Hello, and welcome to McDonald's Second Quarter 2019 Investors Conference Call. At the request of McDonald's Corporation, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Mike Cieplak, Investor Relations Officer for McDonald's Corporation. Mr. Cieplak, you may begin.

Good morning, everyone, and thank you for joining us. With me on the call this morning are President and Chief Executive Officer, Steve Easterbrook; and Chief Financial Officer, Kevin Ozan. Today's conference call is being webcast live and is also being recorded for replay on our website. 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 our website as are reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures. And now, I'll turn it over to Steve.

Good morning. We're pleased to be speaking to you today from our corporate headquarters in downtown Chicago, where we recently celebrated our one year anniversary in this contemporary urban facility. Returning to Chicago was a deliberate move to get closer to our customers and the trend shaping business and society today. Our new facility was designed to be a modern and inspiring environment, a catalyst for our evolving culture. Our move is also a metaphor for the momentum we're seeing across our business. Momentum has been building since we first launched our turnaround plan. As we've recently passed the four-year mark, I thought, it would be important to spend a few minutes reflecting on our journey. Back in May 2015, I announced our initial steps to reset and rebuild our business, including our three-fold priorities of driving operational growth, returning excitement to our brands, and unlocking financial value. At the time, we were keenly aware that the pace of change inside McDonald's is being eclipsed by the pace of change outside our business. We knew, we had to evolve with our changing market and consumer dynamics, and we knew incremental progress wasn't going to cut it. Returning to a growth company was going to require big, bold steps and greater personal accountability. We knew success would be determined by the fast beating the slow, by choosing progress over perfection, and moving with a sense of urgency. So, we set out on the journey to become faster, smarter and more responsive to changing consumer expectations. We restructured to be closer to customers and faster at the point of impact. We refranchised to drive growth and bring greater insights at a local level. We increased accountability and financial discipline and returned cash to shareholders. Most importantly, we returned to operating growth. Indeed, within two years, we established a strong foundation, one that was fit for purpose, and brought the business to a place where we could begin accelerating growth again. That led to the launch of our Velocity Growth Plan in March of 2017. The plan is rooted in building on the fundamentals that have served our Company so well for over 60 years. It's about running better restaurants, offering a compelling menu of delicious and affordable food, and complementing that with hospitality and convenience for our guests. We know that when we create delicious, feel good moments for customers, every visit every day, customers recognize our efforts and reward us with repeat visits. We also know that we must continuously complement that work with big and powerful moves that keep us relevant and inviting for new generations of guests. We deployed three accelerators to help us do just that, our Experience of the Future or EOTF; digital and delivery. With these efforts, we have focused on actions that have the biggest benefit to the most customers in the shortest possible time. That's the path to becoming a better McDonald's. Four years in, we did the hard work to put the Velocity Growth Plan and accelerators firmly in place, and we are energized by the broad-based strength in our results. For the quarter, global comparable sales increased 6.5%, which marks four full years of quarterly comp sales growth. This was complemented by positive global comp guest counts. During the quarter, we made strong gains in running great restaurants. We still have work to do, because speed of service is so important to our customers, seconds matter and impact decisions they make on repeat visits. We're leveraging the power of the system, franchisees, suppliers and employees to reduce menu complexity, improve operational procedures, deploy new drive-thru crew competitions and incentives, adopt best practices for staffing, and leverage new technologies to make it easier for our teams to take responsibility for performance. And we're encouraged by the results we're seeing. We set market level targets early this year and have dropped service times across many markets globally. They're providing a better experience for our customers, and with that seeing record high customer satisfaction scores this summer. Here in the U.S., the plan we built with our franchisees is ambitious. Collectively, we recognized the need for change, and knew it’d be hard work. We spent 2018, deploying major initiatives, including a new value platform, fresh beef, delivery, EOTF modernization, and the restructuring of U.S. field operations. At the beginning of this year, we said 2019 would be a year to execute on running better restaurants and optimize the initiatives we deployed last year. In restaurant visits with franchisees around the country, I'm seeing the results of focused execution against the plan. Importantly, average franchisee restaurant cash flow has grown eight consecutive months through June, fully overcoming the decline we saw in 2018. Across our International Operated Markets or IOM, we’re seeing continued success. Consistent execution against the Velocity Growth Plan is a winning formula. I had the pleasure to visit Italy during the quarter and witnessed firsthand a rigorous focus on operational innovations and improvements. Italy now has posted 10 consecutive quarters of comp sales and guest count growth with double-digit comp sales and guest count growth for the quarter. In fact, Italy has outperformed the local Informal Eating Out or IEO category for nearly two years now. I saw similar energy and focus when I went from Italy to Poland, which also posted strong comp sales and guest count growth for the quarter. This high-performing market was an early adopter of EOTF and digital. In Warsaw, I saw the positive impact our guest experience leaders have on hospitality, as they greeted customers with a special warmth that made guests feel welcome. Italy and Poland are great examples of markets where we start a best practice and replicate it at scale across other markets. Whether around EOTF rollout, hospitality, operations, or digital, ideas originate in one market and rapidly move to another, creating an environment where all boats rise. Now, let me turn it over to Kevin for a deeper dive into our comp sales trends by market and performance drivers.

Our top-line momentum remains strong. As Steve mentioned, global comp sales increased 6.5% for the quarter with each operating segment contributing meaningfully to our growth. In the U.S., comp sales were up 5.7%, our highest comp sales increase since the launch of all day breakfast back in the fourth quarter of 2015. And once again, we also grew comp sales across all dayparts. Performance drivers for the quarter included proven value and deals such as our national 2 for $5 Mix & Match promotion, featuring our core menu items, as well as other locally relevant offers. Our renewed focus on our iconic core menu, resonates well with our customers. Since switching the fresh beef for our Quarter Pound burgers just over a year ago, our sales results and positive customer response confirm it was the right strategic move. In the first half of 2019, we sold over 55 million more Quarter Pound burgers compared to last year. A combination of both deal offers and line extensions, featuring bacon and DeLuxe builds on our classic Quarter Pounder with cheese helped to boost sales. Similar to last quarter, the sales benefit from our modernized EOTF restaurants contributed to our overall U.S. comp performance, which we expect to continue for the remainder of 2019. By taking learnings from completed projects, we've successfully reduced construction downtime, and we're also recovering sales quicker, after reopening. During the quarter, we converted an additional 600 restaurants to EOTF for a total of 1,000 projects completed in the first half of this year. We still expect to complete a total of about 2,000 projects for the full year. Strong average check growth from both product mix and pricing continues to fuel our top-line in the U.S. We're seeing success with offerings that increase average check, traffic and cash flow, such as our current worldwide favorites, LTO. However, returning to guest count growth in the U.S. remains a top priority in the street fight for market share. Turning outside the U.S. Strong balanced results continued across the International Operated segment with comp sales up 6.6% for the quarter. Each of the markets within the segment grew comp sales, and nearly all of the markets also grew comp guest counts. Strong results in the UK, France and Germany were key contributors to the segment’s growth. The UK marked its 53rd consecutive quarter of comp sales growth and increased market share versus our competition across all dayparts. Maximizing delivery was a key success factor for the market, along with menu innovation, such as the bacon roll breakfast sandwich and the Taste of America burgers LTO. France has been successful with both its premium and core burger offerings, balanced with a compelling value platform, helping the market to again achieve record high market share. France now has nine consecutive quarters of both comp sales and guest count growth. And Germany is maximizing contributions from EOTF, our core menu and strong value messages, all of which resonate with their customers. Germany also gained market share versus competitors, and customer satisfaction scores are up. In the International Developmental Licensed segment, comp sales increased 7.9% with sales and guest count growth across each geographic region within the segment. Results across our three largest markets drove the strong sales performance with double-digit growth in Brazil, strong comps in Japan and positive performance in China. Accelerated new restaurant growth by our strategic partners, primarily in China, led the segment to grow system-wide sales by 10% for the quarter in constant currencies. Now, I'll turn it back to Steve to further discuss the growth accelerators driving our global business.

Over the past four years, we've seen unprecedented changes in the global consumer landscape. With this proliferation of change, consumers today expect more from us. Quality, service and convenience are more important than ever. And of course, delicious food served by welcoming people is absolutely essential. Accelerators of our Velocity Growth Plan are all about giving our global customers more control over how they order, how they pay, and how they serve their food. In the U.S., we've made significant progress in modernizing our restaurants through our Experience of the Future initiative. We have now modernized over 8,500 U.S. restaurants. Today, customers are much more like to visit EOTF restaurants than they were just a year ago. At the end of May, I was honored to join our team in New York for the opening of our new Time Square restaurant. Our three-storey restaurant is a major brand statement on how we're providing a better customer experience through décor, enhanced customer service and seamless order and pay technologies. Our major IOM markets have had Experience of the Future for some time and we’re continuing to unlock this potential. For example, in Australia and our major European markets, over 40% of in-store customers now use kiosks when dining with us, taking control of how they order, customize their food and select how to be served. From New York to Sydney and most places in between, our restaurants are not just ready for the future, they are meeting customers on their terms today. Delivery is another area where we're taking bold action to meet customers’ expectations for high quality food on their terms with increasing demands for convenience and speed. We've made significant progress on delivery the past two years and have room to grow in a largely untapped market with great upside. Driving customer awareness and trial about the McDelivery remains a top priority. Globally, we expect delivery to be a $4 billion business in 2019 for McDonald's and franchise restaurants. Across our major markets, we've maintained double-digit delivery sales growth in restaurants offering the service for more than 12 months. In the UK and Spain, delivery now accounts for greater than 10% of sales in restaurants that offer delivery. In the U.S. McDelivery with Uber Eats is now available in more than 9,000 restaurants, which is more than half of all McDonald's U.S. restaurants. They're also continuing to add new partners that allow us to scale and deploy delivery to meet untapped customer demand. We recently announced a partnership in the U.S. with DoorDash to expand the availability and accessibility for customers to receive our delicious food wherever they are. We will quickly scale with DoorDash across the U.S. to provide customers with a choice of delivery partners. In Canada, we've seen incremental strength in delivery with our second national partner, SkipTheDishes. We offer delivery in 850 restaurants in Canada, many of which offer delivery from both partners. Multiple delivery partners now are also the norm in Italy, Spain and Russia, where we're learning from our partners whilst driving increased delivery orders. We're also taking bold action on digital. Since closing the Dynamic Yield acquisition in April, we launched the decision logic technology on digital menu boards in drive-thrus across multiple regions in the U.S. Customers have responded to the point-of-sale suggestive selling by adding french fries, drinks, Chicken McNuggets and other favorites to their orders. We're already seeing an increase in average check by improving our ability to offer customers what they are likely to want with suggestions based on time of day, weather, and items already in customers’ orders. We introduced Dynamic Yield technology in Australia this month, and we'll increase the number of drive-thrus in the U.S., using the technology from about 700 today to over 8,000 in the next two weeks. By year-end, we plan to integrate the technology in nearly 100% of our drive-thrus in both markets. This is another example of using technology to create more engaging experiences for our guests. The technology infrastructure we’ve built over the past three years to support our Velocity Growth Plan and accelerators is fundamental to our transformation. It's a reflection of what our customers demand from us, and it's not static. Digital capabilities change by the day and impact what customers ultimately expect from us. The technological ecosystem we're building will enable us to meet these rising expectations, positioning us for new opportunities to elevate and transform the customer experience. Now, I'll turn it back over to Kevin for a look into the financial results for the quarter.

Adjusted earnings per share of $2.05 grew 7% in constant currencies for the quarter when excluding impairment and other strategic charges from both the current and prior years. Our results have benefited from strong operating performance for the quarter. Revenue grew 3% in constant currencies as our comp sales growth more than offset the impact of refranchising activity. Adjusted operating margin for the first half of the year was 43.2%, an increase of 30 basis points versus last year. As a result of our franchising efforts over the past few years, the largest component of operating income is our franchise margin dollars. With growth of 9% in constant currencies for the quarter, franchise margin dollars now represent nearly 85% of total restaurant margin dollars. Our consolidated franchise margin percent declined 100 basis points as our strong sales performance was impacted by higher EOTF related depreciation in the U.S., as well as 70 basis points from the lease accounting presentation change that I discussed last quarter. As a reminder, this presentation change has no effect on our franchise margin dollars, but the impact to our franchise margin percent will be ongoing. Turning to our company-operated restaurants. Consolidated margins grew 20 basis points to 18.1% for the quarter. IOM segment company-operated margins were flat versus prior year, as our strong sales performance was offset primarily by higher labor and other costs, such as delivery commissions. U.S. company-operated margins grew 40 basis points to 16.3%, reflecting strong sales performance and refranchising, partially offset by continued commodity and labor pressures, along with higher EOTF-related depreciation. Second quarter pricing for both the U.S. and the big five markets in the IOM segment, was up about 2.5%, while commodity costs were up a similar amount across these markets. In the U.S., we expect commodity pressures to ease somewhat in the back half of the year and still expect our grocery basket to be up 2% to 3% for the full year. For the big five markets in the IOM segment, we expect a full year commodity cost increase to be up roughly 2.5%. G&A was 2.1% of system-wide sales for the quarter and flat to prior year in constant currencies. We still expect G&A for the full year to remain relatively flat in constant currencies versus last year, as we continue to invest in digital and technology capabilities. Our effective tax rate was 24.5% for the quarter, and we continue to expect a full year tax rate between 24% and 26%. Foreign currency translation negatively impacted our second quarter results by $0.07 per share, given the strength of the U.S. dollar. At current exchange rates, we expect the foreign currency impact to lessen to $0.02 to $0.04 for Q3 with further easing into Q4. Our estimated full year headwind remains at $0.18 to $0.20. As usual, this is directional guidance only because rates will change as we move through the year. Now, I'll turn it back to Steve.

I've begun my remarks this morning by talking about momentum. The momentum we're building is apparent to our customers who seek the convenience and value of McDonald's great tasting food. It’s apparent to our people; it’s apparent to industry observers who are watching our transformation. Getting to these results wasn't easy. And we need to continue to work hard to sustain performance as we face macroeconomic and industry uncertainties around the world. While we remain confident in our strategies, customers are rewarding us for the investments we're making to offer them great tasting food, a modern and hospitable environment, and unparalleled convenience. We all want to be associated with companies, organizations and brands that engage and inspire us, brands that are inclusive, fun, relevant and successful, brands that strive to improve communities and societies at large. That's where we're headed as we continue to unlock the potential of the Velocity Growth Plan and these accelerators. And it is why you'll see us continue to focus on our innovation and technology pipelines. This is our version of success. We're building a better McDonald’s for a culture of innovation focused on a better customer experience, a culture that strives to make the jobs of restaurant employees easier, and a culture that is focused on sustaining long-term growth. This is our mindset as we push ourselves to execute our Velocity Growth Plan and accelerators with the strong sense of urgency, passion, and commitment. With that, we'll open it up for Q&A.

[Operator Instructions]

Our first question is from Andrew Charles with Cowen.

Great. Thanks. Steven, can you give a little more context to the mix growth in U.S. that seems to be accelerating? Certainly outperformance outside the lower ticket breakfast occasion that's continued, as well as lapping $1 $2 $3 from last year helps. But, I think investors are wondering about the endurance, the customers’ ability to continue to pay up, absent any growth in traffic. Relatively, the most tangible driver may be Dynamic Yield as we look forward. In the 700 stores that have added the initiative so far, have you experienced the consistent lift to sales, particularly on mix, once the drive-thru adds the initiative, or have the lifts of sales been more varied? Thanks.

Thanks, Andrew. As you say, clearly, this is a check-driven sales comp growth in the U.S. What I think is encouraging for us and gives us confidence that we build more sustaining platforms. It's the balance of how that check is built. So, we're about two-thirds improved product mix and one-third improved price. So, I think that's a fairly healthy balance. When you kind of drill into it, I mean, there's a number of elements that play in it, so helping with this. So, if we just look at some of the menu activity and promotional activity through the quarter for instance, there was a good local co-op initiative, which -- menu development co-ops initiative, particularly for the Easter period on the Filet-O-Fish promotion, which gave us an incremental lift. We've been pleased with the way the Worldwide Favorite promotion has worked, and that's beating or maybe this one exceeding our targets and is giving us incremental business. As we continue to innovate around the kind of the heart of the group platform, the Quarter Pounder cheese with different options around lettuce and tomato, that also works along with -- we actually realized lift on the Happy Meal business, particularly now we've reestablished the relationship with Disney. So, I think, there's a number of elements through just the menu and marketing piece that have given us -- building on platforms that has taken us a while to invest in or operationally embrace, but is now beginning to deliver more consistent results. Also we’re seeing, as we convert the EOTF restaurants here, we're getting an incremental sales lift from that, some of which will come through growing and increasing use of the self order kiosks where we generate higher average checks as we mentioned before. Alongside delivery -- don't forget delivery, remember, very much -- as that becomes a large part of our business, we’re still seeing about twice the average check on the typical delivery order as well. So, there's a number of contributors. It's not a one single contribution, or if you look through right across the business, I think it’s the culmination. A lot of the initiatives that we've been investing in the last two or three years are beginning to come together, which is giving us encouragement. On Dynamic Yield, we've been really pleased. I'm going to say sort of three months in, couldn't be more pleased with the integration of Dynamic Yield, both as a company and as a culture, but also, frankly, getting the capabilities into our restaurants. So, we've been running 700 restaurants now for the best part of two and a half months. We're seeing consistent trends across different dayparts, across different days of week, across those 700. And that's certainly encouraged us with the support of our owner/operators, of course, to quite significantly accelerate the rollout. We know the technology works, we can plug it into our existing outdoor digital menu boards. So, we're going to go from about 800 now to 8,000 by this time, in two weeks’ time, which is fantastic. And we would expect to see -- we have no reason to believe that the kind of lifts we are beginning to see, and I'm not going to go into those details, but kind of lifts we're seeing at the moment, we expect to continue across obviously the accelerated rollout. What’s also been really encouraging to us on that front, it’s subject to Dynamic Yield. We've taken it into our first international market and have gone very, very quickly from that 20 restaurants to 150 in Australia. The reason that's important is because -- and I don't want to get too much into it, but the content management system, the kind of the brain, which holds all the data, which Dynamic Yield product works after that produce work, we can show on the digital menu boards. Internationally, they have one typical content management system, and the U.S. has another. And we've been able to prove very, very quickly that the technology works on both platforms, which really indicates this is ready for a global expansion. So, we'll be careful that we don't get over our skis on it. But, the pulse of the market is strong. The excitement of the owner/operators is great. And the most probably rewarding or one of the most rewarding elements, one of the business results is it just makes the managers and crew life easier in the restaurant as well. And order-taking process is a little quicker because we don't have to manually suggest to sell, the technology does it for you. So, that is a long answer. But plenty of -- wide variety of initiatives, are helping support that. And not least by the way, just the fact that we’re actually running the restaurants better. The focus we put on the drive-thrus, which I spoke about the last quarter, we’re seeing drive-thru times dropping almost all of our major international markets, and notably here in the U.S. as well. So I'm going talk maybe more about that later.

Our next question is from David Tarantino with Baird.

Hi. Good morning. And Steve, I guess, while we're on the subject of speed of service, I just wanted to ask, I guess at the opening remarks, you talked about having a philosophy of not focusing on incremental change but focusing on more step changes in your overall strategy. So, I'm just wondering, if there's something on drive-thru speed that can accelerate the progress you're seeing? It seems like it's been fairly shallow so far, but perhaps I'm mistaken on that. And then maybe one clarification at the end, I just wanted to understand the traffic growth or traffic decline in the U.S. and Q2. Did that change from what you saw in Q1 or did it remain around the same level? Thanks.

Well, let me take the drive-thru one. Once a year, we get our leaders from around the world together, so probably 60, 70 strong, including the managing directors of our top 20 markets. And we got together at the start of March. And whilst clearly it's been a really strong performance across the last 3 to 4 years, there are some areas where we know we need to do better. And we kind of had a white of the eyes conversation at the start of March. And we collectively agreed that we were going to renew some emphasis on the drive-thru service times. They've been going the wrong way with most of our markets for 3 or 4 years for reasons we can understand, as we’ve added more to our business, but we knew that wasn’t a sustaining trend. So, when you talk about progress in the drive-thru, I mean, frankly, it will improve. We want to get incremental improvement week-to-week-to-week. So, each time a customer comes back, say a week or two later, they can notice a few seconds difference. There's been a ton of things we've done. We've had some centrally led initiatives but also some market dynamic. All the stuff from many some of the menu simplification moves that you would have read about, particularly here in the U.S. where we streamline the late night menu, removing of the signature crafted, which was slowing down service times, and giving some of the local co-ops a chance to roll back some of the all day breakfast rollout from the second phase. So, those things just helped smooth the operation in the kitchens. But, we’re also introducing -- increasingly introducing technology, and diagnostic tools. Our managers and crew can see in real time in the drive-thru lanes. They can basically decompose the various elements of a drive-thru visit for a customer into its constituent seconds. So, how long are we taking to take the orders? How long are we taking to take the payment? How long it takes us to gather the food and present it? How many cars are we asking to pull forward and bring the food later? And just with that attention, we’re beginning to see notable changes. So, it clearly takes off really by start of this quarter. Just to give you a slight sense of what we're seeing already. In June, for example, in the U.S., we saw a 15-second reduction year-on-year in service times in the drive-thru, which I would say is more than incremental. I mean, that's notable. And clearly, that's rewarding for customers, it's a smoother journey. It also helps us with throughput as well. So, there's certainly a lot more to do. But, I'm really encouraged. And in certain other international markets surpassing double that type of production with the focus we’re putting on. So there's more to come. Kevin, you may want to talk a little bit to traffic decline?

David, regarding guest counts in the U.S. in the second quarter. I think, there wasn’t a meaningful change in the underlying guest count trend in the U.S.. The actual number for the second quarter was, I'll say, less negative than the first quarter. But, there were some specific things in the second quarter, some of which Steve mentioned earlier, things like the calendar shift with Eastern timing this year versus last year that a little bit benefited the second quarter; as Steve talked about, the Filet-O-Fish. We had about 70% of our co-ops that offered a Filet-O-Fish deal in Q2. That helped drive sales and guest count. And then Worldwide Favorites obviously was an LTO. That helped the second quarter too. So, while the actual number was less negative in the second quarter, I'd say there really hasn't been a meaningful change in the underlying trends.

Our next question is from Jeff Bernstein with Barclays.

Great. Thank you very much. Just following on that. One clarification, if you could just provide some color on the breakfast side of the business in the U.S. I got the impression last quarter that you were keen to see the breakfast had turned more favorable. I'm wondering if you can talk about whether there was any accelerating momentum in the quarter, where it stands, the percentage of sales and maybe how breakfast compares to the to the rest of the day? And then, I just wanted to ask one other thing. Should we expect, Kevin, an update on the return of cash targets as we now finish out ‘19 and we're going to get another three-year bucket as we look out through the next few years or how should we think about the outlook for that going forward? Thank you.

Hi, Jeff. I'll take the first one. We did see a better trading performance in the breakfast daypart in quarter two, the combination of local activity with a local comp support, plus we did get to see some strong results out of the McCafé initiatives and the donut sticks that would be launched in the first quarter as well. So, on the daypart, we grew sales. It was still the slowest growing daypart amongst the day, but we're back to a solid sales growth. There’s still guest count decline as I think we mentioned before, as there's been plenty of other entrants who are competing in the breakfast market, and we don't have it all our own way, the way perhaps we used to, back in the day. So, it remains competitive. We’ve got sales growth. We're encouraged by that, but we know we’ve got more work to do.

And regarding returning of cash target. So, as you know, this year, we’ll complete our three-years $25 billion target. We're on track to do that. So, we'll finish that this year. Later in the year, then, we'll provide an update as far as what that means going forward, perhaps beginning in 2020.

Our next question is from John Glass with Morgan Stanley.

Hi. Thanks. Good morning. Can you just update us maybe on the U.S. franchisee relationships? In particular, I think you slowed down the EOTF rollout in concession to them. But now, you're talking about profits, for eight months rising? Is there a greater enthusiasm to embrace this maybe and pull forward some of the things you talked about in ‘21 and ‘22 and get it done faster? Can you also talk about maybe where they stand or where you stand on delivery? I think there was some friction around commissions and sort of the economics of that. Have you resolved some of those issues? And I think there were some adjustments you made -- plan to make in the back half, just what those adjustments to royalty or rent relief associated with that. Thanks.

Yes, thanks, John. As I’ve said before, 2018 was a really hard work year. I mean, both the other operators, and the company invested a lot of time, a lot of effort, a lot of money in really kick starting the bigger, bolder vision, as the plan they built. And that does create tensions at a point in time, and that's natural. We worked our way through them. I would say that by easing off -- the speed of the EOTF -- those owner/operators who wanted a bit of breathing room, were able to select that and push one or two projects out which gave them a lot more confidence and comfort. That said, the results we’re getting from the EOTF rollout are really strong, and they are similar -- very similar to what we've seen elsewhere in the world. So, you’ll find, the majority of owner/operators are sticking with the original plan, the accelerated plan, really to complete their businesses by the end of 2020. It will be optional for owner/operators to pull their projects forward if they want to in 2021 and 2022. They're welcome to. We'll be ready for it. I think what it has also given us is -- I mean, we're a wonderful learning organization as a system. We're always driving curious to get better. And if we look at the performance of EOTF, as an example, because you mentioned it, the downtime of the projects, we're about 2 to 4 days better this year than we were in 2018, which clearly helps get the business back on track. The time to recover the sales as in when you reopen, getting yourselves back up to the levels, that recovery time is quicker. And also, the dip during the closure is a little less this year than it was last year. So, I think our execution around these 2,000 projects this year is sharper, but probably those 3 elements, which again builds confidence in the owner/operators that this is going to be a stronger business outcome for them. With delivery, yes, we’re clearly keen to roll this out. The owner/operators know this is a great business opportunity. We have, around the world, with our owner/operators in each of our markets to find an arrangement with them as to how we can best take some of the heat out of the commission costs they face in order to make it encouraging. We want them to make money out of it and we, as a company, will make money as a result. So, I think we're in a far better place. I think probably the two indicators just here in the U.S. that will demonstrate the confidence the owner/operators have is that once we settled on this new rent arrangement with them, I think, it was within about a week, they voted on a national marketing campaign with Uber Eats to put marketing dollars behind delivery. And the eagerness with which they've embraced the second and third-party operator being DoorDash. I mentioned in my opening comments, we’ve got around 200 restaurants in Houston on DoorDash at the moment. And that's just really making sure we integrate the technology and get the operation right. By the end of August, we’re going to have probably two ways of around 4,000-plus restaurants. So, we’ll be up at about 9,000 on DoorDash by the end of August, again, just showing you the speed we're going, and hence the owner/operator commitment behind it. And we've got already about 9,000 with our kind of our key strategic partners as Uber Eats. There's no perfect crossover. There’s going be about an additional 1,200 restaurants that have either one or other depending on coverage. That means, there is about 8,000, which we’ll have two third-party operators. And yes, we've seen around the world that gives us good incremental delivery business. Customers are typically, not solely, but typically are loyal to one third-party operator app. So, we know what we're seeing from Canada when we added SkipTheDishes to the Uber Eats platform. We’ve also seen elsewhere around the world, such as in Italy where we’ve got three, where we’ve got Glovo, Deliveroo and Uber Eats. So, we’ve got good experience of work in multiple delivery partners and we're confident the incrementally will come with it, and then, as a result, the cash flow to the operators. But ultimately, the mood of the operators, I think are feeling much more confident. By May of this year, their cash flow growth eclipsed the decline that they saw in 2018. So, as you can imagine, that gives people a great sense of satisfaction. June continued that. So, we now have 8 months in a row of cash flow growth. And they're confident and committed to maintaining that such trend forward, because they’ve committed a lot to this plan, they committed a lot to our business and we want them to build business growth and success.

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

Thanks for the question. Just maybe going back to the drive-thru times, can you quantify how much those were up? And then, I guess, the question is, how much have you recaptured with the 15-second, and what percentage of what you have seen in increased in the last few years? And then, how much opportunity do you think there is going forward? And what's the key strategy to address as that as there are changes you have to make on the product front or menu front to kind of capture more time savings? Thank you very much.

Yes. I wouldn’t get into all the details of drive-thru service. They do differ by country as well, obviously, depending on how busy the drive-thrus are. I mean, we've got certain markets in Europe where drive-thru is only about 40% of the business of a drive-thru restaurant whereas here in the U.S., it can be upwards of 70% to 75%. So, that creates a totally different service time dynamic. I would say, across the major markets. As we sat down in March, we wanted to set ourselves abundantly to be about 30 seconds better, which we knew would be notable, and not to be notable to the customer and also then business enhancing as this eases up throughput, particularly in those peak service times. Obviously, that's the most critical time to do it. There's a number of different initiatives to it. I mean, some of it is just getting the focus, I mean, understandably with the aggressive rollout of Experience of the Future. There was a heightened focus in store, front counter dining area, we’re just rebalancing that. So it's just the focus on the drive-thru, people positioning, making sure we’re starting right training and the basics. But, there are certain things for example, on menu, and I think we've got a far more forensic ability through our global operations team and our innovation center now to analyze the complexity of our menus by market and identify those slower-moving items that really are not contributing much to incremental margin and certainly not selling in many volumes, but great barriers to service. So, those diagnostic tools and forensic tools we have now is providing the information into each of the markets, they can make smart menu decisions. But it's not just about the menus around technology as well, and actually just making it fun. I mean, we've had a number of service competitions around all the markets. And particularly now we're getting these tools to the restaurants, to the managers. When I first saw this, the drive-thrus timer tools in Canada probably 12 to 18 months ago and then saw them rolled out in Europe probably about 12 months ago. There is a majority in the U.S. drive-thrus now. Probably what captured my attention among anything else was the enthusiasm the managers and the crew had to that kind of local competition, how are you doing most of the drive-thrus in your area, drive-thrus in your owner/operator group, or the drive-thrus that have similar volume to you. So, we can use these tools in many ways to A, identify where the barriers are but actually just make it fun, incentivize and getting enthusiasm in management and crew. So, more to come. I'm encouraged with where we’re at. We’ve some markets which are actually 30, 40 seconds quicker now just three or four months in. So, they've got a bigger opportunity than some but they're making good headway. And the U.S., I'm proud of where the U.S. is at. I know they're focused on getting better than the 50.

Our next question is from Dennis Geiger with UBS.

Thanks for the questions. I wanted just to ask a bit more about the U.S. guest counts. Maybe if you could just highlight a bit more where you're seeing progress and where the biggest opportunities are to continue to show that improvement? And then I guess within that context, Steve, I think you've talked in the past about a growth strategy to retain customers, regain customers and convert casual customers. Any update there you could give, specifically on the converting the casual customer, and if that's still how you're thinking about getting that discount up in the U.S.? Thank you.

Dennis, it's Kevin. I'll take a stab at that and Steve can chime in. As far as progress or opportunity, I think, as we've talked about, certainly one of our biggest opportunities continues to be at breakfast. As Steve talked about, there's been a lot of new entrants into that space. So, there's not many players that are growing, comp guest count at breakfast, or really in most of the dayparts. But new entrants have kind of caused a scattering, I'll say, of the existing guest counts among just more units. As far as retain, regain convert, the convert strategy for us was always around kind of opportunities in either other dayparts or other areas that we didn't have our fair share, if you will. So areas like coffee and snacking and areas that are potential further growth opportunities, but we're not as strong in some of those areas. It wasn't necessarily taking some of our existing customers and just having them come more frequently. So, there still are opportunities in some of those areas, again, like coffee and like snacking. I think, the way, we think about it is, there's an opportunity, and this is what kind of one of the purposes of both EOTF and our digital is to take our existing relationship with customers, and expand that relationship through digital means, whether that's through apps, further loyalty program at some point. But, the whole customer relationship where we can get to know and personalize offers easier and better for existing customers. That's one of our big opportunities. The U.S. guest counts will continue to be a, we call it a street fight just because it's a very competitive environment here in the U.S. But, I think, there is more of a focus on what do we need to do in the various dayparts. Again, breakfast probably being the biggest opportunity for us to regain some of those guest counts that we lost. And it really is about, we call it losing guest count, but it's not losing customers, it's losing customer visits. So, it's customers that may not be visiting us as often as they were historically. And if we can regain some of those additional visits, especially a breakfast time, which is, as you know, a very habitual ritual. And so, if we can get those customers coming again at breakfast, it would be a huge benefit.

Just to support Kevin's comments, particularly around the, if you like, the technology ecosystem we're building here. For us to have a personalized relationship with our customers, which I think will be valuable to us and also make it valuable to them, we've got to find ways for them to identify themselves, when they enter the drive-through, without slowing the drive-through process down, identify themselves at the self order kiosk. And again, even though this is less pressure on time there, you don't want it to slow them down. Or for example, if they're having home delivery, and when we get some route delivery through the McDonald’s app and we're working with our partner of Uber Eats, we're going to be getting the ability to route those orders through the McDonald’s app. Once we can start a link, a drive-through transactions, to in-store transactions to home delivery, we started to build a really good picture of our customers and eventually person-by-person. I think that will be incredibly valuable for us to make ourselves more relevant and more interesting to those customers. And from customer perspective, just make the experience smoother and more enjoyable. So, you'd expect to hear more, there are certainly some initiatives we’ve been working on the markets right now on those. Nothing to say at scale yet, but I can assure you the culture of innovation that we've got going here is playing out. We've got a number of initiatives in number of our markets, we're learning very, very quickly how best to identify customers or customers to choose by themselves is a better way of saying it, at drive-thru and the in-store, we believe we've got the home delivery piece already initiated. I'm really excited about what they could offer to business.

Our next question is from Jon Tower with Wells Fargo.

Great, thanks. I just wanted to talk quickly on the unit growth. I think today, you bumped up your expectations for 2019 to 800 stores net. And over the past two years, you've seen a nice jump in absolute net numbers. So, can you discuss whether or not you expect this type of net openings to persist in the future? What's fueling this growth or franchisees in new markets, seeing better returns than in the past? Thank you.

Yes. Thanks, John, for the question. Couple of things. First, related to the I'll call it change, slight change in guidance in the outlook section of the release. Really, what's driving that net additions number of about 50 higher than it was last quarter is less closings. So, our gross openings number for this year will be similar to what we thought it was going to be, but the closings that we originally anticipated, beginning the year a little bit lower. And about half of those are in our Developmental Licensed markets and about half of them are in the International Operated markets, half of the change in closing that is. As far as how we think about unit growth, there's still a lot of potential, even in our mature markets. So, markets like Canada, France, Italy, Spain, have a lot of opportunity to continue growing new units, and the U.S. even long-term we believe. Now, what's helpful in the way we've changed our business model is what you actually see is right now substantially, the large portion of openings are in our Developmental Licensed markets, China and the other DL markets, which use their capital. So, it’s a pretty efficient way for us to grow. So, you should expect to see continued growth in new units, again, both in the DL markets by our partners, as well as in our more mature markets that we own, like the ones I just spoke about.

Just to add on to that. I just want to give a shout out to some of the mid-size operated markets. Recently I've been in Italy, Poland, Netherlands, I mean, these markets are doing double-digit sales comps on top of double-digit sales comps. And hence, that’s creating clearly significant increase in volumes and throughput of restaurants and putting some capacity pressure on. So, I’d tell you, desire in the market is to sort of pick up the openings a little bit. I'm heading out to Russia in about two months time to spend some time there with the team. And again with a strong growth at both guest counts and sales they are seeing, I know they have an ambition for growth. And if you remember, we previously called that segment the high growth segment, and that was because we expected them to grow units at a greater pace than the perhaps the more mature market. So, we're keeping a real close eye on it. And the stronger we grow the business, then the stronger the confidence level is to grow the units as well. So, more to come by the end of the year.

Our next question is from Brian Bittner with Oppenheimer.

Can you guys talk a little bit more about your store level margins in the United States? It's the first time, they've expanded in five quarters, and certainly were much healthier level than all of us analysts were forecasting. I know you said refranchising with the positive impact, Kevin, but I think probably a similar impact, as you've seen in recent quarters. So, are the franchisees seeing a similar margin trend change this quarter? And if so, what drove that? And then just following up on the EOTF. Can you tell us what the net impact you believe EOTF was on comps this quarter and how you expect that to change into the second half? Thanks.

Let me start with the store level margins. And I guess, I'll talk about company operated margins, because obviously, we have -- those are our restaurants. So, I can see a lot of detail related to those. I think, one of the big differences is -- certainly comps in the second quarter were higher than they were, let's say in the first quarter. And obviously higher comps definitely help that. But the other thing I'd say is there's a little bit more stability in the restaurants in 2019 than 2018. Steve talked earlier about kind of the hard work and all the things that we threw at the restaurant in 2018, including EOTF, a lot of projects, fresh beef, the restructure we did in the field, all those changes that kind of impacted the restaurants. And so, kind of as we've now kind of I’ll say stabilize the business a little bit, and just have less overall initiative deployment, as well as slowing the pace or getting near the end of kind of our refranchising, the restaurants are now able to just focus on running the restaurants as efficiently as possible. So, we saw kind of more efficiency in labor productivity in the second quarter than we've seen in the -- than we saw in the first quarter and last year. On the franchisees side, we've talked about their cash flow is up. So, their unit level economics have been doing well, similarly. So, I think that's probably the biggest change as far as what we're seeing in margin versus last year, certainly. Related to EOTF, I'd say the benefit in the second quarter was a little higher than it was in the first quarter, and we would expect that to be relatively similar for the remaining quarters of this year. As we said, we completed about a 1,000 projects this year, but as you -- so far this year of our 2,000 that will complete in total. But that's coming off of finishing about 4,500 last year. So, we have a big base of projects that are now complete that we're seeing the benefit of, in addition to kind of improvement in how we're doing those projects, as Steve talked about less downtime, quicker recovery, et cetera. So, we expect those EOTF benefits to continue. And obviously, as we have completed more projects, that certainly helps future results.

As we near the top of the hour, we'll take one final question from Sara Senatore with Bernstein.

I just have two quick follow-ups, if I may. The first was on the EOTF and traffic in the U.S. I had been in the impression that last year, part of the issue was during the store closures you lost some traffic. And I would have thought maybe you'd have gotten that back this year. But, it sounds sort of like, you haven't gotten the traffic back so much as the customers that are still going to McDonald’s are just spending more and EOTF is supporting that. I just wanted to understand the dynamics there between like -- and lapping the closures? And then just on China, are you seeing any cannibalization? We've noticed across the board a lot of restaurants taking up unit growth in China and seeing their comp decelerate accordingly. Is that something that you have to contemplate, or are you still so underpenetrated, it's not really an issue there.

I can start with EOTF. Related to EOTF. So, last year, as you mentioned, we had restaurants closed, the ones that needed to be -- primarily the ones that had the big projects what we call non-modernized, so the ones where we needed to do a remodel plus the EOTF components. This year, while there's less number of projects being done, there are a higher percentage of those non-mods being done. And so, while we've gotten better at reducing the amount of time that they're closed, we still have some of those closures. Now, that isn't the only issue obviously related to traffic though. Again, to be fair, we were losing traffic before we started the EOTF, and that won't fix all the issues related to traffic. So, the traffic piece is beyond just EOTF. And as we've gotten better and done more of these EOTF projects, we're getting better at completing those. But that in and of itself won't resolve all of the traffic issues.

Just to pick up on the China question, Sara. We had really strong system-wide sales growth in China for the quarter. Clearly, we've got a rapid pace of expansion of new restaurant openings, but we also grew sales and grew guest count in the quarter as well. So core business is robust. And I would say probably exceeding the opening plans that we've initially expected. I mean, if you look at the five-year period ending 2022, our partners are looking to exceed more than 2,000 openings that are certainly on track at the moment. And having called out recently, there are -- been very confident moving out of the same level of business. I mean, it's incredibly competitive. You've seen the pace at which other people are expanding. But it is a huge market. The emerging middle class, there's a greater affordability of the mass population there is heading towards Western QSR type of average checks and affordability. So, it's certainly a market we're excited about, we’re very confident about the long-term future there, and really pleased with the way the partners are working out as well. They're doing terrific job. So, it'll be more than 400 openings this year after about 400 plus last year as well. And if they can keep the sales comps going at the same time, then, clearly, that indicates a healthy position for the business.

Okay. Thanks everyone for joining us. Have a good day.

This concludes McDonald's Corporation investor conference call.