Hello, and welcome to McDonald's First Quarter 2023 Investor Conference Call. At the request of McDonald's Corporation, this conference is being recorded. Following today's presentation, there will be a question-and-answer session for investors. [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 today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Ian Borden. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website as are reconciliations of any non-GAAP financial measures mentioned on today's call, along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. [Operator Instructions] Today's conference call is being webcast and is also being recorded for replay via our website. And now I'll turn it over to Chris.

Thanks Mike and good morning, everyone. You know ordinarily in a global business like ours, for a quarterly earnings call, you're prepping to memorize all the different sets of numbers. What's notable about this earnings call is McDonald's consistency, consistency in the strength of our numbers, consistency in the powerful drivers of our business, and consistency in the excitement that exists across the system about the opportunities that lie in front of us. Let's start with the numbers. At the top line, you only need to know one number, 12.6%. US comparable sales, 12.6%, IOM comparable sales, 12.6%, IDL comparable sales, 12.6%, and global comparable sales, you guessed it, 12.6%. These results reflects strong consumer demand for McDonald's that we are seeing around the world despite a challenging operating environment and historically low consumer sentiment in many markets. It is clear that our Accelerating the Arches strategy is working and we are operating from a position of strength. Each of our MCD growth pillars is contributing to our strong balanced performance and importantly, what we've talked in the past about the noise associated with the guest count metric, it is encouraging to see guest counts grow in every segment. In just the last few months, I have visited with our McDonald's teams in France, Japan, the Philippines, UAE and Israel. It's been inspiring to see the dedication of all three legs of the stool. Our teams are proud of what they've accomplished and are performing at a high level. For me, it's been energizing to hear their ideas for how we can do even more to take care of our customers. That's what I love most about the McDonald's system, our restless ambition. While we feel good about our current strategy, our success is driving us to do even more to lay a foundation for the future. Back in January, we announced the evolution of Accelerating the Arches. We're continuing to double down on our existing growth pillars while advancing two new initiatives. The first is accelerating restaurant development. Our strong performance has earned us the right to open new restaurants at a faster rate than we have historically. We're focused this year on determining the best path forward to meet customer demand and look forward to sharing more at our Investor Day later this year. The second newer element of our strategy is fundamentally rethinking how we as a company can work better together to become faster, more innovative, and more efficient. We're calling this Accelerating the Organization. In March, we convened our Annual Leadership Summit with top leaders from across the globe. Part of this meeting, we discussed three changes to our ways of working that will enable us to leverage our scale more effectively to meet the needs of our system and customers and unlock significant growth potential. The first is implementing horizontal ways of working. For years, our organization like many others was too siloed, whether that be geographically siloed or functionally siloed, and yet our biggest challenges and opportunities are rarely limited to just one market. They can't be solved by only one function. They require collaborating across the organization to bring the full breadth of McDonald's skills and experiences to devise the best system solution that can be scaled globally. In other words, they need to be solved horizontally. With Accelerating the Organization, we're now structured to work much more seamlessly in a horizontal fashion to solve these problems once and then scale solutions across markets, for example, is our app offering a seamless and personalized user experience. We're continuing to increase our speed of service. Those are opportunities across every single market and require the expertise of multiple functions. To support our ambition, to scale innovations with greater agility and collaborate more effectively, our second key shift is adopting One McDonalds Way to standardize the common processes we use to drive consistency and enable speed. We're an innovative entrepreneurial organization, but once a part of our system somewhere has solved a problem or developed a novel idea, we need to stop the work elsewhere. We don't need every market to invent its own light bulbs, so to speak. This approach allows us to use our size and scale for the greatest impact. For example, we're already seeing success in how our marketing teams are implementing common processes to quickly scale great creative such as the Raise Your Arches' campaign, which Ian will talk more about. Finally, we're making strategic investments in digitizing our organization and implementing new tools and platforms that make it easier for employees to access information to gain insights and drive performance. Ultimately, this will allow our market teams to spend more time in the restaurants, understanding the needs of customers, franchisees, and crew. Key to operationalizing all three areas of our internal transformation is our Enterprise Global Business Services Organization, also known as GBS. In 2023, GBS will focus on building a long-term strategy that ultimately provides a better experience for all three legs of the stool. GBS will be a key enabler to digitizing our organization, driving efficiency and providing value back to the business for our people, our franchisees, and our suppliers. Harnessing the power of our scale, our ability to strategically invest and the versatility of our system is the secret sauce that will empower us to provide even more memorable customer experiences for generations to come. To expand further on how we are optimizing the business and our growth strategy. I will now turn it over to Ian.

Thanks Chris. The first quarter of 2023 was yet another demonstration of McDonald's at its best. We entered the year with global momentum and remained laser focused on executing against our strategic growth pillars. Though challenging macro dynamics are still evident across many parts of the world, each of our segments and our global comp sales grew nearly 13% for the quarter. This demonstrates that no matter the operating environment, our customers continue to rely on McDonald's as an affordable destination for the delicious food they love delivered with the great service that they expect. Throughout the quarter, we showcased our iconic core menu equities while further scaling emerging equities across markets. I'll share a couple of examples of this in our chicken portfolio where we continue to expand and grow market share and an area where there is strong opportunity for growth. The U.S. leveraged learnings from the U.K., Canada, and Germany by relaunching its Crispy Chicken Sandwich under the McCrispy global equity umbrella. While there was no change to the core product, compelling creative, along with a new flavor offering supported demand, and help drive double-digit sales growth in the market, in fact, we now offer the McCrispy in 10 of our largest markets around the world, adding to our portfolio of billion dollar brands. Another example was in China where in March we featured the McSpicy Chicken Sandwich through a creative campaign that included a partnership with a popular streetwear brand tapping into local cultural relevance. The campaign generated significant social buzz, an increased brand relevancy with a younger generation. It's worth noting that China and Hong Kong originally introduced customers to McSpicy nearly 20 years ago, and it's now part of our core menu in 17 markets reflecting consumers growing preference for spicy across the globe. And while I'm on the topic of China, I want to point out that we saw steady recovery in the market with China posting positive comp sales growth for the quarter. Chicken was also critical to Canada's strong results. With the successful execution of the Chicken Big Mac promotion, a popular limited time offering that had significant success in the U.K. last year. By creating these fresh takes on our classic menu items, we've continued to build affinity and have consistently gained share across our top markets in the growing chicken category over the last few years. In parallel, we continue to maintain our market share leadership in beef, making our core menu offerings even better through enhanced cooking procedures and other slight changes such as improved buns. Now in over 50 markets around the globe, these improvements are resulting in hotter, juicier and tastier burgers. We're seeing improved taste perception scores across markets, giving customers yet another reason to eat at McDonald's. We recently began to introduce these changes to our U.S. customers through a rolling deployment, and the initial reaction has been positive. The Big Mac was also prominently featured across many markets this quarter with strong activations in both Canada and France. While each campaign came to life in its own way, the resulting lift in beef sales across both markets shows that this iconic menu item which became popular more than 50 years ago still resonates with consumers today. As I've mentioned before, rising costs continue to pressure consumer spending across markets. Our ability to meet customer needs in challenging times makes McDonald's value proposition even more important to highlight. In Germany, for example, the launch of the new McSmart Menu refreshed our everyday value bundles, providing smaller, more affordable meals to our consumers, and contributing to Germany's eighth consecutive quarter of double-digit comp sales growth. Our marketing excellence was also on full display during the quarter, demonstrating our position as an affordable destination with iconic equities and strong execution. The Raise Your Arches campaign in the U.K. was a prime example of our marketing excellence in action, bringing to life the true power of the McDonald's brand in a new and unique way. This campaign did not feature our food or our restaurants. Yet by illustrating a simple gesture, the raising of eyebrows, our customers instantly recognize the semblance of the Golden Arches, and the engagement was remarkable. In fact, within the first weekend alone, Raise Your Arches reached millions of people and our customers reacted on social media more than 30,000 times. As the campaign quickly scaled to more than 30 markets across the globe, Raise Your Arches drove brand affinity around the world and once again proved the true power of the McDonald's brand. This is an example of how one singular idea can drive impact when shared across our markets. This is the One McDonalds Way that Chris mentioned earlier. MyMcDonald's Rewards is yet another example of how we've tapped into our marketing engine to deploy our loyalty platform throughout the system. Now in 50 markets, loyalty is building even stronger relationships with our customers, and the results continue to shine. In our top six markets, digital sales now represent almost 40% of system-wide sales, or nearly $7.5 billion growth of more than 30% over the last year. We have nearly 50 million, 90 day active members across these top markets, and our relationship with them continues to grow. We're learning when they visit, how they visit and what they buy. With more and more of our sales coming through identified channels than ever before, we're also continuing to improve our customers' mobile app experience with new initiatives that provide a more seamless interaction. The U.S. market, for example is piloting a new way of ordering through our app. Using existing location data, it allows our crew to start assembling a customer's order prior to their arrival at the restaurant, ultimately delivering hot, fresh food when customers arrive to pick up their order. While it's still early days deploying this new digital enhancement, initial results are already pointing to improve service times and elevated customer satisfaction scores. Australia and Canada enhanced the digital customer experience by officially integrating the ability to order and pay for McDelivery, all within the McDonald's app. This not only brings added choice and convenience for our customers but also allows them to earn loyalty points while they enjoy McDelivery at their doorstep and ensures that we maintain that direct connection. Across our digital and marketing initiatives, McDonald's continues to put the customer at the center of our strategy, driving top line growth and further strengthening the brand. Turning to the P&L. Strong sales performance across each of our segments drove adjusted earnings per share of $2.63 for the quarter, an increase over the prior-year of nearly 20% in constant currencies. This excludes restructuring charges of about $180 million primarily consisting of employee termination benefits and lease termination costs as we look to become faster, more innovative and more efficient as part of Accelerating the Organization. Our company-operated margins remained hampered this quarter by continued pressure from elevated commodities and wages. As we look to the remainder of the year, consistent with the expectations we communicated in January, we expect macro headwinds will continue with the potential for a recessionary environment across both the U.S. and Europe. Total restaurant margin dollars grew by over $375 million in constant currencies or more than 10% for the quarter driven by higher franchise margin dollars. One of the benefits of our franchise business model is the predictability and stability of our franchise margins particularly in a strong comp sales environment. As expected, strong franchise sales performance across our markets was offset by increased franchisee assistance as elevated cost inflation continued to put significant pressure on restaurant cash flows, particularly for our European franchisees. As I've mentioned before, we're providing targeted and temporary support, investing proactively to maintain focus on driving long-term growth during this challenging time. We still anticipate these efforts will have an impact of between $100 million to $150 million for the year. G&A for the quarter decreased slightly primarily driven by prior-year costs incurred for our worldwide convention last April, and our adjusted effective tax rate was nearly 21% for the quarter. Adjusted operating margin was 46% for the first quarter, a reflection of the strong top line growth. As we've said before, we expect to gain leverage on operating margin over time. And while this will not necessarily be linear based on a strong start to the year, we're pleased with our operating efficiency in quarter 1. Based on current exchange rates, we expect foreign exchange to reduce both the second quarter and full-year earnings per share by about $0.03 to $0.05. As always, this is directional guidance only as rates will likely change as we move through the year. Despite the economic uncertainty that may persist, we are well positioned with the unique strength and scale that only the McDonald's system can provide. As Chris talked about upfront, we are focused on how we can even further leverage this advantage in the future. With our strong underlying momentum and aligned focus on the right strategies moving forward, I remain confident that we will continue to deliver long-term growth for our system and for our shareholders. And with that, let me turn it back over to Chris.

Thanks, Ian. Our brand has never been more relevant than it is today, a testament to our Accelerating the Arches strategy and the over 2 million people in our system who bring it to life with our franchisees in the restaurants every single day. As part of our Accelerating the Arches strategy, we've been particularly focused on revving up our world-class marketing engine with our agency partners and internal teams. We have expectations of what creative excellence should look like, and we're certainly proud of the progress we've made. Others are echoing this sentiment, and the industry is taking notice. Recently, McDonald's topped The WARC Effective 100 for the fourth year running, a ranking of the world's most awarded campaigns and companies for effectiveness. This is in addition to earning the #2 spot on Fast Company's World's Most Innovative Companies List of 2023. While we are pleased with where our brand is today, we know there is still more opportunity ahead, particularly as we change our ways of working through Accelerating the Organization, which I discussed at the outset. As I've said before, as goes our brands, so goes the economic health of the company and our nearly 5,000 franchisees globally. As Ray Kroc once famously said, we're not in the hamburger business, we're in show business. This showcases the importance of marketing our brand, which is more than just the food that we serve. The McDonald's franchise business model has provided a significant on-ramp for so many to work hard and prosper. And we want to ensure that the opportunity exists for generations to come. In fact, our franchisees are generating significant returns over the life of their 20-year agreements, far exceeding their cost of capital and relevant benchmarks. At its core, Accelerating the Arches is about us continuing to set up the company and our franchisees to prosper in the long-term. To that end, we'll continue to marshal the weight of the company's resources so that the business model endures. Ray Kroc would often say that we cannot grow without trying new things or without taking risks. Together as a system, we have an extraordinary opportunity to lay the foundation for our future to maintain an unwavering bond with customers. We'll achieve this through continuous innovation, building digital relationships and delivering personalized experiences with ease, no matter how our customers choose to enjoy McDonald's. As I told our internal teams earlier this month, as we adapt to our new organization and new ways of working, the most important thing we can do is to keep taking care of our customers, our system and each other. As we face a dynamic operating environment and changing customer demand, I'm confident that Accelerating the Arches is the right playbook, combined with the actions we're taking to accelerate the organization to keep McDonald's best positioned to be there for our customers and navigate the next chapter of our growth. I want to acknowledge that the path to continuously improving how we innovate for customers in the system involves difficult decisions, and saying goodbye to valued colleagues is never easy. What gives me confidence in our path forward is how the people in our system time and again have shown up for each other to realize the full potential of the opportunity ahead. Thanks again to our incredible employees, franchisees and suppliers for your continued dedication and commitment. With that, I'll now turn to Mike for Q&A.

Thank you. [Operator Instructions].

Our first question is from Dennis Geiger with UBS.

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

Thanks, Dennis. One of the things that I feel very good about is the fact that what's driving the business is a balance of our three drivers here, marketing excellence, focusing on the core menu and our 3D. So we're getting good growth from each of those contributing to the success that you're seeing, not just in the U.S., but you're seeing globally. I think the other thing that I'm really pleased with is how we're seeing customer satisfaction scores improve around the world. PACE is one of the ways that we do this. That's our grading and consulting program that we launched in all of our major markets in 2022 with the exception of the U.S., which just launched. But we're typically seeing results that our customer satisfaction going up mid- to high single-digits. And we know that as you improve speed, accuracy, friendliness, quality, all of those metrics are correlated with business performance. And so for us, the fact that we are running better restaurants, our staffing situation is improving in restaurants around the world, combined with our MCD growth pillars, I think all of those things coming together is what's driving the success that you're seeing.

Our next question is from Brian Bittner with Oppenheimer.

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

Yes. Thanks for the question. Going back to Q3 I think of last year is when we started getting asked questions about our outlook for the macro environment in 2023. And I would say our view remains unchanged, which is our base expectation is for a mild recession in the U.S. In Europe, we expected it to be more challenging. I think things are looking better in Europe than they were certainly back in Q3, but still compared to the U.S., I think more challenging in Europe. So our base expectation from a macro standpoint for 2023 is unchanged. I think how we're positioned, it goes back to the word I used in my opening, which is consistency. And our job is to make sure that no matter what the environment, whether you're in a boom cycle or whether you're in a more challenging macro environment like I think we are in right now, our business has to continue to perform. And one of the things that I feel really good about is, as you mentioned, in good times or in bad times, McDonald's tend to do well. I would just add a little color, which is we do see some of the pressures that give us reason to believe that our view on the macro outlook is accurate, which is, one, we are seeing a slight decrease in units per transaction. So things like did someone add fries to their order, how many items are they buying per order, we're seeing that go down in most of our markets around the world slightly, but it's still going down. And then the other thing is we continue to monitor very closely the acceptance of our pricing. I'm really proud of how our system has executed pricing in light of the double-digit inflation that we have been experiencing. But we are seeing, in some places, resistance to pricing, more resistance than we saw at the outset. So I think all of those things are reflective of, again, a more challenging macro environment. But again, McDonald's, we perform well in good times and in bad. And so that's what gives us the optimism as we go through the rest of this year.

Let me maybe just add a couple of things to what Chris talked about. I just think value for money and affordability, I would say, are two things that we're always laser-focused on, but I think, obviously, even more so in the current context. And I think if you look across our top markets, we have a leadership position in both of those attributes. We know that even as Chris talked to, we're having to take more price on the back of higher levels of inflation that the competitive gaps that we're maintaining versus the competitive set have remained consistent. So I think we're doing that in a very prudent and balanced way to make sure that we are kind of leaning into the needs of our consumers in the different markets around the world. I think the other thing, Brian, that you highlighted, which I think is important to call out is the business, if you look at the U.S. as an example, is in a much different position than the last time we went through an environment like this because of the strategic investments we've made over the last several years. I think about the fact that our entire estate is modernized now. I think as the fact that the channels that we've put in place through digital, where we can kind of interact with consumers on a more personal level, and so I think we've built a level of, I'll call it, pricing elasticity in just because of how we've continued to invest in the brand and the experience for our customers that puts us in a strategic advantage, I think, versus much of the competitive set around us. And so again, a period like this is never easy for anyone to work through, but I certainly think we're really well positioned to navigate the challenges ahead.

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

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

Good morning, Sara. Thanks for the question. Look, I think -- and Chris touched on this upfront, but just I think the consistency of how our strategy is being brought to life across each of our three operating segments is really what's behind the performance. I mean, obviously the context, the pricing is different across different markets depending on level of inflation, et cetera. But I think if you go back to what Chris talked about upfront is we're seeing really good consistency from what I'll call the mix of check and traffic growth. I think we're seeing a lot of consistency around how we're positioned from a value for money and affordability standpoint. And if you look at the key parts of our Accelerating the Arches strategy, there's a lot of consistency and how those are being brought to life for our system. And we feel really good also, as Chris highlighted, just about the focus on execution, which is coming to life across every part of our business and how that's translating into a better experience. And we're seeing really good consistency in that, feedback from our customers and the improvement in the customer satisfaction scores that we're seeing. And so I think that's really what's behind. I think the consistency of results is when our system gets focused on the opportunity ahead of it and brings that to life with a lot of execution and discipline. I think that's what drives the consistency in our performance.

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

Our next question is from Brian Harbour with Morgan Stanley.

Good morning, thank you. Chris, you spent quite a bit of time talking about just some of the organizational changes and ways of working. How is that -- how will that be visible? Or how should we assess the success of that for those of us that are kind of looking at it externally? And then I guess just more specifically, as we think about SG&A expense, it seems like some of the costs that have come off with the employment changes will be reallocated to other things. Could you comment on just where that will be going as we think about 2023?

Sure. Well, from an overall how do you assess whether the work changes that we announced as part of Accelerating the Organization have an impact, it doesn't show up in the numbers. And it needs to show up in the top line, and it needs to flow through to the bottom line. So I wouldn't get too nuanced in any particular metric other than top line growth, how that flows through to EPS and ultimately, what that's also doing for the system economic health. But as I said in my comments, I do think that we have an opportunity to get faster, more innovative, more efficient. The only way that, that was going to happen is we needed to change some of our ways of working where there was just too much internal, what I just call it, obstacles that were impeding our ability to move with that sort of speed. So as we get all of this in place, I think it should give you confidence that we're going to be able to continue to drive the performance. And then what that ultimately means is there's going to be -- there needs to be an efficiency component to that, but it also allows for us to reinvest in the business. I don't think for 2023, everything that we've said around our G&A guidance, that's already embedded in. We'll talk about it at Analyst Day at the end of the year what our outlook is longer-term for G&A. But ultimately, the metric that you should hold us to is the one you always hold us to, which is, are we growing the top line? Are we growing EPS, and what's the health of our franchisee base?

Our next question is from Chris Carril with RBC.

Hi, good morning. So in the context of maintaining your operating margin outlook of about 45% for the full-year because even with the strong start to the year, could you provide us with any additional detail on your latest thinking around the cost inflation outlook, maybe particularly food and packaging costs and then just the pacing of those inflationary pressures over the balance of the year as you see them today? Thanks.

Yes, good morning, Chris. Let me take that one. Let me just start with the back half of your question then I'll kind of work back to what you asked upfront. I mean, I think if you look at -- I'll kind of center in on a data point, which is kind of our quarter one company-operated margin percent, which actually, if you look at it on a percentage basis, we were slightly below where we were expecting to be for the quarter, even though we had obviously that really strong top line result. And so I think that's the impact of us heading into higher levels of inflation than we were even anticipating in the first quarter. And so I think our outlook for inflation for the year, I'll kind of break that into a couple of pieces. I think if you look at the U.S., we certainly believe we're on a downward trend, although inflation remains elevated. So if you look at commodity inflation on the food and paper front in 2022, we were in the mid-teens level in the U.S. This year, we think it will be mid- to high-single-digit. I think labor inflation will still remain elevated just on the back of a really continued strong labor market. And then I think if you move to Europe, from a food and paper commodity standpoint in 2022, we were in the mid-teen levels in Europe, and we expect to be in the mid-teens again in 2023. So I would say Europe, we still feel is kind of working through what I'll call the eye of the storm, so to speak, from a headwind perspective. Certainly believe inflation is front half versus back half-loaded and certainly believe as we get into the back half of the year, we'll start to see inflation moderate down but still really elevated in Europe. So I think if you go back to operating margin for the first quarter, we finished at 46% on the back of that really strong top line. And I think as we've said pretty consistently in the past, we certainly continue to expect that if we can drive strong top line growth, we should get leverage on operating margin from a percentage perspective as we go forward. Certainly, don't necessarily believe that will be necessarily linear. And I think there's a lot of headwinds for us to continue to work through both from an inflationary standpoint, but just as Chris talked about earlier, just from that macro uncertainty that we know we need to navigate. So I think certainly, you can kind of see a path forward where operating margin could come up a little bit from where our guidance is today if we continue to see that strong top line result over the course of the rest of the year, but there are several ifs there. And I think there's just a lot of headwinds for us to navigate that we remain cautious on.

Our next question is from David Tarantino with Baird.

Hi, good morning. Ian, just a clarification on your margin guidance. I just want to make sure I'm clear. The 45% you call out for the EBIT margin guidance, is that a GAAP or a non-GAAP number? And the reason I ask is Q1 typically is your seasonal low quarter for operating margins. So I just want to make sure we all understand that. And then secondly, Chris, I guess your comments about some of the consumer behavior you're seeing change with respect to items for order and otherwise, I wanted to understand that a little bit better. Are you starting to see that emerge as you exit the first quarter and enter the second quarter? Or was that something you saw in the quarter overall? And perhaps, could you just comment on how you're feeling about the business as you enter the second quarter specifically? Thanks.

So I'll take the first bit on the clarification, David. That's a non-GAAP, the 46% I talked about is a non-GAAP number.

And then to your question about consumer behavior, the transaction, I believe we talked about this on the last call. Mike can correct me if I'm wrong. But we were seeing pressure on units per transaction even last quarter. That continued into this quarter. So I wouldn't say that, that is in any way a new development. That's been something that we've seen, which does just give us the perspective that certainly the customer is being mindful about how they're spending their dollar or their euro or whatever the relevant currency is. But as far as outlook for the business, we remain very confident about how we're positioned. We remain confident, as I said in our press release, the demand, the consumer demand for our brand remains strong. So there's no change from our perspective in terms of how we're feeling about rest of the year. Certainly, we have in quarter 1 the benefit of lapping Omicron, and the whole industry does. We also, as I mentioned in our last call, had more favorable weather in January. So we had some things going on in January that from an industry standpoint, made this an easier compare. But our outlook for the rest of the year, we expect to continue taking share. We've been taking share pretty consistently now for several years. Our outlook is that we're going to continue to take share through the balance of 2023.

Our next question is from Eric Gonzalez with KeyBanc.

Hi, thanks. Good morning. You called out delivery as one of the key drivers of comps during the quarter. And clearly, that's one of the more expensive ways to access your brand, but it does seem like consumers thus far have been willing to pay for convenience. So I just -- given the base case for a mild recession, I'm wondering what level of confidence that you might have that this channel could continue to be a driver of comp growth?

Thanks for the question. We are -- we have seen, as you know, historically very strong performance from delivery. I think it is fair to say that the growth of delivery whether that's a function of it just being at a large number now or if it might, in fact, be some of the consumer pressures, but the growth of delivery has certainly slowed. There is still growth, but it's not nearly the growth that we saw previously. So I think as we look at it, delivery is going to remain an important part of the business, but it's certainly not going to be the degree of growth driver that it has been historically, which goes back to why having a very balanced playbook, where you're getting growth from multiple levers is so important.

Our next question is from Jon Tower with Citi.

Great. Thanks for taking the question. Just curious on the $100 million to $150 million in rental abatement that you're offering to franchisees in Europe, how many of those franchisees have actually taken you up on the offer? And what you might be asking of them in return going forward? Are you maybe asking them to hold the line on pricing to the extent you can?

Yes. Good morning, Jon. Thanks for the question. I think I just would reiterate how we've talked about that support previously, which is, I think it's targeted, it's temporary. And it's designed to go to the owner operators that are most in need. As we've talked about, I think the more acute kind of headwinds that our system is dealing with are mainly concentrated in Europe. So that's where the majority of the support that we've put in place is going. I mean, the support that we're providing is nothing new. We provide support around our system when the conditions and context warranted. It's obviously just a little bit more significant this year just because of the pace and I think the acuteness of some of those headwinds that are being worked through. I think it's one of those strategic advantages that you've heard me talk about before that we have as a system because we've got the financial capability to do that. And it's, I think, designed to recognize the headwinds. And we always knew that, that kind of -- the main pressure point would be in the first half of 2023, which is what we're seeing. I think it's designed to ensure that our system stays focused on executing our plan, stays aligned and proactive on investing in the strategic growth opportunities that we know we have, which I think will certainly be an advantage as we kind of get through these short-term pressures in the underlying momentum our business will have as we exit and take us forward as we get beyond '23. And I think we've seen a good engagement from our franchisees in terms of the support we're providing and how we're working together to bring that to life.

I would just add, our message to franchisees in Europe, in this case, but it goes back with the same message that we delivered during COVID, which is so long as you're doing the right things to drive the business in the long-term, if there are short-term pressures out of your control, we'll work with you to help and support you through that. That's very much an organization-by-organization, restaurant-by-restaurant decision. But what we want to do is we want to make sure that our system always remains focused on the long-term. And that's about ensuring that we're doing great service to our customers. We're running great restaurants. We're providing the necessary value. If you're doing all of those things from a long-term that you've got the benefit of McDonald's being able to help you if there are short-term pressures outside of your control.

Next question is from Lauren Silberman with Credit Suisse.

Thank you for the question. Congrats on the quarter. Can you expand on what you're seeing across your low, middle income consumers in the U.S. and where you think you're gaining share across cohorts? And then can you just break down the contribution to comp from guest count and average check? Thank you.

Sure. So we have the best data in the U.S. to be able to do the analysis that you're talking about. And the headline is we're getting share performance, share growth out of all income groups. So it's not that we're disproportionately benefiting from gaining share with low-income consumers, which I think was maybe the underlying question behind the question. We're seeing share performance, share improvement across all income groups, which makes us feel good about kind of where we're at from a value and a consistency standpoint. I don't know if, Ian, if you want to add.

Yes. Maybe just a bit of texture I would add. I think as Chris touched on, I think what we're pleased about, particularly in the U.S., if we use that as the example, is just that balanced growth between check and guest count, probably two-thirds check, about a third guest count, I think if you look from a comp basis, on both sales and traffic, we know we are outperforming the competitive set. And I think it goes back to what we've talked about a fair bit today, which is just that really strong focus that we've got on value for money and affordability. Despite the pricing again that we're having to take in the context we're in, I think the discipline that both our owner/operators and our company restaurants are bringing to life and the pricing that we're doing is ensuring that we're kind of maintaining that healthy balance, kind of resonating with consumers despite their kind of individual circumstances and continuing to drive really healthy momentum as we go forward.

Our next question is from Jeff Bernstein with Barclays.

Great. Thank you very much. First, I just wanted to clarify the comment you made earlier about a little bit of resistance from a consumer standpoint on pricing. I know you often refer to food at home versus food away from home. And it seems like maybe there are some limiting factors going forward where you might be encouraging more cautious price increases as we move through the year. So any color you could provide there as a clarification. Another one, I'm just wondering if there's any common theme in your conversation with franchisees. I know you have 5,000 worldwide, but there's always lots of chatter in the headlines. It seems like you said, significant returns, I mean, they're far exceeding the cost of capital, relative benchmarks, positive cash flow. I'm just wondering if there is any common theme of pushback from the franchise community? Thank you.

On price resistance, I think there is just -- it's a reminder about how we have to be very disciplined on where we take pricing. And we've built a very good capability over the last several years working with some external partners to know exactly by item, by restaurant, the ability for us to take pricing. And what we see is that when we follow that and we're mindful of the elasticities that we're able to get the pricing that we need through, and we've seen really no deterioration in that. But what we are seeing is when you go off script, when you go and you start to try to take pricing in areas that would not be suggested by all of our modeling that we are starting to encounter some more resistance there. And so just as a reminder that we need to stay very disciplined on pricing. The customer is certainly feeling, I think, some of the stress and pressures on that. We remain a great outlet for value and affordability. But we have to do it in a very strategic and a very targeted way, and we've got the tools to do that. As you said, we've got thousands of franchisees, roughly 5,000 franchisees globally. So it's incredibly difficult, I think to get it down to a sound bite of what we're hearing from any one franchisee or from any one particular country. But broadly, there certainly is a lot of concern around the inflationary pressure and an inquiry about when we expect that to flip and be more benign. It certainly is going to improve. Our expectation is it's going to improve through the balance of this year, but it's still going to remain elevated versus what we've historically been accustomed to. We've historically been accustomed to very low single-digit inflation. And I think our outlook for the full-year is it's probably going to be more like mid- to high single-digit inflation in the full-year but nonetheless, improving. So inflation, I think is an area of concern with franchisees that we're having a lot of conversations on. We're also having conversations around digital and just how do they think about what the restaurant experience is in a more digital environment. We have been having a lot of conversations around labor around the world. Fortunately, we're seeing the labor situations improving. In fact, in the U.S., they've made a lot of progress on staffing in the restaurants, which is partly what's driving some of the operations improvement, but labor was something that there was a commentary on around the world. And then as we've phased in our PACE program, as I mentioned, we put it in place in all of our major markets last year with the exception of the U.S., which started this year. But after three years of no grading in the restaurant and then you start grading, there inevitably is questions and in some cases, areas of feedback that we get. And we work our way through that. We did that last year in all of our international markets that implemented PACE, and we're seeing the benefit of that. Joe in the U.S. has been very consistent with the franchisees there that if after the first 90 days of rollout, if there are areas that we need to make adjustments, we'll do that. But overall, we're seeing great performance from a restaurant execution standpoint, and that's a credit to the franchisees, how they've gotten after labor, but also how they're just engaging with their teams at the local level.

Maybe just a small build on that. I think as Chris said, obviously, when you're in a period of higher inflation and cost pressure, that's always going to be a topic to discuss. I mean, I think our job as a system and as McDonald's is to make sure that we've got a set of strategies and plans in place that's going to deliver that strong top line momentum. And I don't think you're hearing any lack of confidence from any part of our system about the strategies and plans that we've got in place. And I think as Chris touched on earlier, the proof point, if that's obviously the best way to work through any significant cost pressure environment, if you look -- the U.S. is a great example, obviously, not only in the results they're delivering, but in that first quarter proof point that Chris talked about where our owner/operator cash flow is actually up. That's what's going to get our system through these short-term pressures and ensure that as we come out of those pressures, we're going to be on the path to recovering margin as we go forward with that strong momentum behind us. And I think that's certainly what we're all focused on delivering against.

Our next question is from John Ivankoe with JPMorgan.

Hi, great. Thank you. The question is on your pricing relative to the informal eating out market. I think you're always very clear that you want to stay competitive with that. But there typically is more inflation at food at home and more deflation at food at home. It's actually a lot more volatile than food away from home pricing, at least looking at the U.S. So do you think there is anything that's changed in the environment that maybe makes the McDonald's brand specifically less at risk to kind of lose any traffic, lose any transaction count to food at home, would presumably it becomes deflationary at some point in the near-term as kind of the first part of the question. And secondly, in terms of the customer promotion within the McDonald's app, the customized promotion within the McDonald's app, how effective do you think that is? Where are we in that overall journey in terms of customized promotion that is going to drive an incremental purchase, incremental profit versus still being done in some fairly general terms with some opportunity to maybe refine that over time? Thank you.

Yes, good morning, John. Let me start with the first bit, and then I think Chris will take the second part of your question there. I mean, I think from a pricing perspective, it goes back to what we've talked about a bit through the call today. I mean, I think we're always focused on ensuring we're delivering strong value, strong affordability, even more so, obviously, when consumers are under pressure as they are. I think currently, I think we certainly -- if you look back, I would say, when we get into these moments where consumer disposable income is under more pressure and they're having to think about moving to more affordable options, I think we are certainly a beneficiary of that as just because of our positioning on value and affordability. And I think strategically, if you go back and use the U.S. as the example, what we've done over the last couple of years to invest in the estate, to invest in our marketing and brand communication, to invest, I think in the channels where we're bringing our experience to life, whether that's digital and how we're connecting with our consumers, whether that's delivery, et cetera, I think we have a lot more compelling reasons to visit and advantage versus those around us. I think if you think of the food away from home and the food at home, I mean, I think the dynamics been in reverse over the last probably 12 to 18 months versus what you would see typically, meaning food away from home inflation has actually been lower than food at home. I think you're starting to see that shift back to more traditional kind of dynamics. But I think we feel good about how we're generally positioned against from a choice perspective for consumers even as those dynamics shift back. And I think you look at kind of the first quarter momentum, the fact that we've got that positive traffic growth that we're kind of outcomping the competitive set, I think are all strong indications of that. But I mean, it's work ahead that we need to stay focused on to ensure that we kind of maintain our positioning from a value and affordability and ensure we're delivering a better experience, as Chris touched on earlier, to ensure that we're kind of earning every customer visit each and every time they need to make a choice on where they're going to go. To the second part of your question, I think even though our digital sales are now roughly 40% of overall sales and about half of that being identified, it's still early days for us in our journey there. I expect that we're going to continue to see digital as a percent of the business grow. You look at China, where it's almost 80%, 90% of the business, it gives you an indication of potentially how high is up. As you get more and more of your sales on digital and as more and more of your customer base becomes identified, I think you can get much more specific around how you're delivering personalized value. And I'll just give you one example. I love our McChicken Sandwich. I order our McChicken Sandwich all the time. I should never be getting, and I say this to the team, I should never be getting on my app on offer for the McChicken Sandwich. We're not yet at that level of sophistication, but we're going to get to that level of sophistication. And so as you think out to the future, I think all of the things that we're doing right now, we're laying a foundation for a very intimate, close connection that we have with our customers. And as we do that and as we get more and more identified, I think it's going to allow us to get much more sophisticated about how and when we're delivering value into whom. And for what purpose? Is it to drive frequency? Is it to drive reach? All of that is to come. We're in very early stages today.

Okay. We're at the bottom of the hour. That completes our call. Thanks, Chris. Thanks, Ian. Thanks, everyone, for joining. Have a great day.

This concludes McDonald's Corporation Investor Call. You may now disconnect. And have a great day.