Hello and welcome to McDonald’s Fourth Quarter 2016 Investor Conference Call. At the request of McDonald’s Corporation, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Chris Stent, Vice President of Investor Relations for McDonald’s Corporation. Mr. Stent, you may begin.

Hello, everyone and thank you for joining us. With me on the call are President and Chief Executive Officer, Steve Easterbrook and Chief Financial Officer, Kevin Ozan. Today’s conference call is being webcast live and recorded for replay by webcast. Before I turn it over to Steve, I want to remind everyone that the forward-looking statements in our earnings release and 8-K filing also apply to our comments. Both documents are available on www.investor.mcdonalds.com, including reconciliations of any non-GAAP financial measures mentioned on today’s call with their corresponding GAAP measures. Additionally, I want to make a comment about our financial outlook for the full year 2017. As you know, each quarter, we typically provide details around our expectations for several key components influencing annual earnings per share. In light of our March 1, 2017 investor meeting, where we will provide an update on our long-term strategy, it was not appropriate to update our outlook in today’s 8-K filing or on today’s call. An update on our outlook will be provided in conjunction with our investor meeting in March. And now, I would like to turn it over to Steve.

Thank you, Chris and good morning everyone. I am energized by the position we are in today as a result of the progress we have made the past 2 years. When we launched our turnaround plan in 2015, we said we first need to get the foundation right. We focused on running great restaurants and pushed harder on the basics, including hot fresh food, convenience and value. We will spend today talking about the foundation we showed up last year and upon which we will build as we transition from the revitalization phase of our turnaround to strengthening the business to a sustainable growth. We are now in a position to prioritize initiatives so we can further accelerate our momentum. 2016 was a year of purposeful change. We dedicated our sales to the actions necessary to get better, stronger McDonald’s. Our objective was to reinforce our foundation and that’s what we did. First, we right-sized our structure, we have been leaner, more efficient, more nimble. We have flattened the organization, so it’s easier to quickly share and scale best practices across like markets and get even closer to our customer. At the same time, we are building a better McDonald’s literally. We recently broke ground on a downtown Chicago office, creating a world class work environment for our staff, and for our franchisees and the restaurant teams who visit Chicago from around the world for training and development. Second, we put the right talent in place. Our leadership team blends individuals with deep McDonald’s experience who are ready to take on more responsibility with new executives who have valuable experience outside of McDonald’s and bring fresh energy and innovative thinking. We have promoted Chris Kempczinski to President of the U.S. Business and Joe Erlinger to President of High-Growth Markets, where…

Thanks Steve and good morning, everyone. By staying sharply focused on our customers, we maintained positive global momentum while continuing to make further progress on our journey towards building a better McDonald’s. We are pleased with our financial performance in 2016, which reflects broad based improvements in our operating performance from the top to the bottom line. At the top line, our global comparable sales performance of 3.8% represented our strongest consolidated results since 2011. And every segment was positive for the second consecutive year. Our bottom line performance was equally strong as full year operating income grew $600 million or 11% in constant currencies and earnings per share was up 16% in constant currencies, both of which exceeded our performance goals for the year. Steve talked about some of the structural and cultural changes we are making. We are also evolving our financial profile, so I will talk about some of the impacts on our P&L as well as progress on our financial initiatives. Let me start with the performance drivers for the quarter. As we evolve to a more heavily franchised organization, growing sales in the associated franchise revenues is critical, as these continue to become an increasingly significant portion of our overall profitability. For fourth quarter, franchise revenues increased 4% in constant currencies, reflecting positive global comparable sales and the impact of expansion and re-franchising. I am encouraged by these results, particularly considering some of the challenging industry trends in comparison against last year’s fourth quarter comparable sales, which were our strongest in more than 3 years. Franchise margin dollars reached $1.9 billion for the quarter, a 4% increase in constant currencies and contributed over half of our growth in consolidated operating income. Our solid margin performance reflects sales driven improvements, led by results in our major…

Thanks, Kevin. We will now open the call for analyst and investor questions. [Operator Instructions] The first question is from David Palmer of RBC.

Thanks. Good morning. Quick question on the traffic per store, it looks like it’s been down for a few years now. I think it might be down 10% since 2012 when you eased away from that dollar menu at least domestically. Cash flow seems like it’s strong per restaurant though. And in this morning’s release, you said that the company is going to continue to focus on traffic. Could you perhaps elaborate as to why traffic declines can perhaps reverse this year and what that focus will mean? Thanks.

Yes, thanks, David. No, you are actually spot on. It’s not a 1 year trend. It’s been slightly longer. It is something that dominates our conversations. We plan our business. And certainly, the other operators are very mindful of it as well, particularly here in the U.S. actually. This is all about getting the balance right. I mean, the cash flow growth through 2016 was phenomenal for our U.S. owner operators. And frankly, there never has been a better time to be an owner operator in the McDonald’s system than there is right now. And part of the discussions we are having certainly Chris Kempczinski and his leadership team or the owner operator leaderships is how and where do we reinvest that strength in the business back on behalf of the customers. So I guess two things that you will see more of through the course of this year that we believe we saw the guest count trends. One is around the investment and the experience of the future. So that is something that we have had great success in many of our more mature markets around the world, where we are really investing front of house to put more choice controller in the hands of customers where it’s around how they order, what they order, how they serve, how they pay. So that’s something where we have a great track record around the world and we are looking to deploy that aggressively in the U.S. And then the other piece where we solidify our own value. The McPick menu really does work well for customers, whether it’s the McPick 5 or the McPick the more value end, whether its $2, $2.50, but that alone isn’t winning us the market share fight and the value end. So you will have seen solid this year that we have an aggressive McCafé beverage value offer, which is $1 any size coffee or $2 on the small specialty McCafé beverages. You can expect to see us be more competitive at a value end through the year. I mean, it’s been encouraging in the way that, that has – that has resonated the customers as we have entered the New Year. And our experience when we analyzed the regions that have been most successful around the U.S. the three or four top performing regions over the last year or two are those that have managed to combine the national value platform with the more local, aggressive for those beverage or food let price offers, value and price offers. So we are lifting that learning and I think all the right we were engaged in right conversations and customers will benefit.

Next question is Matt DiFrisco from Guggenheim.

Thank you. My questions with respect to the International Lead markets and the franchise, I mean just looking at that and I know you did a pretty strong comp there of 2.8% positive. I am just curious why that wasn’t maybe providing a little bit more leverage on the franchise side. It looked like that franchise margin came back a little bit. Can you talk about the dynamic or some of the pushes and pulls that might have resulted in the – little bit more modest margin pressure than you saw in the third quarter, where it expanded modestly?

Yes, Matt, it’s Kevin. Thanks for the question. You know we generally get pretty good leverage from sums on the franchise margin side as more of those costs obviously are fixed certainly than on the company operated side. A couple of things on the franchise margin and specifically in the International Lead markets, a little piece of that is as we reduce some of our refranchising, we are generally selling lower volume restaurants with potentially lower margins. And so in the near-term, it impacts the franchise margin percent a little bit on the International Lead – on those International Lead markets. And then the other thing that we do see certainly is some of the occupancy costs internationally, specifically some of the leads costs continue to pressure a little bit margins. But the franchise margin certainly more than McOpCo margin is driven by comp sales. They are definitely a top line game. And as long as we can continue to drive positive comp sales, we should be pretty good on those margins being healthy.

Matt, there is one other thing I would add to that, which is we have – we talk about a very unique business model and relationship with the way that we have with our owner operators around the 20-year franchise and that the mutual benefits in investing together. We are probably – 2016 was probably a peak year actually for some of the co-investment programs that we have been doing hand in hand with our owner operators in most lead markets, where we will put up some of the support to enable them to accelerate some of these investments. Now we are seeing on the top line, we are seeing on our bottom line, so we know it makes sense. And as the lead markets begin to get towards the end of that cycle on this reinvestment, I think this is a chance to focus our attention here on the U.S. which you can expect to see as well.

Next question is from Brian Bittner of Oppenheimer.

Thank you. Thanks for taking the question. Just want to follow-up on David Palmer’s question from earlier. These solid cash flow metrics per store had been really good despite the traffic declines you see in the business. And I think the obvious reasons are the average check growth has offset the traffic declines for the comp and then food commodity deflation has helped boost the margins. And so you kind of talked about restoring traffic when you responded to David’s question, but my question is how exactly do you keep the average checkup in 2017 and going forward, given that you like to price more towards food at home, which is deflation and the fact that you are focusing more on value and price offers?

So Brian, what we have typically seen around – it’s a very huge question. So I mean if it would seem like an obvious trait. But the reality is what we have seen around the world, the more customers we drive into our restaurants, the greater the top line growth and the greater the cash flow growth. So if that impacts margin percent a little and it may do or actually do the dollar amount or the euro amount or the yen amount on bottom line, both for the company and if the owner/operator improves. It is a delicate balance, 2016 was a – there was a lovely cycle from the cash flow with commodities at an all-time low and probably as aggressive as we would be want to be on pricing. I think we are going to bring – you will see us just bring just carefully bring pricing back more in line with food away from home, which we begin to see now. But the realty is and this is on the new discussion for us in our business. Again, going back to the 20-year franchise agreement, we all know that for the benefit of our owner/operator businesses over the long-term, you are got to be serving our customers more often. So that’s way we return to. But we know we can grow profitably and cash flow can grow alongside that.

Next question is from David Tarantino of Robert W. Baird.

Hi, good morning. Steve, just continuing on the team of asking about the U.S. business, it seems like the hallmark of the McDonald’s system has been built around speed of service and it seems like over the past several years, McDonald’s may have gotten a bit slower, so can you talk about where you are at this system in terms of speed of service and how you are thinking about that as part of your traffic driving program, especially as sort of tie-in experience of the future, which includes some customization elements, so any thoughts there would be helpful?

Yes. No. Thank you. Thanks David. Speed of service has declined slightly, it’s handful of seconds slower by the end of ‘16 and we were by the end of ‘15. So I guess there is a number of things we are trying to do. You will hear me talk about or heard me referring the thoughts around net simplification where if we are going to introduce new menu items, new ideas, we got to reduce the complexity by at least, if not more than the same amount. So our operations teams, particularly in the U.S. are deeply focused on that and just simplification isn’t just on the menu, it could be on different operational processes. It could be the use of technology stated on the manual work out of the way, simplifying just the merchandising all the way through training programs in the restaurants and making them more efficient and more effective. So there is a number of different pillars to our simplification efforts. With regard to Experience of the Future, I think this absolutely addresses the speed of service issue in a way that consumers are in control of. So if you wanted to – maybe you enter a restaurant, you are with your family and you want to spend a little more time ordering at the self order kiosks and you want accustom, you can dwell for as long as you want, placing your order, getting it right, enjoying the moment together. And then a plenty of time together just be able to go and sit at the table and we will bring it out to you. If you are wanting that from counter speed of service in a traditional way, effectively I would see that speeding up, because effectively, some of the larger orders will not be there at the front counter and they will just be the more grab and go type customers. So – and simply on the drive through, we – as we develop and continue to invest in technology and we get our order ahead and our order and pay capabilities through the app, better defined by through the course of this year. Then a lot of the elements of the McDonald’s experience that can slow it down, not just for you, but maybe the customer behind you in the line are taken out of it. So, we believe we can have technology to a lot of that heavy lifting and any of the experience be better and the service charge will improve as a result.

Next question is from Nicole Miller Regan of Piper Jaffray.

Thanks. Good morning. In the U.S, when you think about grocery store deflation, if it were to lessen, do you expect to have more guests that were eating at home or turn that would account for increases in guest traffic or would you expect to have more pricing power to use with the current guests you have? Thanks.

Hey, Nicole. Thanks for the question. Yes, we do expect kind of the food at home, I’ll call it deflation to ease or not be as favorable as it was in 2016. The IEO industry is still projected to be relatively muted in 2017. But I think what it does is, as you know, we look at various factors when we look at pricing. We will look at food-away-from-home inflation and food-at-home inflation and competitors to determine the right kind of approach to our pricing. I think it gives us an opportunity to potentially gain some customers back that are right now eating at home. Again, as Steve mentioned early, we do have to be careful on the pricing side with balancing price increases with continuing to grow guest counts. And so we will take a close look to make sure that we don’t get too far ahead on our pricing at the expense of guest counts. But certainly, if grocery store prices continue to rise or our guests favorable in 2016, we view that as a positive for some of our traffic.

Nicole, it’s just a different perspective on the same question actually. It’s typically clearly we have always been part of the food-away-from-home market. You may have noticed, we have been curious here as to whether there is an opportunity for us to serve the food at home market as well. So, we have initiated very, very early stages to small pilot test down in Florida to see whether home delivery could be something that helps to address consumer demands both at home as well as us making their demand when they are away from home. So, that doesn’t necessarily obviously your pricing equation, but it’s – we are curious as to whether the demand is there for food-at-home is something that we could also play a part in.

Next question is from John Glass of Morgan Stanley.

Thanks very much. I had a question about the SG&A. First just a specific what is your sense of timing of when you are going to get the full 500 changed? I think initially you said most of it in ‘17 maybe the refranchising has changed that a little bit and then so ‘17 versus ‘18 quantity? And then, secondly, is it right to think that $2.1 billion is the right number or is there going to be some reinvestment in the business or growth in SG&A over time. It sounded like Steve, from your language in the release, that we are redirecting some capital in G&A spending towards strategic initiatives. So, I am wondering if you are shifting a little more to putting more money back into the business and therefore the $2.1 billion is the right anchor point for G&A in ‘18.

Thanks, John. Couple of pieces of that question. One, I would say we are on track certainly with our original plan through 2016, if not potentially a little bit ahead from a timing perspective. We will give a little more update at the investor meeting in March as far as kind of how we think about G&A through 2018 as well as going forward. The one other piece I would say is when we gave that target and we have not changed on this is it’s a net savings target meaning that it contemplates a reinvestment within it. So we are not going to say that we are saving money and then reinvesting it all so that you don’t see kind of a net reduction in G&A. You should expect to see a net reduction in G&A that also incorporates what we need to invest in the business in order to grow.

Yes, John, just to tag on any comments you heard me say previously, I am firmly of the belief that we do have sufficient resource given the targets that Kevin outlined. Part of the culture that we are embracing here is to create a higher – a heightened level of competition for those resources. If you have a limited fall of capital and that limited fall of G&A, only the best and biggest ideas get funded, so whether that’s the market level or corporate level. And I was on the receiving end of that when I was a Managing Director back in the UK and you had to fight for your capital. You had to demonstrate you could deliver better returns than the person in the market next to you, not in antagonistic way, but it was a performance-based environment. And as we have heightened accountability across our business, that’s part of it. So I think we don’t see those numbers going back up again. I think there is sufficient resource for us to deliver the great growth that we are filing.

Next question is from Andrew Charles of Cowen.

Great, thank you. In the second quarter you made some nice drive in the refranchising initiatives, but your gains were little light relative to the average in the first three quarters of 2015. So I was wondering can you speak out to the geographic mix of stores you are franchised whether it’s proceeds through store in 4Q relative to what you did in the first 9 months of the year? Thanks.

Yes, Andrew. So, the refranchising is impacted by a couple of things. One, it depends on where we are refranchising obviously, but it also depends on whether we are refranchising individual stores or potentially what I will entire markets kind of the developmental licensee. What you will have seen in 2015 and for a large piece of 2016 is that a lot of the refranchising would be in our markets, in the foundation segment, as well as a little bit in the high growth segment. And a couple of the markets in the International Lead segment, where we are doing more of our conventional franchising, it does get impacted by the mix of stores within every country as well as how far along each country is in their franchising journey, if you will. So, some that have more ways to go, let’s say, may get higher proceeds at the beginning as they are selling some higher volume stores. As they get near the end of their refranchising, they are now selling generally lower volume restaurants and then wouldn’t have the same level of proceeds. So no, you can see relatively swing – relative swings from quarter-to-quarter or from year-to-year depending on the mix of which countries are actually selling the restaurants.

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

Hey, guys. Can you talk a little bit about remodeling, particularly in the U.S. where you stand the kind of returns you are seeing on the remodeled stores and I guess how you view it? Do you view part of the investment is made into capital, some of it as growth capital. I guess, how do you look at that sort of cost and return framework?

Yes, thanks, Greg. Right now, we are little over halfway through the restaurants are being modernized in the U.S. As you know, we are certainly much farther along in most of the international countries, where we are certainly more modernized and are just now investing in the experience of the future aspects of it. In the U.S, a lot of our restaurants need to have both the experience of the future elements as well as the remodeling perspective. In general, in the U.S., we have seen kind of 5% to 6% sales bumps as we remodel a restaurant or bring it up to modernize standards. That’s relatively consistent around the world. It ranges a little bit. But I would say kind of the 5% to 6% sales above market is a pretty good threshold that we use. And the U.S, you will hear some more plans as we get into our March 1 investor event, but we are planning to continue to modernize the U.S. state over the next few years.

And Greg, just to add to that, I mean, Kevin is absolutely right. Maintenance spend is largely the responsibility of the owner-operator. So, we will have maintenance spend in our small full of McOpCo restaurants. So fundamentally, our capital investment and our co-investment is on growth initiatives, whether that’s – and that will be customer facing either it gives us a chance to enhance the menu or enhance the experience. So, we are very much growth focused in how we invest directly or co-invest our capital dollars?

Next question is from Jeremy Scott of CLSA.

Good morning. Just want to talk a little bit about the store consolidation in the U.S. First, how many stores would you estimate are expected to come off the system over the next 3 to 5 years? And then just from the context of the guest count discussion, into what extent is McDonald’s exposure to weakening retail trade zones impacting traffic? Is there a new equilibrium point for store penetration in the U.S.?

So, the eating out market, Germany is huge. And we see IEO as modest, very modest growth potential, but a gentle growth potential over the next handful of years. So that push you into a market share and without still having a relatively small percentage of that overall and formal eating out market, there is plenty of customers out there eating out. We just need to fight harder and make sure that we earn the right models to turn our way. So I believe there is guest count growth potential there if we do the right things. With regard to the new restaurants, I don’t know if Kevin has anymore details, but we are typically a net growth company. We have had about 1 or 2 years over the last decade where we have looked to address the portfolio that we have chosen to take a particular project and just deal with the title, the locations, which are no longer appropriate for us. But I don’t see that they have contraction frankly.

Globally, certainly, you would see several, probably net near the 1,000 restaurants that we have been on track. I will say in the U.S, you wouldn’t see a lot of growth over the next couple of years as we will probably focus most of our investment dollars on the experience of the future and remodeling as we talked about.

Next question is from Brett Levy of Deutsche Bank.

Good morning. Can you provide for us a little bit more updates on the technology front specifically what you are expecting out of the U.S. as you expand out your mobile and your mobile ordering? And also if there is any reference points you can give us from either Scandinavia, Australia or France that provides any background for what kind of sales lifts or returns you are expecting and how are you quantifying what’s the success on it? Thank you.

Yes, thanks, Greg. Well, I mean, the quantification is satisfied customers and growth in sales and transactions. So I mean we have got absolutely hard measure expectations, because we are investing significantly in technology as our owner operators. Just to give you some texture here in the U.S, for example, where we have launched the global mobile app launch here in the U.S., we have now had 18 million downloads. We have had over 11 million of those are registered users. And the month of December 2016 saw the greatest contribution to sales by the app that we have seen yet and that has been growing month by month by month. It’s still – it’s noticeable now, but not material. So clearly, our ambition is to make that a material number. Elsewhere around the world, we are testing different elements through technology that we can then put together. So for example, order ahead – order and pay, for example, whether it’s through the internet or through the app, we are testing that. We are testing curbside check-in where if you pull on to the parking lot, you can actually pull up into a dedicated bay where you can just scan your order, we can bring it out to you. Plus also, a lot of the in-restaurant technology, maximizing the consumer benefit of the self-order kiosks. Again, you can just check your pre-order and just scan it at kiosk and sit straight down and get your table service and also to help support and that is around the whole area of CR loyalty where we have a huge opportunity. Again, acknowledging there are others who are further ahead than us, but this is one where you got to get it right. It’s better to be right than to be first to market. And so we are investing a lot of time and effort to best understand what resonates most with customers in terms of appreciating that business and encouraging them more often. But ultimately, at the moment, we are focusing on the experience side, order, pay, curbside check-in, and just making that experience smoother, easier, more convenient and then we’ll start building reward mechanisms into that over time.

Next question is from Jason West of Credit Suisse.

Yes, thanks. Just one quick follow-up and then a question, on the G&A targets, Kevin, I just wanted to confirm if that includes or excludes the movement in incentive comp that we have seen since you originally gave those targets. And then a bigger picture question on the March 1 meeting, if you guys, I don’t know if you want to give details. But just what’s the kind of purpose of this meeting? Is it just to lay out the ‘17 guidance or is there more in terms of longer term targets and things like that, that you are going to be discussing at that meeting? Thanks.

Thanks, Jason. Let me start with the G&A. Just to give perspective, the – as most companies do, total incentive comp is higher and lower in any given year depending on the company performance. So you will see in our earnings release, we split out incentive comp, so you can see that phenomenon, if you will. And you will see that in 2015, we incurred a little over $300 million of incentive comp. That was at below targeted performance for us. In 2016, you will see that we have a little over $400 million of incentive comp and that was significantly above target performance for us. So certainly, depending on our performance in a year and that’s generally operating income growth and EPS growth. That line could swing from 1 year to the next. Having said that, a couple of points I want to make, one is, going into 2017 and as you would imagine, we reset that number to 100% as we go into plan every year, not knowing where we will end up obviously. As we go into to 2017, so I mentioned that in 2015, we had over $300 million, and that was at a below target performance. Going into 2017, our plan at 100%, total incentive comp will be less than $300 million. So we are saving some incentive comp on our base plan because we have less people obviously. Second, the other thing I just want to make sure that everyone is focused on is, our focus is really on growing operating margin. And that you know while we are focused on saving G&A and making sure we are efficient, I am not 100% certain that everyone in the industry classifies all the costs exactly in the same line item within a P&L. And so we are focused on operating margin because that’s kind of the bottom line of how efficient are you at bringing your total revenues down at the bottom line. So just wanted to make those a few points related to the G&A. And then the operating margin as I mentioned, we grew that substantially in 2016 from 28.1% to 31.5%. Related to the March 1, Investor Event, there will be a few components of it. One, we will talk about 2017 guidance. As Chris mentioned, we normally have an outlook section that gives you 2017 guidance in there. We didn’t have that in there this time, because we thought we could give you half the sorry without all the context. So it would be easier to do this all at once on March 1. And so part of what it will be 2017 outlook if you will. But it also be talking about our longer term strategies and long-term financial targets and how we expect to get there. And so that’s where a chunk of the time will be spent on March 1 at that Investor Event.

Hey Jason, just add to that, we are confident and we are excited about where we got the business to over the last 2 years. And we are certainly quite excited about the plans we have had, I mean just to be clear, we are planning growth and like-for-like growth in every major market around the world in 2017 and beyond. And we want to share they are the find the best way that we can share that excitement and build the credibility and the confidence in – that you can match our confidence and excitement. So rather just listen to the plan, we thought it would be fun to have you to actually experience the plan. So this will be surely some content, some meaningful content on the table, so this will be an experiential day for you as well. So we can take people through some of the components that we believe are customer driven will drive that guest count growth we talk about drive business growth, drive profitability. But it will be a varied and fun day and something – somewhat unique I think in Investor Day, so I am looking forward to that a lot.

Okay. We are near the top of the hour. So I will turn it over to Steve, who has a few closing comments.

Thank you, Chris. And given that this is Chris’ last earnings call with McDonald’s, I would like to take a moment to personally acknowledge Chris and the significant role he has played, not only building and leading a first class IR team, but also the trust advisor to Kevin and me. On behalf of everyone at McDonald’s, we bring these words and culture over the years, Chris, thank you very much. We wish you all the best on your new endeavors. And again, thanks to everyone else for joining us this morning. So in closing, I want to reemphasize how encouraged I am by the progress we have made. 2016 was a year of purposeful change. We have built the foundation that’s enabling us to transition from turnaround to longer term growth. We remain focused on the basics of running great restaurants, at the same time, driving operating growth, building brand excitement and enhancing financial value. As a result, we are now in a position to prioritize initiatives will further strengthen our business. We look forward to talking more about our plans in March. As we step up and lead in 2017, I am energized about the opportunities ahead and eager to continue our journey to assert McDonald’s as the global leader of the IEO industry. Thanks to all of you. Have a great day.

This concludes McDonald’s Corporation investor conference call. Thank you. Have a great day.