McDonalds 1Q15 Earnings Call Notes

Separate call on May 4 to go over turnaround

“we have scheduled a separate call on May 4 to share the initial details of our turnaround plan. We appreciate your patience, as we focus today on our first quarter results and the overall approach we are taking as we develop plans to reenergize the business.”

France, Russia and US remain challenging

“the U.S., France, Russia and Japan, where challenges persist. U.S. results remain disappointing. Recent actions taken by Mike and his leadership team, including implementing a more efficient operating structure, simplifying the menu and holding the U.S. Turnaround Summit with operators in March, are helping to create a renewed sense of energy and focus around better delivery of local customer needs.

In both, France and Russia, consumer confidence remains low and challenging macroeconomic conditions continue to negatively impact results. ‘

CEO’s operating principles

“Let me shift gears now and discuss the approach I am taking to lead McDonald’s into the future. My operating principles, if you will. First is a greater emphasis on personal accountability. I am honest and fair if I don’t dispense forced kindness. Where we need to fix the fundamentals, we need to act now; and where we need to make an impact, I’m not looking for incremental steps.”

“second operating principle is grounded in the customer. As a retail business we must be even more customer-centric. This means deeper understanding, better listening, better segmentation, genuine sharp insights regarding what our customers want”

“My third philosophy is progress over perfection. We will try new things, move fast with what works and even faster from what doesn’t. And when we find winning plays, we’ll be more nimble, much like we did with the rollout of Apple Pay this last fall, from first contact to going live to 12 weeks.”

“My final approach to leading is I champion simplicity. We are simplifying for greater transparency, accountability and speed.”

Modern and progressive

“My overall vision is for McDonald’s to be seen as a modern, progressive burger company, delivering a contemporary customer experience. Modern is about getting the brand to where we need to be today, and progressive is about doing what it takes to be the McDonald’s, our customers will expect tomorrow.”

Stop using antibiotics that are “important to human medicines”

“we will stop using antibiotics that are important to human medicines, and are checking supply chain within the next two years. And there are plans to feature 100% sirloin burgers for a limited time in the U.S., along with a current test on all-day breakfast.”

Foreign currency translation impact results by 0.40-0.45 this year

“Based on current exchange rates, we now expect foreign currency translation to negatively impact our results by $0.13 to $0.14 in the second quarter and $0.40 to $0.45 for the full year. As usual, take this as directional guidance only, because rates will change, as we move throughout the year. ‘

Driving demand with new products and more local

“riving demand is going to be driven through both national and local menu news. So we have some strong and some exciting product pipelines ahead. So most recently we’ve announced the sirloin burger, which we believe will be a favorite with customers and have broad resonance. But also we are liberating the creativity, and I guess the insights of our local markets to develop local food menu items that better resonate with the local customer base. ”

We are moving from a world of mass marketing to mass personalization

“We are moving, without a doubt, from a world of mass marketing to one I describe as mass personalization. And clearly, technology allows us to do that now, which allows us to build a much more meaningful relationship with our customers, to shift from a transactional relationship into a far more engaging and meaningful, purposeful relationship where we can understand their needs on individual basis rather than a generic basis.”

This is a growth led turnaround

“this is around driving operating growth in our operating business. Simply put, we want to sell more hamburgers to more customers, more often, around the world. So this is going to be a growth-led turnaround. There are things we can do to help that.”

We are proud of our core products

“What we are working on now and what Mike and the menu team is working on is how could we deliver a better McDonald’s menu? So we are very proud of our core products. What can we do to enhance the quality, both direct quality, and also the quality perception as we develop new items. Again, our benchmark is ourselves. And our customers are guiding us on that. So we believe if we can bring great quality products at the value of McDonald’s that is the equation that will drive growth.”

I’m not new to most of McDonald’s system

“I am not new to most of the McDonald’s system. I am new in position. I totally recognize that. And different expectations and accountabilities come with that, but I think my track record and my history in McDonald’s is relatively well known around the place. And therefore, I don’t come as a complete surprise. So I look forward to sharing more on May 4 and ongoing.”

McDonald’s 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Operating income down 15%

“In constant currencies, operating income was down 15% for the fourth quarter and 8% for the year. Earnings per share was down 14% for the quarter and 11% for the full year, both in constant currencies.”

Negative trends are beginning to moderate in Germany

“over to Germany; negative trends are beginning to moderate with the month of December marking the highest comparable sales performance in more than two years. ‘”

China recovering after supplier issue

“Fourth quarter comparable sales in China were negative 6.7% due to the lingering impact of the supplier issue. Each month of the quarter showed sequential improvements, reflecting the positive impact of our ongoing customer recovery efforts in the market.”

Broad based challenges in the US

“he underperformance of our U.S. business; throughout 2014, our results reflect the impact of ongoing broad-based challenges, including operating in an increasingly competitive marketplace and the sluggish industry growth.”

This is a market share game, it’s always going to be a market share game

“In the near-term, this is a market share game; it’s always going to be a market share game. So we trust and we expect to see a more customized approach from our owner operators in terms of owner operator-driven business plan locally, it’s based on the customer insights and the unique competitive sets in the marketplace.”

Low inflation plus higher min wage, healthcare expense going to hit operating margins by 20 bps

“Having said that, we are in a relatively low inflation environment, so pricing as I noted in my commentary, pricing will still be probably below our average if you assume the low inflationary environment continues. At the same time, multiple states are increasing minimum wages. We’ve got National Healthcare impacting 2015 for the first time. That’s going to hit the McOpCo margin for about 20 basis points.’

Margin pressure as variables don’t head in the right direction in 2015

“historically we’ve talked about a 2% to 3% — I’m sorry, 2% to 3% comp needed to maintain margins in the U.S., and again that’s been modeled in what we called a normal year. So when you have normal commodity inflation, normal price elasticity and ability to raise prices normal wage inflation et cetera. So a lot of those variables are a little bit out of whack for 2015. So the prices I already addressed we don’t see getting to our historical levels. Wages will probably grow a little faster than normal, especially if you throw in the healthcare impact of that. So again as we think about it, especially in this first half of the year U.S. margin will continue to be a little bit under pressure.’

Localization of relevant products, enhancing chefs

” we’re seeing this localization of what more locally relevant products that are being drawn or pulled from the marketplace as they get into the customer insights. We’re looking at building our culinary talent to support our talented U.S. chefs. We’re including our supplier team of chefs. We got some outside consultants who will bring a fresh and forward thinking perspective on our menu vision”

We have to make sure our definition of quality matches with our consumers

“We have to make sure that our quality aligns with the consumers’ definition of quality moving forward. So we’re going to be very aggressive in that area looking at — we’re working with our own operators to revise our product vision for a very different future, as led by the consumer from the provenance to the label ingredients, to the processes we use to bring the food from farm to table. We’ve opportunities to clean up our ingredient list and enhance the taste.”

McDonald’s 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Pretty poor performance

” Let me start by saying that we are disappointed by our recent performance which fell short of our expectations. Global comparable sales decreased 3.3% for the quarter, operating income was down 14% in constant currencies and earnings per share was $1.09, a 28% decrease in constant currencies.”

We haven’t changed as fast as our customers

“In some of our markets the reality is that we haven’t been changing at the same rate as our customers’ eating out expectations or, more specifically, their expectations of us at McDonald’s. So we’re changing. And we’re changing aggressively as we refocus on building the business for the McDonald’s system and for our shareholders. The key to our success will be our ability to deliver a more relevant McDonald’s experience for all of our customers.”

customers want choices

“Customers want to personalize their meals with locally relevant ingredients. They also want to enjoy eating in a contemporary inviting atmosphere. And they want choices; choices in how they order, choices in what they order and how they’re served.”

Focus on modernizing decors and enhancing convenience

“Our efforts to create this experience in our restaurants build upon the investments that we’ve already made including the Made for You operating platform, modernized decors and leading edge point of sale and mobile technologies, all brought together in a visible, tangible way to enhance convenience for our customers.”

If you have to do this, you’ve lost

“Conveying the facts and adjusting misperceptions about the freshness, quality and integrity of our ingredients appeal to our customers and supports the work we’re doing to offer greater menu choice.’

Tax rate contributed significantly to the poor earnings

“Let’s begin by reviewing the significant decline in third quarter earnings per share versus a year ago which was primarily due to four factors. The first was a much higher effective tax rate of 44.4%.”

Commodity costs rose

“For the quarter U.S. commodity cost rose 3% primarily due to higher beef and dairy prices. This pressure is expected to continue into the fourth quarter. As a result, our revised full year outlook for the U.S. basket of goods is an increase of 2.5% to 3%.”

We’re one of the only restaurants that Apple has a strategic partnership with

“We are also excited about the relationship that we have begun to cultivate the most recent of which was Apple Pay and we’re the only restaurant, as I mentioned, that will be able to allow consumers to leverage Apple Pay in the drive-through. And so and one of the only restaurant businesses that Apple has had a strategic partnership with”

We’ve tested everything in the innovation lab

“First of all you know anything that we would implement in an restaurant we have taken it require a bit of testing. So relative to create your taste has been through the innovation lab, the innovation center and the testing protocols”

We’re focusing on competitive pressure, which we don’t have to do too often

“one thing we do not do too often, Jeff, and you probably won’t hear us do too often, and that’s talk about for fact that our focus is now on competitive pressure. What we do is acknowledge it; they’re folks in the marketplace that are doing some solid things”

The whole QSR industry isn’t registering with millenials

“et me just broadly relative to millennial. If you look at the quick service restraint industry there is a decline relative to millennial usages of the quick service restaurant industry”

The problem is our value and food options

“the question is whether or not our value and our food options are resonating as strongly and so I believe that that is the fundamental basis of some of the challenges that we are having.”

MCD’s CEO says it’s really about customization not just integrity of food

“we believe that if you look at the broader market and you look at what customers are asking for, they are asking for transparency they’re asking to know what’s in the food, they’re asking for integrity of the food. There are cases and there are markets where organics are drivers at a higher level. But I would offer is that the highest level is more about their transparency, integrity and also the ability to customize and have what they want on a sandwich or a burger.”

I wont say CMG is right or wrong

“I know Steve I use to visit his first restaurant when we entered into an initial partnership back then when we were sharing the McDonald’s supply chain system which helped him as he move forward Chipotle. But I would not say Steve is wrong or right, I think each individual organization has to look at that and look at it through the eyes of the customers and what customers are asking them to deliver.”

If organics gets more trendy then we’ll get more aggressive there, but there are other focuses around the world too

“so I think you’ll see a lot of changes though, Howard, I mean if these things become even more large, even more trendy then that something clearly we’ll look even more aggressively at. But we do have markets around the world that focus more on organics we have markets that focus more on locally relevant products. France just finished up one of their launches and it was basically speaking about French beef; we talk about Australian beef over in Australia.”

Customers want real and fresh food

“Customers want real food and they want to make sure they understand that its real food and they want fresh food. So they want to understand the sources or the origin, they want to make sure that I know what’s it, where it came from and the integrity of those sources.

And so what we’re trying to do is more visually depict that both in our marketing, in our foods of question and even more importantly at the important movement of truth which is in the restaurants and for those of you visit our restaurants and been behind the counters you’re seeing the freshness and the quality of our produce. However ,not everyone has done and seen that and so we want to make sure that we’re transparent enough to do that many times real and fresh is also conveyed. “

Has Healthy Eating Hit a Tipping Point?

Last week Sprouts Market ($SFM), a smaller competitor of Whole Foods ($WFM), made a comment that stood out to me on its conference call.  The company said that middle income consumers are adopting healthier eating habits faster than any other segment:

Studies today show that the most rapidly growing segment of Americans adopting healthier eating habits is primarily middle income consumers. For years, price and availability have long been viewed key barriers to attracting this middle income shopper”

If this is accurate, it may be an indication that the healthy eating trend has “crossed the chasm” to mass market adoption.  The healthy eating trend has been brewing for a long time, but we may be at a point where awareness, availability and price have converged to a tipping point.

The “tipping point” theory could be an explanation for why we are finally starting to see negative comps at a company like McDonalds.  Even though the healthy eating movement has grown rapidly for years, it may have been too niche up to this point to have a material impact on a behemoth like $MCD’s numbers.  MCD grew US guest count all throughout the recession.  In 2013 and so far this year though, guest count has been declining.  If this is indeed an inflection point, it could be the start of more to come.

McDonalds Guest Count Growth

McDonald’s 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“In Europe we’ve got less pricing power than we had a year ago, and consumer psyche is affected by both the economies and also some of the upcoming austerity measures, VAT pressures, etc.

In the U.S., we continue to experience a bifurcation of the consumer base. McDonald’s core customers skew towards those customers whose disposable income is not rising as much and are spending a little bit less in QSR. And so as we look at those things, as we look at the macroeconomic conditions that persist in APMEA and across APMEA, we believe that this fourth quarter is still going to be relatively challenged, as we mentioned.”

“when it speaks specifically to the wings, there were a couple of things that, although it performed within our targeted expectation range, again at the lower end, there’s a couple of things we can improve on. One, there’s still affordability. $1 per wing was still not considered to be the most competitive in the current environment. The other thing we saw, and it’s a very slight modification, but the flavor profile was slightly spicy for some consumers.”

“today we’re 81% franchised globally, 19% company operated.”

“The modernizing customer experience is something we’ve been focused on and that really deals with our reimaging and making sure the restaurants are contemporary. That part has been received well by customers. We continue to do that. The strong portion of that, and Pete mentioned it, is that when you look across Europe, Europe is much further ahead there. So we won’t have to do as many globally, but we’ll leverage what we do need to do to make sure we are a compelling offer to customers around the world.”

“Technology is going to be a big part of our future, particularly digital engagement with consumers. And so you’ll hear us and see us talk much more about digital engagement with consumers. The other thing that you’ll see change a bit is we are being much stronger relative to communicating about our brand, communicating about our food. Customers want to hear more about transparency. They want to hear about provenance and where the food is from. So those things we’re very proud of at McDonald’s, and we’ll continue.”

“Today, IEO is flat to declining. That makes it a little bit more difficult for growth. And the Chinese typically, in tougher economic times, they typically revert to what we would call CQSR, Chinese QSR, noodle shops, etc., than they do Western QSR-based companies.”

“The challenge for us is still there is softness in the QSR industry. And we have the right things in place, I believe, for the long term to continue to drive shareholder value.”

” customers that, to the moderate, middle to low ends, are a little bit more stressed from a discretionary spending perspective.”

McDonalds 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“United States, where comparable sales for the quarter were up 1% and operating income was flat. We continue to appeal to our customers with an increased emphasis on new news across our menu, and an ongoing focus on everyday affordable value.”

” Europe, where comparable sales were down 10 basis points for the quarter and operating income was up to 5% in constant currencies. The U.K. and Russia continue to deliver positive results, while weak performance in Germany and France persist. The UK’s business remain solid.”

“Although market share improved in China, Australia and Japan, comparable sales were negative for our big three markets. Positive performance in other markets like South Africa, Singapore and South Korea partially mitigated the overall segments decline.”

“In China, comparable sales were down 6.1% for the second quarter reflecting the negative impact from avian influenza which continues to dissipate”

“In Japan, consumers remain extremely price sensitive.”

“A unique franchise business model that harnesses the entrepreneurial spirit of local businessmen and women will operate approximately 28,000 of our nearly 35,000 restaurants around the world.”

“Now the interesting thing about IEO is that QSR makes up the vast majority of IEO. And so when you hear us talk about IEO, we are talking in a large part also about the QSR industry.”

“one thing we do see in the broader industry is we’re seeing a lot of discounting, price discounting rather than consistent value platforms which we have around the globe and we’ve put in place and we’re going to maintain that consistency because it’s important to consumers.”

“First of the all European economy, I can give you a perspective. All of us travel quite a bit to our markets. I don’t know – the economists may be a bit ahead of themselves. That’s my personal perspective but it’s based upon the fact that if you look at GDP growth even quarter one versus year ago or even as you roll into quarter two, France is still in a recession two quarters now that we’ve seen negative GDP growth. We had Germany, which is negative in GDP growth. Spain is still suffering. From an unemployment perspective, you’ve got much higher unemployment than the norm across Europe. Youth unemployment is something that is somewhat alarming whether it be in France at 26%, Spain at 57%. You’ve got markets – I was recently in Portugal and Ireland, you got markets, some markets may have bottomed out. I would tell you some of the larger markets are still having some challenges”

[analyst comment] “It looks like obviously both quick service and casual dining consumers in the U.S. are pulling back on spending pretty dramatically in June and July.”

“what we do know is that there was a pullback to some extent, and it does seem to be impacting the informal eating out industry a little bit more or so than broader retail.”

McDonalds 1Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“The challenging economic environment in which we’re operating impacted our first quarter results.”

“U.S. where comparable sales for the quarter were down 1.2%…In Europe, comparable sales were down 1.1%…Asia Pacific, Middle East, and Africa, where comparable sales were down 3.3%”

“Today, a large percentage of the Asian population eats breakfast away from home. But our breakfast sales as a percentage of full day sales are only 11%. That’s less than half the U.S. average of 25%”

“In China, comparable sales decreased 4.6% for the quarter in part due to the residual effects of consumer sensitivity around the supply chain issue in the chicken industry.”

“we normally don’t talk about weather at all, but we know in the month of April, last quarter – the first quarter of last year, we saw very favorable weather.”

“We’ve historically said 2% to 3% comp would allow us to hold margin”

“I would tell you today, our product pipeline is more robust from a global perspective and the other aspect of this is, we are moving products around the world at a much quicker pace”

“Japan has been one of our most difficult IEO markets as far as negative IEO”