both wage pressures and our continued investments and deployments of our key initiatives along with higher commodity costs. Commodity costs in the U.S. for the fourth quarter were up a little over 1.5% versus last year while our full year U.S. grocery basket increased 60 basis points. In terms of menu pricing our fourth quarter pricing was up 3% year-over-year, which was above food away from home inflation of 2.5%. The menu price increases we took in the fourth quarter were part of our broader strategic pricing reset of the menu board ahead of the launch of our $1, $2, $3 menu in early January. By the end of the first quarter this year we expect our pricing to be back below food away from home inflation. For the international lead markets commodity costs were up about 3% for the fourth quarter and 2% for the year, with menu prices up about 2% year-over-year. G&A for the year was down 7% in constant currencies, in line with the guidance we provided at the start of the year. I'll put these things in the perspective relative to our G&A savings target in a few minutes when I review our updated outlook for 2018. Finally, other operating income increased nearly $60 million for the quarter, primarily due to the one-time reversal of the valuation allowance in Japan that I mentioned earlier.

Thanks Kevin. As our results demonstrate, McDonald's is much more agile and able to move at a pace needed to address the needs of today's customers. With the introduction of our velocity growth plan last March we aligned and mobilizes the McDonalds system. We began actually straightaway and by the end of the year we made substantial progress in the eyes of our customers. We are serving more customers as we retain those most loyal to our brand, regain visits from those who have been coming less often, and convert the casual to committed customers. We have grown sales across the full breath of our menu with great tasting value offerings, delicious core selections such as our Big Mac and exciting premium sandwiches with a wide range of flavor profiles. With relevant menu choices for our most price sensitive customers we have strengthened consumer perceptions of McDonald's as a place to find a tasty and affordable meal. Across the system our markets have increased the range and appeal of our food and real bundles offered everyday at compelling price points. At [indiscernible] in France offers premium quality and a very affordable portion size. The saver menu in the UK and value picks in Canada provide a range of affordable food for snacking and adults. In the U.S. from a big troop [ph] of $5 combined with $1 any size found in beverages provides customers the opportunity to bundle and share with incremental visits and average share in the quarter. Programs like McPick 2 for $5 and Germany's tasty McDonald's featuring both taking core sections for EUR1.99 not only appeals to the price conscious consumer and drive incremental traffic they re-introduce customers with the great taste and quality of the food at a core of our menu. Across the model systems we have increased a full and excitement via iconic food customers identify with our brands, the Egg McMuffin, the quarter pound of a cheese, chicken McNuggets, French fries and of course our world famous BigMac which is celebrating its 50th anniversary this year. We have reaffirmed that customers crave this food and the core of our menu still drives growth. Maintaining greater strength in our core menu platform has allowed us to venture further into exciting and compelling new offerings such as all-day breakfast which is satisfying customers and driving growth for McDonald's in the U.S., Australia and Canada. We also recently launched Buttermilk Crispy Tenders in the U.S. which contributed in a meaningful way to our sales performance for the quarter. Markets that have already modernized their restaurants and have the capacity and creditability to promote premium beef and chicken sandwiches. Such as the Signature collection in the UK and Seriously Chicken in Canada which is driving brand perceptions towards higher and profitable top line growth. [indiscernible] for our customers who access our great taste include we are providing them with greater flexibility and choice in how they order pay and are served their food. In 2017, we left from piloting delivery with UberEATS reaching 200 restaurants in Miami, Tampa and Orlando, so offering our customers the convenience of great McDonald's food delivered from 7,000 more restaurants in 21 different countries around the world. With our market in Asia and Middle-East where we've often delivered for many years we are now delivering meals from over 10,000 restaurants more than one quarter of the systems restaurants. Delivery orders tends up above average check size by 1.5 to 2 times and with high customer satisfaction we are seeing solid repeat business from those who try it. During the fourth quarter delivery gained traction and emerged as a meaningful contributor to our comparable sales in several of our largest markets. In many of our markets we've scaled the experience of the future platform providing our customers a more seamless, personalized and enjoyment experience with digital menu boards, self-order kiosk, greater hospitality and a modernized look. They are telling us they like the new McDonald's better. They are rewarding us with more frequent visits and they are spending more on average when they do. We deployed experience the future for ALGF in about one-third of the restaurants in the McDonald's system, including nearly 3000 restaurants in the US. Customers increasingly expect to engage with brands by apps on their mobile phones and in the US alone we have over 20 million registered users of the McDonald's mobile app. We are well positioned to capitalize on that user base. ending 2017 with 20,000 restaurants around the world offering mobile order on pay. I'm proud of our team's work we achieved that milestone from a standing start in just over 10 months. While still very early with customer usage we're encouraged by digital orders as we're seeing higher average check size and greater customer satisfaction among the customers. In particular many customers are appreciating the added convenience of curb side pickup. Now as we're starting 2018 our focus is on executing our velocity growth plan. We will continue to provide customers an improved experience and greater choice in how they order, pay and serve their food. We have opportunities in 2018 to raise consumer awareness of the enhanced convenience available with delivery and mobile order on pay. In the coming months we've initiated marketing campaigns that encourage more customers to enjoy these expanded options to engage with McDonald's. As we do we're optimistic this will contribute to the momentum of our business. With nearly 37,000 restaurants in a 120 countries McDonald's has a distinct scale advantage and significant potential. Over the course of 2017 [indiscernible] markets throughout the United States and around the world. We could see first-hand how our local teams are leveraging the benefits of being part of the larger McDonald's system and delivering on that in ways that matter most to the customers in their communities. The contemporary décor of well-trained crew members we saw in markets such as the UK, Canada and Poland demonstrate how successful we've been in enhancing the overall customer experience in a modernized restaurant, where customers have better experience perceptions of our brand improve sales increase and guest counts grow. In Italy we saw the results of a strong focus on the operational excellence. Customers appreciate the quick friendly service and great tasting food they receive which has dramatically changed the trajectory of our business in the market. With this accelerated growth we enjoyed its best year of sales since 2006. Cost [ph] has been a system leader in the development and evolution of self-order kiosks at the customer convenience and solutions for bottlenecks during high volume periods. During our visit last fall we saw how our French team has led in hospitality and table service across the market, to further elevate the customer experience and open up capacity. Service in the bases like these on top of their menu and value platforms have helped the market achieve an all-time high in market share. Restaurant employees in Sao Paulo and Buenos Aires demonstrate an outstanding commitment to hospitality. While visiting the [indiscernible] I experienced first-hand the passion, energy of our crew and managers as they embrace [indiscernible] an innovative program creating a new service focused culture, is making a real meaningful difference for customers. The confidence we have in the business continues to grow and I can say that our franchisee share our optimism. Buoyed by this confidence and the benefits the franchisees and the company will see as a result of U.S. tax reform we are further accelerating our investment in experience of the future in the U.S. We will bring EOTF to nearly 4,000 additional U.S. restaurants in 2018 resulting about half of our U.S. restaurants being completed by the end of this year. This is no small feat. While our franchisees are confident about our plan for the future they also acknowledge this is a major undertaking, that will require significant investment of time, focus and leadership to execute well. And clearly it will require significant financial investment too. Between the company and our franchisees over the next two years we will invest approximately $6 billion to transform the U.S. business. The impact will extend beyond the new equipment décor we are bringing to restaurants. This is an investment on our local communities as a benefit of these projects which extends construction crews and supplies. We also will continue to demonstrating our commitments to our people as we look at enhancing the training and development opportunities now offered through our Archways to Opportunity program. We did all this in partnership with our owner operators, with confidence and a firm commitment that the payoff will be a better stronger McDonald's delivering a vastly improved customer experience and sustained profitable growth. Now Kevin would share additional details about our outlook for 2018.

With the progress we made in 2017 our business is strong heading into 2018. Over the last few quarters I have been messaging that our 2018 results will be choppy due to the refranchising of several markets in 2017 and the $100 million of depreciation benefit in china and Hong Kong in 2017, associated with the refranchising of those markets. Looking forward we expect 2018 results to be even a little more choppy, with U.S. tax reform and a new level recognition accounting standard that went into effect January 1, this year. On revenue recognition while the new accounting standard will have no impact on our cash flows the change will affect the way we recognize revenue for initial franchise fees that we received, for new restaurant openings and new franchise terms. Previously we recognized initial franchise fees when we received them, upon opening new restaurants or granting a new franchise term. Beginning in 2018 we will recognize that income over the life of the franchise term. For this year we expected this change to have a negative impact of about $50 million on our consolidated franchise revenues and franchise margins. I talked to you about the impact of U.S. tax reform on our 2017 results and I'll spend a couple of minutes walking through how we expect the full impact of business going forward. All of this is based on available information and our current estimates which we know could change as further clarifications provided and our analogies are finalized. From an earnings standpoint we expect our effective tax rate for 2018 to be 25% to 27%, down from our historical range of 31% to 33%. Our global blended rate will be higher than the new U.S. rate due to taxes that we pay outside of the U.S. which currently average close to 30%. From a cash flow standpoint, we expect an incremental benefit of 400 million to 500 million annually prior to any reinvestment. A few points to put this in the perspective. First, we historically have not had a large amount of cash held overseas. So, the new law will not result in us suddenly bringing back a lot of cash. Second, this incremental cash flow represents less than 10% of our historical annual operating cash flow of roughly $6 billion. Finally, we have not been capital constrained in the past, so we expect our capital allocation priorities to remain consistent with what they have been. First, to reinvest in existing restaurants and invest in opportunities to grow the business; second, to pay dividends, and third, to repurchase our stock. Having said that we now expect to return about 24 billion to shareholders for the three-year period ending 2019 which is at the high end of our previously stated target. From a business operation standpoint, we expect our U.S. franchisees in general to also benefit from tax reform. Given the ongoing strength of our franchisees existing cash flow this benefit should enhanced our ability to invest in and execute on the velocity growth plan. Next, I want to take a moment to review the progress we've made on our financial targets around refranchising and G&A. During 2017 we completed transactions in the Nordics, Taiwan, China and Hong-Kong which, enabled us to reach our targets to refranchise 4,000 restaurants. We begin 2018 ready to operate under the streamlined and more heavily franchise business model that we set out to create under our turnaround plan. While we do expect to continue to refranchise some of our company owned restaurants in our major markets like the U.S. international league markets we anticipate the gains on sales of restaurants in 2018 will be down roughly 30 million to 40 million from 2017 as our refranchising activity begin to slow down. Regarding G&A we developed the targets savings of $500 million from our base of $2.3 billion at the beginning of 2015. Through 2017 we have realized about $300 million of net savings. In order to achieve those net savings, we save significantly more than $300 million on a gross basis related to maintenance spending. And then reinvested some of those savings primarily in technology and digital. So, at the same time we saved cost overall, we've also shifted more of our remaining spend from maintenance spending to investing in activities that drive growth. For 2018, we expect G&A to decline by 1% in constant currencies. This reflects savings from our refranchising transactions and a reset of our incentive compensation offset by one-time cost associated with our bi-annual worldwide operator convention to final year of our Olympics sponsorship and our upcoming headquarters office move, as well as continued spending in technology. We expect to fully realize our targeted $500 million of net savings in 2019. As we have become more efficient with the G&A required to run the business we will continue to invest in activities that we believe can accelerate growth. At the same time, we will continue to exercise strong financial discipline in the use of our valuable resources. Moving on to capital, we expect to end 2017 with capital expenditures of nearly $1.9 billion. This was slightly higher than we anticipated at the beginning of the year because of currency exchange rates and because we were able to complete more EOTF projects in the US than planned, ending the year with 3000 EOTF restaurants as Steve mentioned. In 2018 we expect to spend about $2.4 billion of capital, approximately 1.5 billion or two-thirds of our capital will be dedicated to our US business, primarily focused on further acceleration of experience of the future. Of the remaining capital budget about half is earmarked for new restaurant openings and half is allocated to reinvestment as we continue to expand the experience of the future in markets outside the US. Our capital will contribute to about 250 new store openings while capital from developmental licensees and affiliates will contribute to another 750 openings for a total of a 1000 planned new restaurants. Finally, for 2018 we anticipate some currency tailwind primarily in the first half of the year. At current exchange rates we expect a positive impact of $0.07 to $0.09 in the first quarter and $0.23 to $0.25 for the full year. As you know over the last month exchange rates have fluctuated more significantly than we've typically seen and we don't know what will happen to rest of the year. So please take this as directional guidance only. We've made significant progress in our business. The path that we're on with the velocity growth plan along with the investments we're making in our future position the company for sustainable long-term growth. We remain confident in our ability to achieve our long term financial targets beginning in 2019 and now I'll turn it back to Steve.

As you can see our business is growing. It is fundamentally sound and we're confident about our future. We have returned the business to growth and have achieved momentum with comparable sales. 2017 was our best performance in six years. Customers are rewarding us with visits because the actions we're taking to serve them great tasting meals, offer friendly hospitality and provide more choice in how they order, pay and serve their food. The three biggest draw to McDonald's system is continuing to make bold and aggressive investments in our most promising growth platforms. A strong signal of the confidence we have in our future. We're also looking forward to 2018 because there're many opportunities that will bring the building brand excitement with our customers and our people. This spring we'll gather at our worldwide convention in Orlando with nearly 14,000 owner operators supplies employees in the McDonald's system. This will be a tremendous opportunity for building our enthusiasm as we celebrate our progress and then rally together to pursue our even greater ambitions in the years ahead. As I mentioned this is the 50th anniversary of the BigMac a one of a kind sandwich invented by Jim Delligatti one of our earliest McDonald's franchisees. We have exciting plans to celebrate the many fans who remained so passionate all these years later about this iconic burger. Our flagship Chicago restaurant is receiving a dramatic makeover and it will offer great convenience and hospitality to our customers when it reopens later this year. The modern designs will play our latest technology and decor side, the green space, planters and outdoor sitting and a park for community to enjoy. And, I can't wait to take another picture there and advancing the evolution of our culture, when we open our new headquarters in Chicago's West Loop. Moving into the heart of such a dynamic city will put us closer to our customers and energize the McDonald's team. We are becoming a better McDonalds and as we do, its driving better results. While pleased with the progress we made in 2017, we have far greater ambitions. We have the right organization and the right plan. The fact always we put in place is delivering growth today, we are confident they will serve as the spring board accelerating our future success. So, thanks everyone, and now I'll turn it over to Mike to lead the Q&A. A - Michael Flores: Thanks Steve, so we will now open up the call for analyst and investor questions. [Operator Instructions]. And give as many people as possible the opportunity to ask questions please limit yourself to one question and we will come back to you with follow-up questions as time may allow. Now the first question is from David Palmer with RBC. David?

This is regarding U.S. it wasn't that long ago that surveys that we have done or seen elsewhere had McDonald's U.S. towards the bottom of the pack and if you are -- in the peer set, in things like quality and even towards the middle of the pack and things like value and convenience where you think McDonald's should obviously be winning. Those surveys are probably pretty stale now. You are probably seeing some improvements but perhaps place where you have made the most progress? And then it maybe it makes sense to tie into a market like Canada where you are further along with reimaging and other initiatives, how you think the brand perception can improve from here? Thanks.

You are absolutely right, I mean clearly, we see at a market by market that we are very close to all the consumer research and feedback we can get. I mean very simply, I guess you could characterize it into brand perceptions but also operational metrics as well and the two kinds of got to hand it hand. What we have seen around the world, and what we are beginning to see in the U.S. is when you look at a brand like McDonald's everything that you do communicates, so the look and feel of the restaurants, the quality and engaging element of our marketing programs, the friendliness of our people and their enthusiasm, technology innovation, you saw us talk about keeping the business for the future as well. So, what we are beginning to see is as we can change the broad-based investment both in our people and our restaurants in the menu improvements such as through poultry supply chain with the antibiotics, whether for the clean label nuggets and so on all of these things communicate at businesses on the move and a business that’s heading in the direction that our customers wants us to. So, we are certainly encouraged we are seeing some improvement in operational metrics in terms of friendliness, better service in terms of the customers perceptions and then you look at the broader brand metrics like is a brand for -- it is a company for a customer like me for example, so broader brand metrics, and we are beginning to see that mix. begins in the markets that are more advanced and you can look on the more developed markets, markets like Canada as you mentioned UK, Australia but we also see it into a number of our high growth markets where we already have modernized the estate and really repurposed the whole employment preposition countries like Netherlands and Poland and Spain and Italy. We begin to see as each part of progress we make it's just a mix all brand perceptions and also just the taste and quality of the food perceptions go up if you are able to satisfy customers in more environment. So, we are encouraged its early days we finish the year in the U.S. with around 3,000 of our restaurants really representing the look and feel that we are proud of going forward and with the further acceleration that we've announced the day, the 2018 we are going to have probably just north half of our state converted into really a great expression of the forward-looking brand McDonald's by the end of 2018. So, we are encouraged but a lot of work to do.

And next question is from Brian Bittner with Oppenheimer.

Can you just give us any insights into any sales benefits if any that you are seeing so far from your national value platform whether you are seeing a change in the industry gap or just incrementality in your business would be helpful. And could you also second to that help us understand that this platform has changed to sales mix from value in any meaningful way in your sales driver's recent history?

It's really too early for us to give any meaningful feedback on the dollar menu 1, 2 and 3 and it's only been 20 plus days it's been in the marketplace. And when you introduce a platform as strong and that's being built upon for the medium-and-long-term it’s going to take 3 to 6 months for it to fully ebbed in the minds of consumers. With that said in terms of the gap we're beginning to see in the marketplace broadly we ended the year in a competitively strong position. We announced in the U.S. a sales number of 4.5%. I think the overall competitive set was pretty much flat I think it was plus 0.2. So, we have noted that over the four quarters of the year the gap has suddenly increased. They are giving there any future direction but it was very encouraging for us that the more illicit the plans that we execute across the market we are making a dent in the competition which clearly gives us further encouragement. On a weekly basis I think we outperformed the peer group in 48 out of the 52 weeks across 2017 so again really consistent strong competitive performance marching here in the U.S. We feel good about the dollar menu 1, 2, 3. I mean just as an overall guide we are not seeing a significant or material shift in product mix. we are still seeing average shared growth across the overall business. so, we feel that it's settling in and embedding in well. we've brought in some of the elements which was successful for us in 2017 so that should be the dollar any size fountain drinks, which we know is very powerful and very strong. there were really augmented with some breakfast products and both across beef and chicken menu as well including then also the $3 happy meal.so we're off to a good start. it's very days to comment anything meaningful for it but it's certainly encouraging.

Next question is from Andrew Charles with Cowen.

Kevin, can you speak to a long-term CapEx target you laid out at the Analyst Day back in March and how would expect it to bridge from 2.4 billion in CapEx in 2018 to 1.2 billion ultimately and just kind of in reference to the original expectations for about $1.7 billion per year through 2020. And just one clarification as well, you talked about investing in tax savings in your experience for the future. Just want to clarify, you're investing greater than a 55% stake that you originally did in 2017 into the modernized restaurants in 2018?

Okay, Andrew. I'll try and hit all of them, if I forget something you'll remind me, but let me start with the capital. So, you're right when we talked about it at Investor Day back on March 1st, we expected that it would take several years to complete the experience of the future roll out in the US. We've now taken the opportunity with the momentum we have and with the operators on board so effectively just pull that forward some. So, what you'll see is a total capital envelop of around $2.4 billion in 2018. You should expect a relatively similar amount in 2019. My guess is there will be a little left over in 2020 I hesitate to say it'll be completely done in '19 but it should be significantly completed by the end of 2019. And then probably beginning in 2021 would be the ongoing normal run rate which right now absent anything new that we know about would be in that 1.2 to 1.3 billion range. So that's how I think of kind of evolution of the capital, it isn't spending more than we originally anticipated it's just moving forward the spends that we're able to complete the EotF projects quicker. Same with that investment is as you referred to our 55% hasn't changed, it's just accelerating the timing of some of those projects but our contribution rates, the partnering program we have is consistent with what we talked about. So that hasn't changed, again it’s just the timing aspect we'll be able to get the projects done quicker than we originally anticipated.

Just to add to that, and Kevin's absolutely right, I just want to put into context the significance of the acceleration that we are describing here. We exit 2017 with around 3000 restaurants fully converted. We started the year with around 700 so 2017 therefore we completed around 2300 projects. so, this is the best part of doubling that rate and again just to put it into context something similar to do in the UK, France and Germany all together in one year. I mean this is a massive undertaking, a massive signal of confidence from all of our operators and ourselves. But the other piece, the devil's always in the detail and our aim isn't just to get 4000 done it’s to get 4000 done very-very well because owner/operator is committing their money into this and every customer would like to see how the go stand the execution. So, for us this is a really significant undertaking ensuring our confidence in the future of the business and the confidence that we have for an infrastructure investment such as this as a result of tax reform I think is worth pointing out.

Next question is from Sara Senatore with Bernstein.

Hey thank you, I have one question and then a follow up if I could. The first is actually considering such a strong year I was surprised to hear Steve say that you think you can accelerate the momentum next year. So, I guess I'm just trying to figure out what that means, is that sort of talking about brand perception or do you actually see traffic and comps accelerate and so just trying to understand maybe quantitatively what that commentary means. And then the second question I had was sort of broad on, was a follow up on the value discussion. I think some of your smaller competitors have tried to be aggressive on value and have seen kind of a worst-case scenario where they maybe get better traffic but there is pressure on check and profit dollars. Could you maybe talk a little bit about how your marketing messaging allows you to drive value traffic but still see higher check averages, is it just your volume of marketing, is it the nature of the messaging just trying to understand how you are able to do this thing from what some of your other competitors are seeing?

I'll have a step of both of those and Kevin can join me on things I miss. We don’t want to get into any habit of forward projecting if you like but as we enter this year and because we are reviewing our plan, areas of strength, areas of opportunity, the path is delivering and through 2017 delivers -- we exceeded what we expected out of our fan in 2017. That gives us encouragement that we have a number of facets of our business that are working, whether it's the core nuts and bolts focus in the market on the day to day operations, your friendly service, hot fresh food, staffing our restaurants fully, and the real basics of the customer experience but all the way through to the efficient accelerators and the other platforms of growth whether it's through delivery, the emergence of some of our digital and technology and the growth opportunity that has and what we continue to see out of experience the future. So, you have heard me talk probably number of times around how we try to layer these platforms of growth upon each other. They don’t all outperform, but if they can just underperforming we go back and take a look and review and look to enhance and want to outperform our expectations. As we enter the year we feel confident that the plans we built and the progress we have in place are going to continue to deliver strong growth. As we continue to invest -- you are absolutely right the brand perceptions will undoubtedly improve if we continue to execute to the standard that we set ourselves. So, once we have about a third of our global stakes now fully modernized in the truest sense actually continue that pace. We know that the brand perceptions improve in restaurants is a much more modernized. So that we find, we are confident that the key metrics both the -- if you like the lightening indicators and the leading indicators both the financial metrics as well as the brand metrics will continue to improve. With regards to value, it’s a market share fight, we don’t see really, I think any significant broader market growth this year. We are certainly not planning on that. So therefore, we know we are in a market share fight and values is where it really does get the street fighting really hits. What we feel good about on the marketing side here and particularly if I talk to the U.S. is two things. One, we have great quality and great value items in the $1, $2, $3. If you look at that line up these iconic products the customers are familiar with are confident with and really, I think exudes much of the values and the things around what we stand for as a business and also as we develop our menu. So, as well as offering great value and we think it reinforces the quality perception and taste perceptions that we are looking to move. In terms of just the muscle we have, I mean one of the changes that the operators in the company signed up to last year was we were going to divert more money from the local agencies, the local costs, into national, into the national marketing cost. And that is A, more efficient in spend, and secondly, gives us much more universal trout. So, I think that makes us somewhat in -- really gives us a differentiating muscle as opposed to any of our competitors. so, I think the quality of the lineup and the financial muscle we have through our national marketing program in general we think will remain very competitive on the value add.

Next question is from Chris O'Cull with Stifel. Chris O'Cull: It looks like the average U.S. company operated store experience have decline year-over-year in the margin profit dollars. I'm curious if franchises experience similar performance and given the level of promotional activity and labor pressure what comps you really need in the U.S. to increase that margin dollar profit?

It's a fair comment because historically we have always set kind of a normal inflationary environment that a 2% to 3% comp would maintain margins. I think clearly today the 2 to 3 isn't enough mainly because of labor pressures. For us it's both on the cost side as well as we are investing in labor to make sure that we deploy all these initiatives in the right way. on the operator side it certainly we have the wage pressures. Having said all that their cash flow is still doing pretty well right now so, in the U.S. they are near all-time high cash flow so they are able to still invest in the business and move forward will all these EotF projects that we need them to do. So, while there is additional pressure because of labor, the fact that we are growing guest counts and growing account sales is affording the operators with the cash flow that they need to be able to appropriately invest in the business.

And just actually just share comps of the previous points as well from Sara's question, if I would continue comment on our marketing shift and to national from local because of the [Indiscernible] we can gain, we've been able to slightly reduce the marketing contribution that goes with the P&Ls of both our operators and our company stores. So again, this is huge in our size and scale not just an advantage to get us share of voice and drive the effectiveness of our programs, but actually, we can do more cost effective and pass on that benefit through the P&L, so it turns out to be a win-win forward of us.

The only other thing I would reiterate is we have talked about our conscious efforts to invest in some of this labor in the near term. so, some of that investment in our labor as far as to make sure we deploy all these initiatives is a near term phenomenon that we would expect for another couple of quarters but shouldn’t be ongoing then forever if you will.

The next question is from David Tarantino with Baird.

My question is on delivery in the U.S. and Steve I think you mentioned that is becoming a more meaningful contributor to comp so I was wondering if you would be willing to share some metrics around that, what type of sales lift are you seeing overall and comment on what you've seen in the markets that have been offering delivery for the longest period of time. And then lastly if you could also talk about what the franchises are seeing from a margin perspective on those delivery transactions?

Yes, I would speak a little more to delivery. I am not going to give any precise commercial information, that wouldn’t be sensible. But I'd like to talk about platforms of growth. We believe we have 5, 6, 7 platforms of growth all working at the same time. Delivery is one of those. So, it's now featuring as a meaningful contributor to the overall sales build we have in the market. We did a really good job at rapidly rolling out delivery across -- well globally but also across the US and we ended with around 5000 restaurants with UberEATS here in the US. So, we got a two-pronged approach for 2018. One is to continue to expand but it won't be at the same rate because we're looking at major cities and open areas and we hit a good number of those early and clearly, we can only expand at the rate that the UberEATS coverage will offer as well. But I mean we have a, have a great opportunity to actually just be aware of this and the usage from a customer perspective, the US is a little behind in terms of guest counts but the number of other established markets. so again, what we are doing is kind of the stuff you'd expect us to do for some great best practice sharing, what is it that's driving such high take up in markets like the UK, Australia increasingly so Canada. We're getting some great results also out of Netherlands, out of our growing businesses in Spain and Italy as well. So, we believe we can get the adoption and frequency to increase in the restaurants that are already offering delivery and we will just generally expand that number across the US as the UberEATS coverage expands. In terms of the franchisee, clearly is a different margin dynamic because there's a fee element that we pay to the provider through UberEATS which compensates for the fact that we don't have some hire drivers, run cars, have all the insurance cost, all the complexity and the complication of that, so that's kind of clearly the consideration balance we have to make. But the reality is this is, we're seeing the vast proportion of this is incremental business. And as long as that business stays incremental then we get an incremental dollar profit as well. It will be a lower margin percent but it's incremental dollars which is ultimately what we're aiming for and frankly we believe we had a bit of a jump on the market here as well with us by leveraging the size and scale. We will find ourselves very high up if you were to go on to UberEATS in many of the markets now, we'll be one of the early recommended restaurants just because the operation that we run now we can actually get from order to delivery in under 30 minutes pretty much everywhere we are which puts us right at the head of the pack in terms of the convenience that we offer customers.

Next question is from Jeff Bernstein with Barclays.

Great, thank you very much. A question on I guess probably on franchisee sentiments, I mean you talk about massive signal confidence in the franchisees, obviously they're pleased with the sales on that. I am just wondering if you could take a bit about is there any pushback you often hear about the overloads from some of the initiatives going on simultaneously Steve as you mentioned you've got five, six, seven platforms going. so just wondering whether from an ops or a cost standpoint you're getting any focused pushback. and one of those initiatives I'm assuming is fresh beef which even give much color to today I was just wondering whether as an aside you can offer anything incremental in terms of feedback from test or the timing and pace of the rollout that you're expecting which I believe was in the middle of '18. Thanks.

Yeah, sure Jeff, so franchisee sentiment, clearly, is something we work so closely hand in hand with the owner/operators. I mean our owner operators knew as our leadership team in the US, they were building a very aggressive and confident plan and they call it in the US the bigger, bolder Vision 2020, so they collectively built this plan knowing that there was a lot tied up into it. As we entered the 2018, there is a totally expensive combination of excitement and confidence and also just the anxiety that comes with the workload and commitments that have to be made. So, I would say so much as push back but just the reality is now hitting home, we have got a lot of work to do, both at a local and the restaurants of the owner/operators and also at a national level to execute some of these priorities. But Jerry its nothing that’s are changed and talk about and then really, we are looking to alleviate the anxiety just with some great execution. If we can execute Dollar Menu 1, 2, 3 from the start of the year, we have got a couple of other promotional campaigns coming up soon that why we are really exciting and drive the business. And then if we can get the -- and change the bit of liability through the technology through the mobile app our customers have and also improve on the user experience for example on the self-order kiosk. There is loads of areas we are looking to continuously improve and as we do so our collective confidence grows. But I wouldn’t say the sentiment is any different from any normal human reaction to when you enter a year and you got to work really hard also write some big cheques, always makes you think twice and I understand that and Jerry we are very empathetic to that. With regards to fresh beef, yes, haven’t spoken so much about this because we are in roll out stage, we are converting a lot of our facilities around the country in order to meet the demand when we go to national launch which should be around May-June tie. So, we really completed the first full wave. We probably have now 2,000 to 3,000 restaurants, which now have the fresh beef or quarter pounders and our signature range. And clearly, we have a phased rollout for the next two to three months. But the feedback we are getting is clearly unique diligence in the operational training in order to get our grill teams familiar with the new procedures, but once they are embedded by crew members are very tactful they learn very quickly. I mean the other -- it's mostly encouraging feedback we are getting is from customers who just love the taste of the fresh beef and the quarter pounder. So, we are getting unsolicited feedback from customers on a notable improvement, so again that just gives further encouragement as we roll this out in the next two, three months.

The next question is from Brett Levy with Deutsche Bank.

If I may two questions, one to clarification. On G&A did you intentionally or was it accidentally that you removed the 5% to 10% additional savings beyond '19? And then just as a follow up to some of the questions on the franchise profitability. Based on your conversations how are they thinking about their spread between not just the investments hitting OTS and value but also what they are seeing on a labor front as companies like Starbucks and Walmart has once again taken it upon themselves to pass along savings and raise wages, any color you could provide on that would be helpful.

I'll start with the G&A. So yes, it was conscious that we took out the 5% to 10%. I guess just to reiterate some of the things I said we have been focused on both savings G&A and shifting some of our spend from maintenance to areas that grow the business. The way I -- our overall philosophy is to achieve savings as far away as possible from the areas of the business that directly impact our customers. So that’s where we have been focused. We have realized that we are going to need to continue to invest in technology and digital in order to keep up with where the world is going and our customers' expectations. So, we're going to comment to the $500 million but not commit to anything past that. We do look at a variety of G&A measures both internally and externally to compare with our peers so we look at G&A as a percent of sales, we look at G&A as a percent of operating income, because effectively the G&A is incurred to grow sales and operating income and I'm not a 100% sure that everyone in the industry classifies all the cost exactly the same way so to me the ultimate measure is looking at operating margin, kind of how efficient are you at bringing revenues down at the bottom line. So, we look at all those measures to ensure that we are spending our cost efficiently, we're going to continue our financial discipline. I think over the long term we would expect that our G&A would be at or below 2% of sales but for now we're going to commit to the 500 and just keep reevaluating and keep our discipline. Related to the labor cost. It's very early days and each of us is working on the programs that we are building for the benefit of our people so it's no immediate impact we can see but overall, I would say that the fight for talent continues, it's going to get increasingly challenging to attract the talent you want into your business and then you go to work really hard through training and development to retain them. so, the local level owner/operators company restaurants clearly want to stay competitive on pay but also want to differentiate ourselves through the program such as our trace of opportunities which we are looking to significantly enhance the benefits to our employees from that and also broaden the accessibility beyond the U.S. into a global program as well because we want to make sure that all of our people around the world stand to benefit. So, we remain very close to it and that's actually one of the advantages of a franchising organization such as ours is that when owner/operator is close to the market as they are very swift to adapt to the changing marketplace.

So, we've reached the top of the hour. We will take one more question and that will be from John Glass with Morgan Stanley.

This question is around return on capital goals. First of all, just the lower tax rate, does that necessarily imply higher dividend even keeping your payout ratio the same or do you tend to sort of smooth that overtime. Anything with leverage ratios as tax reforms or potentially you think about leverage. And then finally you think about sort of overall return on capital goals. I know you are still within that 2019 goal but is it -- given you got line of sight in CapEx spending a couple of years when is the appropriate time to talk about new goals or return on capital for investors to think about under this new all franchise business model?

Let met talk about I guess the various pieces of written on capital that you mentioned since you hit them all. That's a board decision, we will review with them kind of ongoing we didn’t have a new discussion right now related to changing dividend kind of as quick reactions to tax reforms but we certainly will have those discussions as the year progresses in our normal course. I don’t know that a tax reform in of itself changes dramatically the way we think overall about dividends. we've been committed to dividends for over 40 years, well we're still committed strongly to dividends. We do look at things like payout ratio and so we will continue to look at just as a guide we don’t have a set target but we will continue to look at payout ratio to help inform that decision. We did as you indicated even with our acceleration of CapEx for 2018 and 2019 we're still comfortable in indicating that we'll return about a $24 billion to shareholders through 2019 which was at the top end of our range. Leverage ratios you know I think the rating agencies are still working through some of how to look at tax reform and how to think about their model for us right now. We continue to believe that we're at the appropriate credit ratings so we don't have a plan to change our credit rating. That gives us a little bit of room plus or minus in any given year and so as we think about returning it does imply a potentially a little bit you know little bit flexibility in adding some debt and as I indicated our priority still is the same, the first priority is clearly to invest in the business for growth and then we'll consider dividend and share buyback.

Well thank you, I'll now turn it back over to Steve.

Yes, just before I close just to add to Kevin's last comment. Just not to lose sight, the fact is our operating business is still the massive generator of cash and there's no doubt tax reform provides an encouraging help post for our owner/operators and ourselves but growing the business is going to be the primary source of cash growth going forward and that's where we remain focused. So just to close up I just want to reiterate our philosophy strategy is working and we really do have high expectations for McDonald's in 2018. We've got strong leadership team and a great commitment and are live over the franchisees, supply partners and employees who make up the three nuggets store the McDonald's system. So, we got great confidence about where we're going to take our business this year and look forward to sharing that with you as we progress, thanks very much.

This concludes McDonald's corporation investor conference call, you may now disconnect.