Mike Flores – Investor Relations Steve Easterbrook – President and Chief Executive Officer Kevin Ozan – Chief Financial Officer

Sara Senatore – Bernstein Andrew Charles – Cowen John Ivankoe – JP Morgan David Palmer – RBC Brian Bittner – Oppenheimer David Tarantino – Baird Matt DiFrisco – Guggenheim John Glass – Morgan Stanley Will Slabaugh – Stephens Peter Saleh – BTIG Jeff Bernstein – Barclays Greg Francfort – Bank of America Merrill Lynch Alton Stump – Longbow Nicole Miller Regan – Piper Jaffray Jeff Farmer – Wells Fargo Brett Levy – Deutsche Bank

Hello and welcome to McDonald’s April 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 today on the call are 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. 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. Both documents are available on www.investor.mcdonalds.com, as are reconciliations of any non-GAAP financial measures mentioned on today’s call with their corresponding GAAP measures. And now I would like to turn it over to Steve. Steve?

Thank you, Mike. Good morning. I’m pleased with our first quarter business performance as we continue to build momentum and grow customer visits with delicious food, compelling value, and enhanced convenience. We are managing our business for the long-term and with our Velocity Growth Plan, I am confident that our strategy and actions we’re taking will position the business for sustained growth. The U.S. market has embarked on an aggressive plan and one of the most significant transformations in our history. Since the start of the year, the market has modernized and improved hospitality in nearly 1,000 restaurants, setting the pace to bring the Experience of the Future to an additional 1,000 restaurants every quarter this year. This is an aggressive pace. 1,000 projects would be like modernizing every McDonald’s restaurant in Australia and we’re doing that each and every quarter in the U.S. We’ve introduced cooked right when ordered Quarter Pound burgers using fresh beef in thousands of our restaurants and trained hundreds of thousands of restaurant crew on our new procedures along the way. And we’ve transitioned the entire market to a new value platform, offering our customers greater choice and variety. All of this has been accomplished while streamlining our marketing structure. We reduced our advertising co-ops from around 200 to just over 50, allowing us to be more agile in decision making and execution. Also we’re becoming more efficient and effective as we shift to a more natural market approach. Our International Lead segment once again delivered strong results and they executed foundational elements of our plan in a majority of restaurants. These markets are providing better food, value, and convenience for our customers and capturing more of the potential from their growth initiatives. So what do I mean by this? The markets established a solid foundation that starts with strong local leadership and franchisee alignment and also leverages delicious food at the core of our menu, effective value strategies, rooted in deep consumer insights, and great running restaurants. These markets then layered in multiple platforms to accelerate and sustain growth with modern and appealing restaurant designs, both inside and out, that signal to our customers we care about our business and care about them. Optimized kitchens have expanded our capacity to serve more customers more quickly in a more productive and enjoyable work environment. Digital menu boards, self-order kiosks, and mobile apps that build awareness of the breadth of our menu and quality of our food. Enhanced drive-thru is helping us quickly serve more of our time-pressed customers whilst creating a culture of hospitality with table service that unlocks the potential of the investments in technology for capacity optimization by creating a low-stress, personalized experience. It’s the layering of these foundational platforms which has strengthened the brand in these markets whilst building the capacity and capability to drive growth. We’re seeing the results and that’s why I’m so confident in our ability to sustain momentum in these markets and it’s what I look forward to in the rest of our system. Globally, we marked our 11th consecutive quarter of positive comparable sales with growth of 5.5% in the quarter. Guest counts grew by 0.8%, marking our 5th consecutive quarter of positive global guest count growth. We’ve listened to what our customers are saying by millions of surveys each month and they are telling us that we’re getting noticeably better with fast and friendly service and great-tasting food. Satisfaction scores rose in 2017 and the positive trends continued into 2018. The most significant improvements were in Japan, France, Australia, and Canada, where in many cases we’re seeing double-digit increases in the key measures of customer satisfaction. With these improving customer perceptions, guest count growth, and market share gains, we are building brand strength which fuels future growth. Now Kevin will walk you through more details about our sales performance during the quarter.

Thanks, Steve. Our comp sales performance for the quarter was strong. Steve and I talk about the size and scale of McDonald’s. To put our 5.5% comp sales increase in perspective, it equates to over $1 billion of growth across the system for the quarter. Each of our operating segments contributed to this growth, with the first quarter also benefiting from a shift in the timing of Easter and related school holidays. U.S. comp sales increased 2.9% for the quarter, with a positive comp GAAP of 270 basis points versus QSR sandwich competitors excluding McDonald’s. Sales were fueled by higher average check, driven by two primary factors; menu price increases as part of a broader strategic pricing reset of the menu board, and favorable shifts in product mix, consisting of trade-up to new premium products and a higher number of items per order for $1, $2, $3 Dollar Menu transactions. One of our challenges in the U.S. is consistently growing comparable guest counts, especially when current overall industry traffic is negative. U.S. guest counts declined in the first quarter due to the very competitive breakfast day part and our conscious decision to simplify our value platform, eliminating most local value offers. We remain focused on executing our plan to deliver guest count growth through offering the appeal to customers, as well as taking actions to grow our breakfast business. In the International Lead segment, comp sales were up 7.8% with positive comp sales and guest counts in all markets. Leading the segment, the UK maintained momentum and posted its 48th consecutive quarter of comp sales growth. That’s 12 years of uninterrupted quarterly growth in one of our largest and most competitive markets. Germany delivered its best guest count performance since 2005. Drivers of this growth included a fun digital Easter Countdown Calendar promotion and the successful Taste of McDonald’s campaign, featuring products such as the Big Mac and Royal TS Burger. And Canada continued to gain market share across most day parts, supported by continued success of all-day breakfast and premium products such as the Seriously Chicken lineup. Comp sales for the high-growth markets increased 4.7%, led by continued strong performance in China and Italy. Italy experienced its best quarter in both comp sales and guest counts in the market’s history, driven by digital engagement and the My Selection platform, featuring local ingredients on our premium burgers and chicken sandwiches. And in the Foundational segment, comp sales were up 8.7%. In addition to Japan’s continued strong performance, comp sales were positive in each of the segment’s geographic regions.

Thanks, Kevin. Our strong broad-based performance illustrates the traction we’re gaining across the system with our Velocity Growth Plan. This gives us confidence we’ll continue to drive business momentum as we scale what’s working. We have strong market leadership teams which have effectively adapted the plan based on local customer insights, driving greater relevance and impact with the food we serve, the value we offer, and the experience we provide. We are reclaiming leadership and serving great-tasting burgers through product innovation and elevating our core offerings. This year, around the system, we’re celebrating the 50th Anniversary of the Big Mac. We’re reenergizing the brand and rekindling the passion our customers have for this iconic and delicious sandwich. Many markets are extending the line, offering a limited time trio of Mac Jr., the classic Big Mac, and Grand Big Mac. In the UK, this was a key growth driver for the quarter, with Grand Big Mac sales far exceeding any promotional beef sandwich previously offered in the market. The Quarter Pounder with Cheese is another iconic core burger with tremendous potential. The U.S. is going after this in a big way with the national launch next week of Fresh Beef, cooked right when ordered in our quarter pound burgers. We have already been serving these sandwiches in select markets throughout the U.S. and the response has been very encouraging. In our pilot markets of Dallas, 90% of customers who tried the burgers said they’d buy them again. These initiatives, on top of the improvements we’ve made to our core chicken products and the scaling of all-day breakfast in Australia and Canada, reinforce the notion that our core menu remains a strong growth driver for our business. Additionally, most markets grew traffic and check with strong premium burger offerings, like Gourmet Creations in Australia and Mighty Angus in Canada. Across the McDonald’s system, value is foundational to our business and an integral part of our growth plan. Our strategic brand of iconic and relevant value platforms and high-impact deals drove traffic during the quarter. The $1, $2, $3 Dollar Menu is the platform that anchors our value strategy in the U.S. With the introduction of this menu at the start of the year, we’re offering customers choice and variety for a simplified menu at multiple price points. It’s performing in line with expectations as customer awareness continues to grow and, as Kevin mentioned, $1, $2, $3 Dollar Menu was a key factor in higher average check for the quarter. In France, the market is providing great taste at a low price with P’Tit Dej’ and complete lunch meals under €5 with Menu McFirst. With this successful varied approach, McDonald’s France achieved a 6th consecutive quarter of guest count growth and an all-time high per share in the IEO market. During the quarter, we also drove sales, traffic, and brand excitement with the continued expansion of our velocity accelerators. As we enhance the customer experience and provide greater convenience for our Experience of the Future, delivery, and digital initiatives, we’re learning more about what is most important to our customers and rapidly scaling what works. Table service, which was developed in France, and enhanced hospitality, which was perfected in Canada with their guest experience leader program, have proven to be critical drivers of customer satisfaction. This has helped us unlock the potential of our self-order kiosks to build capacity, frequency, and average check. We’ve achieved a critical mass of POT at deployment in Australia, Canada, and the UK and are well on our way to being there by year-end in Germany and France. The U.S. remains on pace to have POT at deployment in about half of the market’s 14,000 restaurants by year-end, integrating the best approaches that we’ve learned from the International Lead markets. Regarding another of our accelerators, more than 11,500 restaurants now offer delivery. Whilst we continue to expand the base of participating restaurants, we’re working closely with Uber Eats and our other partners to optimize the model, building awareness, trial, and more frequent repeat orders, and, most importantly, customer and career satisfaction. In most of our major markets, delivery is already a meaningful contributor to overall comparable sales. With mobile order and pay now active in over 20,000 restaurants, we’ve turned our focus to building customer awareness, encouraging more app downloads, and driving active usage. One great example of this is Germany. As Kevin previously mentioned, the market had great success as it launched the McDonald’s mobile app with an Easter Countdown Calendar, offering 32 straight days of different and compelling offers only available through the app. This generated over 5 million downloads, making it the most downloaded app in Germany in February, and it drove business results: double-digit comp sales increases and the best guest count growth in 12 years. The success we’re already seeing across the system reinforces my confidence that we still have significantly more potential in our plan. Our market leadership teams are focused on what works and we’re sourced to execute for impact. Now Kevin will provide additional financial highlight for the quarter.

Thanks, Steve. As I mentioned earlier, our comp sales growth for the quarter reflects our broad-based strength around the world. Earnings per share for the quarter grew 12% in constant currencies to $1.72. EPS was impacted by $0.07 for some adjustments to amounts we recorded in 2017 as a result of tax reform. Excluding this impact, EPS was $1.79, an increase of 16% in constant currencies. Sales leverage offset the drag of refranchising activity and we saw benefits from a lower tax rate and FX, which I’ll cover in a few minutes. As we review our operating results, I want to remind everyone that for the first half of this year, we’re comparing against China and Hong Kong results prior to refranchising those markets in the third quarter last year. As we anticipated, we’re beginning to see the benefits of our more heavily franchised business model in our operating margin, as it grew from around 36% in the first quarter last year to nearly 42% this year. Looking at the components of operating margin, the impact of positive comp sales growth, coupled with refranchising, drove a 60 basis point increase in our franchise margins, which now represent over 80% of margin dollars. Where the most significant refranchising activity in 2017 was developmental license fees, we expect that most of the refranchising this year will be conventional franchising. We also expect that most of this activity will occur in the first half of the year. Looking at 2018 and beyond, we still have a few markets that we’re exploring to potentially refranchise via the developmental license model. Moving along to company operating margins. Consolidated margins declined 150 basis points to 16% for the quarter, primarily due to the impact of the China/Hong Kong transaction in 2017 along with wage increases in most of our major markets. In the U.S., company operating margins increased 50 basis points to 15.8%, driven by positive comp sales, a lower advertising contribution rate, and refranchising activity, which helped us overcome higher wage rates and commodity costs this quarter. Turning to pricing and commodities, our first quarter pricing in the U.S. year-over-year was slightly below food away from home inflation of 2.5%. I mentioned that commodity costs were higher in the U.S. for the quarter. They were up just over 2% versus last year. We continue to expect our U.S. grocery basket to increase about 1% to 2% for the full year, reflecting less commodity pressure in the back half of the year. Similarly, we expect commodity pressures to ease in the International Lead markets in the back half of 2018. While commodities increased about 3% in the first quarter year-over-year, we continue to expect costs for the full year to increase about 2%. Our menu prices in the International Lead markets were up just over 2% for the quarter. Continuing on to G&A, G&A for the first quarter was down 1% in constant currencies. We expect our G&A to increase around 5% in the second quarter as a result of costs related to our worldwide convention earlier this month and our corporate headquarters move in May. And we continue to expect our full-year G&A to decrease about 1% in constant currencies. Our effective tax rate was about 27% for the quarter, reflecting $52 million of adjustments as a result of tax reform that I mentioned earlier. Excluding these adjustments, the tax rate was around 24.5%. While we may have additional adjustments this year as the guidance on tax reform continues to evolve, we still expect our full-year tax rate to be in the 25% to 27% range. Turning to foreign currencies, for the quarter, foreign currency translation benefited EPS by $0.08 per share. At current rates, we anticipate a slightly lower benefit from foreign currency for the second quarter and about $0.19 to $0.21 for the full year. As usual, this is directional guidance only because rates will change as we move through the remainder of the year. Our broad-based strength is a reflection of the power of our Velocity Growth Plan and we’re confident that the actions we’re taking will continue to drive growth, both for today and the long-term. And now I’ll turn it back to Steve.

During the quarter, we made a series of announcements intended to help us maintain and build trust with our customers. With our Scale for Good framework, we are elevating a select group of global priorities where we believe we can make the greatest difference and drive industry-wide change. McDonald’s is stepping up to address major social and environmental issues that matter most to our customers, franchisees, employees, suppliers, and other stakeholders. Scale for Good is not a separate corporate responsibility platform, but rather an initiative embedded in our growth strategy. We’ve set goals to reduce packaging and increase recycling, take bold actions related to kids’ nutrition, and support producers in developing more sustainable approaches to raising beef. McDonald’s is the first global restaurant company to address climate change by setting a real target to significantly reduce our greenhouse gas emissions. And we’re expanding on our longtime commitment to restaurant crew and managers. Last month we announced that we will increase our investment up to $150 million over five years to our global Archways to Opportunity education program. With Scale for Good, our goals extend beyond our direct reach. With initiatives such as beef sustainability and operating more energy-efficient restaurants and offices, we’re working across our supply chain and collaborating with thousands of franchisees, suppliers, and producers. Whether it’s with Scale for Good or other partnerships, McDonald’s possesses a convening power like no other company in our sector. A prime example is the announcement during the quarter of a new alliance between McDonald’s and the Walt Disney Company. Building on our goal to offer more nutritionally balanced Happy Meals, Disney and McDonald’s will collaborate with cross-promotional campaigns involving movies from Walt Disney Animation Studios, Pixar Animation Studies, Disney Live Action, Marvel Studios, and Lucasfilm. This alliance combines two of the most iconic and beloved brands for families and we’re excited by the fun and innovative opportunities it will create for engaging with customers. Over the past couple of years, you’ve heard us talk about our higher appetite for calculated risk, greater personal accountability, and growing ambition. We’re asking a lot of everybody in the McDonald’s system. As is certainly the case in the U.S., where we’ve developed an ambitious plan over the past year with our franchisees. It’s going to be hard work and we’re taking on a lot at once. This is what it takes to keep pace with today’s rising customer expectations. The McDonald’s system is up for the challenge, we’re fit for purpose, and we’ll continue to get better. We’ve seen the results when our other markets have executed strong plans and we’re confident about the U.S. Let me tell you why. Franchisees, suppliers, and corporate staff are energized and enthusiastic about our future. As I talked with many of them recently at our worldwide convention in Orlando, Florida, I was struck by their deep sense of commitment to our customers and robust determination to maintain our momentum. The convention was an occasion for the entire McDonald’s system to reflect on the progress of our business over the past two years and a large amount of the strategy guiding our future. The 15,000 people attending our convention were eager to share and learn the best approaches in our top-performing markets and restaurants. We have one of the world’s most powerful brands and with the Velocity Growth Plan, confidence is growing throughout the McDonald’s system that we can make it even stronger. We’re ambitious and hungry to unlock even greater potential remaining in our plan. As we look to maintain this pace in the quarters ahead, we’re confident that we’re on track to strengthen our leadership position. The McDonald’s system is fully aligned and engaged, from the crew members in our restaurants to our franchisees to our suppliers and corporate staff, we are committed to showing our customers every day how we’re becoming a better McDonald’s. And with that, I’ll turn it over to Mike to lead Q&A. A - Mike Flores: Thank you, Steve. We will now open the call for analyst and investor questions. [Operator Instructions] And now the first question is from Sara Senatore with Bernstein.

Thank you very much. Just on the U.S. comp, if I may, you pointed out that traffic is a priority. There was some softness in the breakfast day part. And also just in terms of the $1, $2, $3 Dollar Menu, since it’s driving average check, it sounds like maybe it’s adding to existing customer orders but maybe not bringing in new customers. So I was wondering if you could maybe talk about the tweaks you might be making. Is it on the value side? And, if not, in terms of breakfast, where do you think you’re losing the customers? Is it to kind of coffee shops? Is it to other QSRs? Just trying to understand the complexion of the U.S. comp.

Sure. I’ll start, Sara. I think the reality is footfall is down. So I’m not sitting here thinking that there’s share going to any particular competitor. It’s just a market share fight overall. So as you say, we’re going to continue to sharpen our plans. And if you want to talk about, for example, the value platform, this is the most significant value platform launch we’ve had in probably more than ten years. So it takes a while for the customers to get familiar with the new menu. And we’ve got three or four items each at $1, $2, and $3. And, yes, we’re getting a better understanding now of how customers are buying from that menu. And as we’ve seen, we know it can build average check, so we’re selling more items per order than we were previously. But we’re also still very keen just to get that single dollar customer come in at the real value end as well. So I think you’ll just see us continuing to make sure that we can highlight the range we have. But actually we’ve got some absolute knock-out products on our $1 and $2, like our $3 Happy Meal, for example. So I think we’ll keep finessing it. There is flexibility there. We’re changing media weights. We’re changing some of the creative work as well on the marketing side, to better have some of the stronger items just pop out a little bit more from a customer perspective. But we’re satisfied with where we’re at. Although we don’t want to get the guest count piece moving again and we’ve never made any secret of that.

Our next question is from Andrew Charles with Cowen.

Great. Thanks. Two parts to my question. Just a follow-up on the first question. What’s the diagnosis behind the soft morning sales and did the two for $4 Breakfast promo meet your expectations given the backdrop of softening morning day part? And then I know you’re not prepared to discuss the lift you experienced from Hot off the Grill, the fresh beef initiative in the test markets, but from a timing perspective, did this initiative lead to a faster lift in sales in test markets relative to what you saw with the $1, $2, $3 rollout earlier this year? Thanks.

So the two for $4 Breakfast meal was – the first thing I want to do is highlight something that really encourages me, which is how nimble the U.S. system now is. We have sometimes been a little bit slow to be able to effect change and the guys could see where the market was going. Breakfast was competitive. With the owner/operators, they created a device, the two for $4 deal. And we’re satisfied. We think that makes us much more competitive in the breakfast day part so I can see continued enthusiasm for that. For fresh beef, we really have not put any advertising weight behind it yet. So in the test markets, what we were getting more of was the understanding of the operational consequences, so we could best train our people, and certainly the customer feedback at a restaurant level was absolutely fantastic. So we haven’t attempted to drive sales with it yet so we haven’t put the marketing dollars behind it. But that’s going to change soon now that we’ve rolled this out across the entire state. We’re ready to go. And if you haven’t tried it, you’ve got to try it. It just tastes great. Honestly, it’s a hotter and juicier Quarter Pounder and customers are really enthused about the noticeable difference it makes.

Hey, Andrew, the only other thing I’d say is, just as perspective that two for $4 breakfast that you talked about didn’t go in until mid-March. And so it really didn’t have a meaningful impact on first quarter results. It’ll really have more of an impact related to second quarter.

Our next question is from John Ivankoe with JP Morgan.

Hi. Great. Thank you. First, how much was the calendar shift a benefit, I think particularly to International Lead, which is where I would suspect it would be the highest? And then secondly, for the main question, what can we learn from International Lead in terms of various initiatives that that collection of markets may be ahead of the U.S. that could be a leading indicator to future U.S. sales and comp performance? If you could just highlight a couple and where we are in terms of rollout for International Lead versus U.S.

Yes, I’ll start with the calendar shift and then Steve can talk about learnings from the IL. It’s actually different by market. Certainly Europe had a bigger impact than places like the U.S. Germany, for example, has one of the bigger impacts, more related to school holidays actually than the Easter timing, but they obviously are correlated. So it was certainly a benefit in the first quarter and we’ll see that benefit, if you will, reverse in the second quarter.

John, I’ll take the second one. Because you’re absolutely right. I think what’s really created the confidence to put such a bold plan together for our U.S. business has been what they’ve seen and what we’ve all seen with the International Lead markets. So one of the benefits we do have here now is, as we are rolling out thousands of projects per quarter – so, I mean, it really is a phenomenal project management exercise and change management exercise. We have so much learning now from Australia, Canada, and UK, in particular, the most advanced, the sort of details that we can get into and share now, which helped the U.S. from a learning perspective. Things like the real nitty-gritty stuff. So with the self-order kiosks, what’s really important about the self-order kiosk is not just the customer-facing user interface but actually physically where you position them in a restaurant, for example. So you can better understand customer flow. It provides another ordering option for a customer apart from the front counter. So the devil is in the detail, as you expand as rapidly as we do and we’re investing as much as we are. But things like training programs. Understanding the best way we can train both kitchen crew and also front of house and the hospitality. So part of what we have committed to, to our U.S. business, is we will literally just pick up and share the best practices. And we still think there’s more the International Lead markets can get out of some of the initiatives of Experience of the Future. So we’re going to continue to really squeeze it hard and get as much out of it as we can. But I think what gives us confidence is the U.S. doesn’t need to make any of the mistakes that we made in some of the early days as we’re learning some of these initiatives. We have a proven model now and we can just get into that groove of 1,000 projects a quarter and we’re excited about what it’s going to do for the business.

Next is David Palmer, RBC.

Thanks. Good morning and congratulations on that phenomenal momentum in your leadership markets. Perhaps you can make a highlight on the UK market, why that one is so particularly strong. We’ve heard about such tough weather conditions there. I would imagine that you’re outperforming the eating-out market there, particularly by a wide margin. But a separate question on the $1, $2, $3, I’m just trying to understand where you’re coming from on this one. You said it’s performing in line with expectations but that traffic was negative in the quarter. Are you going to probably keep the architecture the same on the $1, $2, $3 going forward, confident that it will build in momentum and acceptance with the help of some of the premium innovation that you have coming? Or do you think that this is something that you’ll continue to tweak along the way? Thanks.

Thanks, David. So, the UK, they’re on a real roll. And we do call them out from time to time because they’ve really gathered some fantastic momentum. I think ultimately what they’re benefiting from is not just the motivated owner/operators and the investments we bring into our restaurants, but actually for many years, they have really been very good at putting attention to building the brand as well. It’s a competitive marketplace. It’s facing many of the societal challenges and business challenges that we face elsewhere in the world. But they really are beginning to reap the benefits of long-term sustained investment in the brand, as well as just in the core business. And, yes, they’re taking plenty of market share. They’re in a very dominant position and I think it would be tough to be a competitor of McDonald’s in the UK. They really are firing on all cylinders which is great. For the $1, $2, $3 Dollar Menu, I think the architecture, you could expect to see it pretty much the same. Yes. As I say, we’re understanding more about how customers are buying from it and what they see. Could we rotate one or two items on and off it? Yes, absolutely, that was always part of the plan so we can always keep it fresh and have got something new to talk about. But fundamentally we’re satisfied with where it is. Overall, we’re not satisfied with guest counts being down. But the role the Dollar Menu plays and the way it – the influence it has on our overall product mix is where we want a value platform to be.

Next is Brian Bittner, Oppenheimer.

Thanks. Good morning, guys. Just with fresh beef in the U.S., surely it must provide a tremendous perception with the quality of your Quarter Pounders. But the question I have is, is there any risk that it puts a shadow on the rest of your beef menu at all? Or are you just simply not seeing this anywhere where you’ve tested it?

Brian, it’s a good question. It was actually one of the things we were very mindful of when we actually established the test in the first place. And we wanted to make sure there wasn’t any other sort of, as you say, shadow or reflection on the rest of the menu. But customers really did not create any concern for us whatsoever in the way that they interpreted what we are doing. They were just saying if you could help make the Quarter Pounder taste even better, good for you. You’ve got our backs. So we didn’t see anything to cause us any concern. That’s why we did have a robust test. I mean, we’ve been testing this for about 12 to 18 months so we’ve got a really good read from a customer basis now. And they’re just saying good on you. If you can just make this taste better then bring it on.

And what we actually saw in our test markets was sales of Quarter Pound burgers went up but also sales of our overall burger lineup increased. So even the burgers that weren’t using fresh beef in our test markets of Tulsa and Dallas saw an increase during the pilot test phase.

Next up is David Tarantino with Baird.

Hi, good morning. Just one clarification on the U.S. comp for Q1 and then a question on mobile ordering. So the first, a clarification, I know you don’t like calling out weather issues but the winter was pretty tough in the U.S. So did weather impact the Q1 comp and, if so, do you have an estimate for that? And then secondly, on mobile ordering, I was just wondering, Steve, if you could give us an update on the adoption rate you’re seeing in the U.S. It seems fairly modest from my view so far but I guess where are you on that and what’s the plan to drive better adoption given that could be a pretty big unlock for throughput? Thanks.

Yes, I’ll start with weather and then Steve can take the digital stuff. You’re right. We generally don’t like to call out specifically weather. It did negatively impact first quarter. I guess I’d say maybe a little over a half a point would be approximate quantitatively. But we’re generally not big plans of calling plus or minus the weather. But it certainly impacted us here. And surprisingly it actually had an impact in Europe, too, because Europe, for those of you who follow, had some rough weather during the first quarter also. But that’s kind of quantitatively about how much it impacted us.

We’ve had a couple of relatively gentle winters prior to this as well. So I think this was just a little bit more of a typical weather pattern across it so we’ve just got to get on with it. It’s just the way it is. So for mobile ordering, current adoption is pretty low actually, David. So the platform is getting more reliable. We’ve still got things we’re trying to improve on our end, from the user experience perspective and training our teams in the restaurants and just getting the technology more reliable. But the adoption is still relatively low. We’re certainly seeing the curbside pick-up being the most favored benefit that customers are seeing from it. But we’ll continue to work away on it. It’s not anything that we’re going to put a massive emphasis behind, in terms of anything promotional, for example. However I think it’s pretty inevitable that our customers will increasingly engage with us as a brand and as a business through their phones. So the fact that we’ve got a product out there that’s decent at the moment, I think there’s a lot of upside. And we’re excited about the potential but, at the moment, we’re not seeing it drive significant business for us.

Next question is from Matt DiFrisco with Guggenheim.

Thank you. Just a bookkeeping question and then a question on delivery. Did you guys specify how much that is in the U.S.? And then just looking at the U.S. store margins from the company side, I wonder is that a good trend to follow, as far as if you wanted to look at what the franchisees are experiencing, as far as the margin fall off in the U.S. stores? Or is that just more of a difference in mix? Because it sounds like the value menu that you’re launching would be favorable. Given what it’s done to the check and other methods through the income statement, if that would be favorable to the franchise margins?

Yes, I’ll take this. We won’t quantify exactly what delivery – I’d say delivery certainly contributed to the U.S. comp in the first quarter, as it did at the end of the year last year. We would hope and expect that to continue to grow as sales grow on the delivery side. So it’s a meaningful contributor to the comp. On margins, a couple things relate to the U.S. margins. One, and you just mentioned this, but most of the comp or effectively all of the comp is really driven by check, which by definition brings with it then a positive impact on the margin side, because you get a bigger flow through, certainly from price than on the guest counts. Although that’s not the way we’d want it to work long-term. So the fact that check is driving comps is helping margins. That would also be helping the franchisees margins. The lower advertising contribution rate that we mentioned, that would be helping both us and the franchisees also. One of the things that helped us specifically was some refranchising that we’ve done, really over the last year in the U.S., where we sold some underperforming restaurants, as the franchisees can generally run those better than we can. Obviously that piece wouldn’t add to the franchisees margin. And then the other piece certainly is labor wages that are impacting both of us. So, in general, most of the benefit that we saw in margins would also be helping them. Again, other than the refranchising benefit which, to us, was a significant benefit that they wouldn’t realize.

Next question is from John Glass with Morgan Stanley.

Thanks very much. My question is on the Experience of the Future. And Steve, you mentioned you’re accelerating the rollout of it in the U.S. So, first of all, is there a risk or did it impact at all same store sales in the first quarter, as either restaurants are closed or maybe crews are somehow distracted? Can you maybe talk about how you frame that potential impact to the business on the short-term? On the long-term, it seems like, if you’re doing about 4,000 units this year and maybe therefore another 4,000 units next year, you might be able to get this done faster than you thought. Is this an acceleration, I guess, is the question versus the prior pace or is this just about where you thought it would be?

No, we have upped the pace a little bit, John. I think we spoke about it actually over the last – earlier quarters as well. I think with some of the benefit we have seen from tax reform, it enabled us to, if you like, frontload the project and we’ve got our orders lined up so we expect to make significant headway in basically the next two years, 2018 and 2019. And we will have a substantial amount of the estate complete by then. In terms of the impact, yes, it does hold back the like-for-like sales a little bit because we’ve got 1,000 projects. And it depends how long the – depending on how the restaurant currently looks does dictate how long the project lasts. And it’s one of those – I should really have mentioned that earlier. One of the benefits we’re seeing from the International Lead markets is we’re getting pretty good about scheduling these restaurants so you can minimize the downtime. So you can get the maximum effect for the customer, minimize the downtime. But the restaurants can be shut for 10 days to 14 days for some of the more significant investment. So, yes, that does slow us a little bit on the like-for-like. It’ll be fine once we start to get into the routine year-on-year because we’ll be doing another 1,000 next quarter, another 1,000 first quarter of 2019. But this current year, it will hold us back on the comp side a little bit, yes. But as I say, we’re playing the long game. We know what the upside can be. It’s a small price to pay for the benefit we believe the business will have.

Next question is from Will Slabaugh with Stephens.

Yes, thank you. I wanted to ask on average check, globally and in the U.S. as well, and just your comfort level with what looked like globally, I think, a 4.7% increase. And I realize there are a lot of moving pieces across the globe in that number, considering the pricing rebasing that you’ve done, but could you generally just talk about your comfort level with running an increase in check of that size? And is there any sort of longer-term check growth goal that we could think about for the business, either in the U.S. or globally?

Yes, I’ll take that. Some of that is U.S. obviously and some of that’s outside the U.S. Our general goal is to optimize menu prices across all our price tiers within a market. And we look at various factors within each market, including things like food inflation or food away from home, other cost pressures, whether that’s labor or any other costs. The biggest thing is kind of what customers will accept based on that market, based on competition. And so it’s really an attempt to balance guest count growth and average check growth. And like I talked about in the U.S. right now, we’re a little bit more skewed on the average check side versus guest count than we would want. So we’d like to make sure that we get the guest count growth. But, in general, we generally try and stay a little bit below food inflation as kind of an overall guide.

Just to add another perspective to what Kevin’s just said. What we’re seeing, particularly once we’ve made the investments in the Experience of the Future, clearly a number of those are customer-facing, but what we’re also doing is adding some firepower to the kitchen as well, which means we can offer a different range and particularly at the Signature end of the business. So part of what we’re seeing is, with a better invested restaurant, great hospitality, we’re launching premium ranges more consistently across our lead markets and that’s also driving average check as well. So there’s a product mix piece. But it’s the permissibility we get on price is – if you run a great restaurant, it looks great, and it’s welcoming, great hospitality and table service, then people are willing to pay a little more as well. So I think we’ve got a bit of that helping.

And then the one other newer aspect, I’ll say, over the last year or so would be delivery. Delivery check size is generally one and half to two times kind of our regular in-store check. So that’s also helping drive average check up, kind of on a global basis.

Next question is from Peter Saleh with BTIG.

Great. Thank you. I just wanted to come back to the conversation around the Experience of the Future. I think historically you had discussed a mid-single digit sales lift in the first year. But now that you have a critical mass of restaurants, both domestically and internationally, can you talk about the comp performance and the margin performance in year two and beyond?

Yes, I can start on that. Certainly in the U.S., we wouldn’t have year two and beyond. But internationally, what we’ve seen historically that we’ve talked about is generally mid-single digit sales lifts for restaurants that convert to the Experience of the Future when you compare it to the rest of the market that maybe hadn’t put it in yet. And most of those markets also see continued comp growth in year two after that. So it’s not a one-time benefit but kind of builds on itself. In the U.S., it’s obviously much earlier days right now so we don’t certainly have the year two. But even in the early days, right now what we’re seeing is consistent with what we’ve seen internationally, which is kind of that mid-single digit sales lift for the projects where we have full modernization, where we do a full remodel and add in all the EOTF components, if you will. The projects that have already been modernized and only add in the EOTF components, that’s a smaller lift, more around 1%. But the ones where we have full modernization and EOTF, it’s similar to what we’ve seen internationally, which is that mid-single digit lift.

Next question is from Jeff Bernstein with Barclays.

Great. Thank you very much. Just maybe a two-part question on the refranchising and the ultimate worldwide operating margin that you referred to in your prepared remarks. On the refranchising side, it looks like you had close to $100 million in gains in the first quarter and it hasn’t been that far off from that number in most of the quarters in 2017. So I’m just wondering whether we should assume these type of gains continue or are we now in the very late innings of the refranchising and therefore the gains should moderate? And the related part is just as that impacts the broader operating margin. I think you mentioned your operating margin is right now at 42%, which was up 600 basis points, and that was in the first quarter. Presumably that’s led by the refranchising but I’m just wondering where you think that ultimately settles as you wrap up refranchising and what type of growth rate we’d assume once the refranchising is done off of that. Thank you.

Yes, thanks, Jeff. I think I mentioned in my remarks that we’ll have more conventional – more of our refranchising in 2018 will be the conventional type versus a lot of the developmental license that we had certainly last year. And I also mentioned that most of that activity will happen in the first half of the year. So to your point, we had about $100 million of gains in the first quarter. I would expect relatively similar, maybe a little bit less, in the second quarter. And then it’ll start easing off a little bit in the third and fourth because most of the activity this year is in that first half of the year. By the time we get to the full-year, it’ll be a little bit – we expect it to be a little bit lower than what we would have seen last year. So I think earlier, in the last quarter, we said about $30 million to $40 million less. We’re actually seeing gains on each transaction a little bit higher so it may turn out to only be $20 million less than last year. But it should be a little bit less than last year. And then it will kind of ratchet down more than that next year then. Sorry, then the operating margin. So what you are seeing in operating margin, a couple things. You’re seeing the benefit of refranchising as we certainly converted China/Hong Kong last year in the big transactions. When we refranchised that, certainly it benefits operating margin. And then you’re also starting to see the benefits of G&A management and the rest of our P&L. We’ve talked about our long-term goal beginning in 2019 of being in the mid-40s on operating margin and in our mind we’re still on track for that.

I think the only thing I would add to Kevin’s comments was, given the way that we’ve restructured ourselves as a business now, with our International Leads markets, with the high growth, those are typically the markets that our company owns still. We actually have, literally restaurant by restaurant, we have a very clear understanding of our franchising plans, who would we be selling to and which restaurants we want to keep and operate ourselves as well because that’s an important piece for us. So we really have got a very granular look now and we can drill down country by country to have a very, very clear and, I guess, strategic franchising plan looking forward now.

Next question is from Greg Francfort with Bank of America Merrill Lynch.

Hey, guys, two questions. Just one is on the macro backdrop in the European markets and can you talk about what’s going on there and then maybe how sustainable you think that is. And then my second question is on the U.S. marketing side. Can you talk about your marketing weight during the quarter, whether or not you pulled forward any spending around the $1, $2, $3 and whether or not – we’re hearing, I think, that the industry margin weights are up pretty substantially. How sustainable do you think that is? I know there’s a lot there.

There is a lot there. So what we’re seeing Europe. I mean, typically we do want to look at mainland Europe, where we’ve got clearly France, Germany, two very important markets for us. We’re getting some really good momentum out of some of the mid-size markets, kind of the 500 restaurant style markets, like Italy and Spain. The Netherlands is growing strong. Typically we’re not seeing any particular headwinds but nor are we getting any great tailwinds. There seems to be a little bit of calm has entered the markets after the kind of shock from the Brexit decision maybe a couple of years back. But it doesn’t appear to be quite as disruptive as perhaps people feared. We are seeing differences in labor movements. There’s less migration going on across Europe and we see that here in the U.S. as well. So there are some dynamics we’ve got to pace into but, as a business environment, I’d say it’s fairly calm and our success is really just because of what we’re choosing to do and we’re being aggressive in each of those markets. In terms of our – yes, we did shift some of the media weight. The quarter was a lot more than just $1, $2, $3 here in the U.S. But, yes, we wanted to make sure that we – we wanted to get the awareness of the items, the awareness of the menu at really good levels quickly. Customer awareness of what the items actually on the Dollar Menu wasn’t quite what we wanted so we did shift the emphasis a little bit on that. But I think there was a lot of competitive spend in the quarter as well. So I think we feel pretty good that we battled through a tough quarter. We’ve certainly got plenty of gunpowder we can throw out as well and, if the others have struggled over their spend, then I guess that’ll be something they’ll deal with.

Next is Alton Stump with Longbow.

Good morning or good afternoon. Congrats on the result. I guess just a question. It isn’t difficult, of course, to get a higher ticket when you roll out new value platforms. So can you just kind of walk through what is driving that? I presume that means that the $3 bucket items are selling well or is there anything else going on there that is driving the higher ticket off $1, $2, $3?

Yes, I can start talking about that. A couple of things. So we’re seeing people use the $1, $2, $3 Menu in a variety of ways. Some people will create a meal using some items from the $1, $2, $3 Dollar Menu. Some people will buy a combo meal that isn’t on $1, $2, $3 then add an item from the $1, $2, $3 Dollar Menu as an add-on. So we’re seeing people use the $1, $2, $3 Dollar Menu in various ways. And one of the things we’re seeing is that the items – when people use $1, $2, $3 Dollar Menu, the items per transaction in those transactions is higher than our average when people don’t use that $1, $2, $3 Dollar Menu. That is helping drive average check for those transactions. And so that’s, in general, what we’re seeing. And as Steve talked about earlier, we like the construct of that menu. And so it allows people to use it in various ways. And, again, we need to make sure people are aware of all the specific items in the menu, but general awareness of the menu is pretty good.

And clearly we’ve stayed pretty close to customers when you launch something like this. We’re getting high satisfaction and value perception scores as well from the Dollar Menu, which is obviously important to us. So, yes, above average checks run a little higher is clearly helping support the business. But from a value perception point of view, customers are feeling good about it and are playing that back to us.

And our next question is from Nicole Miller Regan with Piper Jaffray.

Thank you. Good morning. My question is around commodities. So what pieces are, in the U.S., inflating that cogs basket up closer to 2% to 3%? And if that persists, will you address value differently? And was that any contributing factor to removing some of those local value deals that you talked about earlier? Thanks.

Yes. Most of the increases for 2018 that we expect are in the main categories that you would expect: beef and chicken, primarily. Right now, those increases aren’t enough that it would change any of our marketing plans or product plans or anything along those lines. Like I mentioned, the first quarter was probably – right now, it looks like the first quarter increase would be the highest increase in the U.S. that we’d see for the year. So we anticipate that increase kind of dissipating as the year goes on. But it isn’t to a level where it’s driving any change in marketing or product plans for the year.

Our next question is from Jeff Farmer with Wells Fargo.

Thanks. Just following up on the U.S. restaurant level margin, does that 1Q margin fully reflect the cost headwinds from I guess both the wage rate inflation and your investments in labor? Or will those headwinds further build out into 2Q and the back half of the year?

Yes, thanks for the question, Jeff. It does reflect certainly the wage rate, the cost, I’ll say. What we have started seeing, to be fair, is that some of that labor initiative investment is starting to dissipate a little bit. Some of that related to training as we got ready for the fresh beef rollout and so now that we’re kind of coming upon that, we’re seeing some of that labor training investment starting to dissipate. So it’s fair to expect that that will continue – that piece will continue to dissipate as the year goes on.

And I think the other piece to add as well, this is kind of a shout out to the operations guys out there, is working really hard to minimize crew turnover as well. So we’ve got the 90-day turnover down to a really good level at the moment because that’s where hidden costs can sometimes come in if turnover gets out of hand a little bit. So the guys in the field, while there’s a lot of change in the restaurants, we’re working really hard with the investments we’re making both on the pay side but also the training and education side for our crew and managers, and we’re beginning to see that with the turnover being well managed as well.

We’ve got time for one last question and that will be Brett Levy of Deutsche Bank.

Great, thank you. If we can revisit Greg’s question on the competitive landscape in Europe and if you can share a little bit more detail on what you’re seeing in terms of IEO growth and competitors’ rational or irrational behavior. In other words, how much of what we’re seeing from McDonald’s successes are coming solely from what you’re doing and how much of it might also be a little bit of a tailwind? Thank you.

Yes. I’ll start and Steven can chime in. What we’re actually seeing in most of the international markets is that we’re gaining market share. And just about all of those are big, major markets, I’ll say. Competitive landscape certainly varies by market. Some of the markets are a little bit more competitive than others. I’d say overall IEO market in most of those countries is relatively muted. You’re not seeing gang busting growth in any of those countries. So it’s relatively muted which makes it competitive to have to gain market share. And in most of those we are seeing improvements in our market share.

Yes, I think the only thing I would add is, if there is any growth in the sector at all, it’s typically on new units. And we have been a little bit more modest on new additions because we prioritized the reinvestment in the existing estate. But I think really that it’s a zero sum game. It is literally a market share fight, I think, in all of our major markets. There is no one market, whether it’s Australia, Canada, UK, Italy, Spain, none of those markets have macro tailwinds that’s helping us lift. We’re just literally scrapping hard, working hard, and taking share. So I think our gain is typically someone else’s pain.

Well, we’ve reached the top of the hour so that concludes our call. I want to thank everyone for your great questions and we’ll sign off.

Thank you.

Thank you.

This concludes McDonald’s Corporation Investor Conference Call. You may now disconnect.