McDonald's Corporation (MCD) Q3 2012 Earnings Report, Transcript and Summary

Hello and welcome to McDonald's October 19, 2012 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'd now like to turn the conference over to Ms. Kathy Martin, Vice President of Investor Relations for McDonald's Corporation. Ms. Martin, you may begin.

Hello, everyone, and thanks for joining us. With me on the call are Chief Executive Officer, Don Thompson, and our Chief Financial Officer, Pete Bensen. Today's conference call is being webcast live and recorded for replay via phone, webcast, and podcast. Before I turn it over to Don, I want to remind everyone as always, the forward-looking statements in our earnings release and 8-K filings also apply to our comments. Both of those documents are available at www.investor.mcdonalds.com, along with any reconciliations of non-GAAP financial measures that are mentioned on today's call with a corresponding GAAP measures. Now I'd like to turn it over to Don.

Thank you, Kathy, and good morning, everyone. McDonald's is the destination for more than 69 million customers everyday, because we offer great tasting, high-quality food, and increasingly more modern and contemporary restaurants. We remain focused on being the most appealing choice for our consumers and because growth in the global informal eating out category has been relatively flat growing share in our major markets is key to our long-term success. I’d like to discuss our latest results and provide insight into how we are approaching our business in the current environment as we manage for the long-term. For the quarter, global comparable sales were up 1.9%, operating income was flat in constant currencies, and EPS reached $1.43, which is a 4% increase in constant currencies. And as we begin the fourth quarter, global economies remain challenging and our comparable sales for October are currently trending negative. We continue to face pressure on both the top and bottom lines some of which is the result of planned strategic decisions, including actions taken to enhance our value platforms, investments in technology, and our Olympic sponsorship. But other pressures have been driven by the external environment including declining consumer sentiment, higher commodity and labor cost, and heightened competitive activity. When the economic crisis began in 2008, few people thought the environment would still be as uncertain and fragile as it is today. It is clear however that this operating environment is the new normal. As such, our near term focus is on stabilizing and growing traffic and market share. We have been and continue to refine our efforts to increase frequency and penetration by addressing local market conditions. Our underlying strategy still revolves around a high-low approach that provides exceptional value across the menu at an affordable entry point and the bills on…

Thanks, Don, and hello everyone. McDonald's continue to grow both constant currency revenues and earnings per share by 4% in the third quarter as we faced softening demand, tightening competition and rising cost in many of our markets. The environment will likely remain challenging for at least the next few quarters as we lapped some very strong quarterly comps. We remain focused on those factors within our control driving increased customer visits by delivering exceptional value, service and new products through an increasingly modern and relevant restaurant experience. Despite the environment, we continue to operate from a position to strength. Our global system is aligned, our financial discipline is intact, our brand is becoming increasingly more modern and differentiated, and we generated another $2 billion of operating income this quarter. We enjoy significant long term competitive advantages in our size and scale, and we are committed to managing the business for the long term by strategically investing to drive future growth and returns. Through September, revenues increased 6% in constant currency while our combined operating margin decreased 70 basis points to 31.1% as higher revenues were unable to offset increased expenses. Our overall profitability continues to be driven by franchise margins, which exceeded $1.9 billion in the quarter, an increase of 4% in constant currencies. Each area of the world contributed to this growth. The franchised margin percent for the quarter declined 30 basis points as positive comparable sales were more than offset by higher depreciation, primarily due to reimaging and rent. Consolidated company operated margin dollars were relatively flat in constant currencies and totaled $924 million for the quarter. The company operated margin percent remains healthy at 19.1% despite decreasing 90 basis points as positive comparable sales were more than offset by higher operating cost across nearly all of…

Thanks, Pete. (Operator Instructions) So we’ll begin the Q&A with Michael Kelter from Goldman Sachs. Michael Kelter – Goldman Sachs: You guys talked a lot about the reason for the same-store sales deceleration being primarily macro driven, soft industry sales and economic slowdowns, and lower consumer confidence, but this quarter, your global same-store sales were lower than in any quarter even during the peak of the financial crisis, at time when the macro indicators like consumer confidence were much worse. Why do you think that is? Why is McDonald not weathering the macro turbulence as well as before? And then on a related note, how can you be certain that emphasizing value is the right strategic response and [more] just compound the challenges you're faced by eroding margins too?

Hey, Michael a couple of things on your comments. One, relative to how we fed in the past actually the strategies and some of the results we're seeing are similar, I will tell you one of the differences is it's been very red we've ever seen all of our major markets experiencing the impact of these kind of global economies at the same time. And so, that is one of the things that we're seeing right now and therefore we are as we have been investing to ensure that we continue to drive traffic and market share, because we know that correlates to our longer term growth. Relative to whether or not we know that these are the right strategies. I mentioned earlier on the call, our market share is flat or up in all of our major markets, that is a definite sign of strength, and we are gaining market share and some of our markets where we've really placed some of these additional efforts. So, we feel really good about that. Clearly, we'd love to be able to see more sales, and that will come in time, but right now it's about having more traffic and appealing to more customers.

Great. Our next question is Mitch Speiser from Buckingham Research. Mitchell Speiser – Buckingham Research: Great. Thanks very much and thanks for sharing the trend in October. And I was just wondering, I know you usually don’t do this, but you did say negative, you haven't said that in a current quarter as far as I could tell. Can you maybe just give us a sense of the magnitude of the negative comps that are running in October and does that big trading day shift play into that negative at this point during the month or more at the end of the month? Thank you.

Hey, Mitch, thanks, a couple of things. one is, as you know, we have been transparent and continue to want to be. So we wanted to give you guys some insight into where we saw October trending and that's only what that is. That's about October and the trend we see in October. We won't give additional information about the quarter. I will tell you that the trading day does factor into that negative trend.

Next question is Andy Barish from Jefferies. Andy Barish – Jefferies & Co.: Yeah, just wondering on the inflation outlook for 2013, the U.S. being lower inflation than 2012. Is there something going on with contracting or supply chain just kind of shifting around when you look at obviously the raw material prices in the markets they appear higher, can you give us a little more color there?

Yeah, Andy. It absolutely has a lot to do with the contracting that's going on. The suppliers were able to get a fair amount of contract in place before the drought started impacting some of these costs significantly, and so we feel pretty good. Obviously, in January, we'll quantify that for you and give you a little more texture, but it really has to do with the great work the supply chain and our suppliers have done working together with our risk management folks to get some pretty good positions on.

Our next question is David Tarantino from Baird. David Tarantino – Robert W. Baird & Co., Inc.: Hi, good morning. Question on the tactical changes you’re making to emphasize value. Don, could you give us some examples of how that has worked in the past and may be the magnitude of the lift that you see when you pursue the value strategies. And then also, if you could give us some idea of you talked about a lag between the implementation and the impact, if you could give us some sense of layout the plans for the next six to 12 months. When do you think you’ll start to see the biggest level of impact on a global basis?

Hi, David. Absolutely, we can touch based on those points. First of all, some of the things we've seen, earlier in the year, we talked to you guys about some of the things we wanted to see in Australia, and actually we talked about it for the very beginning of the year relative to their value and the fact that we thought we needed to have stronger value as we saw the economy soften. They put in place the Loose Change menu, we saw a very solid turnaround in terms of our guest counts, our guest counts now are quite strong. They continue to evolve the Loose Change menu to look for opportunities for profitability, but we know again that when consumer confidence is soft what we have to do is to appeal to more customers to come into the restaurants. Australia has been trending in a very positive direction. They are clearly comping on some tougher numbers from last year at our 40th anniversary celebration, but their numbers have been solid. France, we’ve talked about France earlier. In France, we say we needed to have stronger value, so now we know Petit Plaisir is strong. I did mention that there is a €2 Quarter Pounder with cheese that they’ve implemented in the market. They've implemented a €3.90 McRoyal, which is a Quarter Pound cheese, but it has barbecue sauce on it to get a little bit more margin. Petit Pre, which is in the one to two year old price point range. So, France had to do the same thing and as you all know, France is one of those markets where austerity is quite strong and the reduction in tourism has also impacted that marketplace. Lastly, I mentioned Japan. Japan had, we have been growing guest counts tremendously…

Our next question is from John Glass from Morgan Stanley. John Glass – Morgan Stanley: Thanks very much, a sort of a two part question. In Europe it does seem like you're getting some traction on value at least the last two months seem to be showing some directional improvement despite a very poor macro relative to U.S. So can you confirm you're actually seeing in your restaurants that kind of improvement? And then further around U.S. maybe we're just not as – or still earlier into this sort of value promotion we're not seeing it in the U.S. yet, and maybe it's just a matter of time, but if you could comment on that, specifically in the U.S. you said you're flat to gaining share in every market, do you still think that in the U.S. this quarter or do you think maybe you have back slipped a little bit in market share? Thanks.

John, for the U.S. specifically, we still know that for the full year we’re still gaining market share. One of things clearly that we’ve been looking at is sales comps and making sure that as we look at comparables if you were through the rest of the competitive set that we’re also still in that mode of gaining market share or at least maintaining market share. We have had as you know, this quarter was a tough quarter for the U.S. and so what I’m feeling good about is again the implementation of the value, platform and Dollar Menu being more aggressively spoken to in our advertising and the menu calendar with CBO and with McRib. So at this point, still gaining share for the year in the U.S., but also looking forward to the fourth quarter really stimulating some of our momentum again.

And in Europe John, we are seeing the benefits of some of that value emphasis. I think Don mentioned in his remarks, the McDeals in Germany, which isn't entry level value, but as a value meal per se has really stimulated the sale, not only of that product group but of all Extra Value Meals. And we are seeing it as well in France with some of the items he mentioned and their trends through the quarter as well. So the tactics are gaining some traction.

Our next question is from Jeff Bernstein from Barclays. Jeffrey Bernstein – Barclays Capital: Great. Thank you very much. Just a clarification on a question. Clarification just being on, I know there was a question earlier about October and you said trending negative. I'm just wondering if you could provide a little bit of color to say that, kind of expatriating the shift, is there any reason to believe we're seeing a change in trend line in any of the three big regions, because otherwise it would seem somewhat understandable to be a modest negative comp. But I'm just wondering if you could give any color as to whether you've seen something more recently in any of the three regions to suggest the change in trend line. And then separately, more broadly, Pete, you talked in Europe and you just talked about this earlier about pushing the value in the near-term, it hurts your check-in margin, but helps traffic. I'm just wondering whether you might think of Europe somewhat differently than the U.S. or perhaps Australia, where they would be because it's not one contiguous region and so many different markets and consumers that you should see a different response from Europe with this big value push, versus perhaps essentially sort of elsewhere? Thanks.

Okay, Jeff. Regarding October, it's not our practice to get into a lot of detail while we're still in mid-month. So when we do the release of the October sales in early November, we'll give you the appropriate texture around the geographic segments and impact of the trading day, et cetera.

Regarding Europe, it is a little bit disguised when we look at Europe in total and the fact that Russia and the UK are doing very well. They are both growing traffic, both of those IEO markets are expanding. So some of the phenomena we are seeing in the rest of the continent and mostly in Southern Europe where the IEO is contracting is not being experienced in those two big markets. And in fact, the UK has had kind of that traditional approach of value across the menu board, so the Saver Menu with the 99 pence entry level value. The little tasters with that kind of next year and then just great value across the rest of their menu with core and premium products has continued to do well. So again, that strategy that Don talked about bringing in traffic with entry level value and then ultimately those customers trading across the menu overtime is really working well in the UK. And as the eating out markets either stabilized or start to grow again in those other markets in Europe, we know that by continuing to maintain and grow the traffic that ultimately will allow them to expand their purchases at McDonald's as well.

Our next question is from Greg Badishkanian form Citigroup. Gregory Badishkanian – Citigroup: Great. Thanks. Just a quick one on China major QSR operator recently guided to moderating same-store sales in the fourth quarter. And I’m just wondering with respect to your comment about taking share, are you taking share from the global chains or is this more domestic and we’ve got a comment about the last quarter, in the last few months or was that just kind of year-to-date when you talked about taking share in China?

Greg, what we look at is, we look at the overall IEO, so the informal eating out category and we look to see whether or not we are growing share in that informal eating-out category. And that's what my comments were about when I mentioned we are maintaining or gaining share in our major markets around the world. Relative to China specifically, when we talk about share, we focus our measurements on the top five cities. And those are the cities that we have really focused our growth efforts on initially. In those cities, we are gaining share and we continue to gain share. And so we feel very good about that. We are less focused now on the cities around those five or outside of that five top tier cities. We are continuing to grow into those cities, but right now our concentration is in the top five.

Next question is from Howard Penney from Hedgeye. Howard Penney – Hedgeye Risk Management: Hi, thanks very much. I'm having some trouble sort of connecting the dots if you will for what is causing the deceleration in McDonald's sales trends. And I understand the macro environment and the question those asked on the outset about the difference in time, but last time versus this time but and when I think about what you are doing to address the problem, when you use the word tactical, it sort of implies temporary, meaning value is not something that you can live off or an aggressive value strategy is not something that you or your franchisees could live off for sort of any extended period of time. And I think about the changes that you’ve made to the menu and the way the menu has grown, including beverages over the last sort of five, six, seven years or eight years since Plan to Win has started. And if I go back to the last time McDonald's had a comp problem, you did a time-and-motion study saying that, the way the employees moved in the back of the house was causing a comp problem and it allows you to make creating inefficiencies and if I think of all the equipments that you’ve put in the back of the house it could be creating again inefficiencies. So I am just wondering that the strategies that you are taking on now to really correct what you're seeing in the back of the house. Again, I'm not, I guess this is more of a U.S. centric kind of question. But it just seems like there is something else going on that I can't really put my finger on and I don't know if you know the answer to the question either. But it just seems like there is something else here that went missing to understand the decline in the or the deceleration in sales in what appears to be a continued deceleration through this year and early next year? I don't know if that question made sense or not, but…

Hey, Howard, I'll give it a short and you'll tell us whether or not we speak to the concerns that you had. First of all when we talk about value, we're not talking about as we view it aggressive value, we're talking about having a value component that is a good solid mix. So typically our value components are somewhere in the neighborhood of 10% to 15% of sales. So we are not talking about being super aggressive and many of the markets that we've talked about this, we had already made some type of an adjustment whether that would be, we weren't speaking about value as much, some markets didn't have value platform in place. And then there is other market, so if you looked at U.S. a couple of things were done tactically that we are readdressing now. So as an example, earlier in the year we began to talk about Extra Value Menu in the U.S. business and we stopped talking about the Dollar Menu. That was as a result of trying to get a little bit more profitability in margin out of the existing value offerings that we had. What we found is that, that did not resonated strongly, so we are going back to talking about the Dollar Menu. So that's what we mean by a tactical adjustment. These are not strategic changes in a large sense. We're going to maintain value. We’re maintaining our focus on premium based products. We’re maintaining the growth category focus we have around chicken, and beef and breakfast. We’re maintaining operational execution around extended hours and operating hours. We have continued to improve operations in the restaurant. We continue to see what we call our CSO scores, Customer Satisfaction Opportunity scores go in the right direction, we’re improving there. We have continued to support service enhancements and improvements where there's dual-lane drive-through, handheld order takers, continuing to reimage the restaurants. So all of the operational things we’re continuing to move those. In addition to just getting back on course with premium based products, a little less advertising we’ve had this year on some of our blended ice beverages, we did do the frappe, chocolate chip frappe. We’ve had a little less on smoothies. So we’ll get back to get to the right mix relative to some of those kinds of things. So that’s really what we mean, when we say tactical adjustments. They are not strategic changes. They’re tactical adjustments are things we may have moved a little bit away from, and we did that for reasons. They were based upon some of the margin and commodity cost considerations, but now we are getting back to a point, where we can make these adjustments. Our cash flow for operators in the U.S. this year is up $9,000 year-to-date. It is up $12,000 trailing 12 months. So we are healthy relative to the owner operator organizations and we had a point where we can make some of these shifts.

Next question is from Matt Difrisco from Lazard. Matthew Difrisco – Lazard Capital Markets: Thank you. I just had a question with respect to sort of follow up on that with the remodel campaign as well. I wonder if you could give us any sort of color as far as the same-store sales. In recent quarters it looks like you are losing a little share there in the U.S. And I’m wondering if you are seeing the sustained lift that you were reporting earlier on a global basis from those remodels, therefore I guess it’s still producing some good lifts rather than the overall comp base or is the overall comp base slowing it down a little bit. And then, I just want to know how should we think about our neighbors to the north there in Canada, I was wondering if you’re seeing similar trends in Canada that you’re seeing in the U.S. or is that a little bit stronger I guess as their economy is? Thanks.

Matt, specifically about the remodels, we're continuing to see the same performance out of the remodels that we've been experiencing over the last couple of years. So that kind of 6% to 7% average lift is what we’re experiencing. We were just with the U.S. leadership team and the leadership operators a week ago, and we took a part of the discussion was around that specifically and the remodels continue to perform as we've been seeing and as we've expected. And specifically if you talk about Canadian remodels, they are also doing extremely well in that same range as they have embarked on what they call “Destination 2012”, but basically going about reimaging their entire system here over the next couple of years.

Next question is from Jason West from Deutsche Bank. Jason West – Deutsche Bank Securities: Coming back to the U.S. a little bit and you talked about some of the tactical changes, could you also talk down if you guys are planning to step up the cadence frequency promotion around new products and sort of much more of a new product pipeline for the first half of next year versus what we saw this past year, and heavier marketing weight behind that is that sort of in the plans?

Jason, thanks for the question. Yes, we will have a stronger new menu presence for 2013 then we have had in 2012.

And our next question is from Larry Miller from RBC. Larry Miller – RBC Capital Markets: Yeah. Thanks. Pete, I was wondering if you might be able to parse our how much of the margin erosion in the major markets was due to the increase in value and how much was due to the deleverage on same-store sales? And then, in conjunction with that, can you give us a sense on, you talked about how the increase in the value program, you typically see traffic rise in a certain period of time, how long after that does the margins tend to normalize? Thanks.

Yeah, Larry, we don’t have the, I can't pinpoint for you specifically the components of the margin decline between the value pieces, et cetera, because especially what you have going on in some of these environments is, flat to declining transaction counts in the declining broader eating-out markets, at the same time, commodity costs are increasing significantly, and we are promoting more value. So it’s really the combination of all of those that are pressuring the margins. And as Don was talking about it in one of his answers, there is not exactly a specific timeframe with each and every market as to when you see that change. Australia actually saw it probably quicker than a lot of other markets over this past summer when the Loose Change menu was introduced in the March timeframe and by the summer months, they were already hitting hard with some premium product. They hit a premium Olympics sandwich promotion, and then went right into the Serious Lamb promotion, which were great at trading customers up and building average check. So it does depend on the market and the general, both marketing plan and what’s happening in the overall environment. But as Don mentioned, we're confident as we do this, that we know we will ultimately as the market start to improve, hold on to those customers and trade them up.

Next question is from John Ivankoe from JPMorgan. John Ivankoe – JPMorgan: Hi, thanks. Just thinking about the U.S., maybe other major markets as well that have perceived a recent point of sale upgrades. I mean just wondering if there is anything that you can do in that regard in terms of customer loyalty for example or just trying to reach your active customers more specifically and maybe to offering them value on a very targeted basis, through some functionality that either does, or could it just on that new platform?

Hey, John, thanks for the question. First, a couple of things, and I know, I'm surprised no one has asked it today yet. But we usually get asked the question about this New Paltz help you out at all in terms of order in time and things of that nature. We have found that we have seen a small benefit in this early on relative to that. So the ordering time has decreased slightly, which helped us with capacity and that's one of the thing that we wanted to be able to make the job easier for those taking the orders in the restaurant. So we know that that happens. Relative to other promotional benefits or consumer related benefits with our new technology systems, we are looking at and testing in certain countries around the world, everything from e-couponing to mobile order and pay to a bit of I will cal it a customer recovery, customer retention type relationship that we build with those who have smartphone. So this is one of the thing that we are looking at. We are not at all prepared to go broad with that as of yet, but we are looking at those kinds of things John.

Our next question is from Keith Siegner from Credit Suisse. Keith Siegner – Credit Suisse: Thank you, and my question is for Pete. Pete, as we think about this franchise margins and kind of this interplay between comps and I know you increased D&A from your reimaging program, I mean, we could see it in the U.S. and Europe, as the years progressed and comps have slowed, we've gone from gains year-over-year to now slight declines. How do we think about modeling that interplay, maybe for each of those regions, where's the turning point, like what comp do you need to offset the increased D&A? In other words, where do we maintain franchise margins in that setting, where do we grow or where do we decline?

Yeah, Keith, there's not an exact number that we can share with you. You broadly touched on it. At a 1.9 global comp for the quarter with the increase in the investments we're making in these markets that obviously is not enough to overcome the additional depreciation, so it's somewhere north of that. It also does matter on the pace of that reimaging. So how quickly is that depreciation expense building as we start to get near the end of a lot of these investments in Europe, those reimaging expenditures will start to trail off and so the incremental depreciation won't be as large and at the same time, the U.S. is around a similar amount this year that they did last year and should probably be something similar next year. So that incremental piece will be somewhat stable, meaning, we'll continue to need that higher comp to increase the margins there.

Next question is from Joe Buckley from Bank of America Merrill Lynch. Andrew Charles – Bank of America Merrill Lynch: Hi, it’s Andrew Charles on for Joe today. Don along the lines of technology upgrades, can you give us an update on kiosks and where you stand with those? And then Pete, I know you remain cautious on pricing, but I was wondering what the early forecast for the food away from home index looks like in 2013 for context? Thanks.1

Hi, Andrew, relative to kiosk, as you guys know, we are looking at some, we have some restaurants in Europe, and we have one of the markets that we have quite a few kiosks in. We're looking at how that will apply globally and whether or not this kind of gets to a point that was made earlier or a question that was asked earlier by John, whether or not, where we go with the technology platform. So kiosks are one option, but the other option is how much we use mobile phone technologies or smartphone technologies, because those are also mobile apps and you can do mobile ordering. So we’re looking at both of these things, and we do have a couple of markets though that are almost fully implemented with kiosk.

And then regarding next year’s forecast for food away from home, it actually looks like it might be a little bit higher than this year. So this is preliminary, but food away from home is looking to be 2.5% to 3.5% next year. And then the other index we look at there is food at home and while this year food at home is growing more slowly than food away from home, that will flip next year potentially with the early forecast being 3% to 4% for food at home. So again, these are early numbers, but that’s kind of an indication of where things are going and I think probably right now more indicative of the broader commodity market than anything else.

Right. Our next question is from R.J. Hottovy from Morningstar R.J. Hottovy – Morningstar, Inc.: Thanks and good morning. Just wanted to focus a little bit back on China, and Don, I appreciate the color you had on the Tier 1 and Tier 2 cities and the progress you’re making there. But assuming Tier 3 cities and below are going to be part of the program to get to that 2000 number by the end of fiscal 2013, could you just give us an update on the average unit volumes you are seeing in some of those smaller markets and some of the nearest locations you have there?

Yeah, RJ. Clearly our average unit volumes are strong than our Tier 1 and 2. They do decrease a bit as you go out to Tier 3. The one of the things that we’ve seen also is, as we begin to move out of the urban areas that's where our drive-through strategy really kicks in more so. So as we really begin to expand and as we build more drive-throughs, there we expect to see some stronger volumes as a result of drive-through base restaurants instead of restaurants that are in line. So you got a little bit of a balance there. In the urban areas where you are more retail, street retail, those volumes are very strong because of the population base. As you moved to look further out, if we build street retail, it might be lower, but if we're building drive-throughs with those then we see increased volumes. Clearly, you see increased costs, but you do see increased volumes and we're seeing strong sales results in those drive-through bills.

All right. We have time for one more question. It’s Sara Senatore from Sanford Bernstein. Sara H. Senatore – Sanford C. Bernstein & Co., LLC: Thank you. I just made it. I had a question to go back to China. I just wanted to talk a little bit about the margins and get some context for the unit openings. Is this different in the sense of new units dragging on segment margins or country margins? Is that a different fundamentally from what happens when you see growth elsewhere, or is it just that you are growing faster in China than you are in other markets? And to that same point is the growth from like a segment level in anticipation of staffing up and that kind of thing for the new units or is it that they may with so much lower volumes that they tend to drag on margins?

All right, Sara, great question. It is actually something that we see in all markets. So when the new stores open, they tend to open a little bit below, depending on the market, but tend to open below the average volume for that market, but then the next couple of years, their comp sales exceed the average for the market and they quickly get up to that market average. And so in China at 225 to 250 openings, it is that pace of growth in that market that's causing the new stores to impact the overall margin more significantly than you’re seeing in other markets. If you look at our margins before the new stores in China, they’re actually up for the quarter and year-to-date period, and the impact of those new stores is lessening compared to what we were seeing, let's say this time last year. So it is all directionally as expected. And the new unit it is appropriate reason to why they are a little bit lower in terms of margins. Some are as I mentioned the opening volumes they come out with. Some are some of the additional preopening cost associated with opening. Some as Don mentioned to drive-throughs, which are going into some more green areas they tend to have a little bit higher construction cost built for the volumes we know will be there in the future, but don't quite hit that volume in the first couple of years. So it's a variety of those factors.

Okay. We are out of time for questions. So I'll now turn it over to Don now who has a few closing comments.

So I really want to thank everyone for joining us this morning. As we said and we believe, the McDonald's System of franchisee, suppliers and company employees is well aligned as we continue to execute our Plan to Win and our three global growth priorities of optimizing our menu, modernizing the customer experience and broadening accessibility around the world. We remain steadfast in our commitment to our long-term strategies as we make smart and strategic decisions to mitigate short-term pressures in these challenging times. And in closing, I'm confident that what our solid strategic plans continuing to grow our global market share. We will deliver and building profitable growth for the system and for our shareholders. So again thanks for joining us today and have a great day.