Hello, and welcome to McDonald’s Fourth Quarter 2020 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. I would now like to turn the conference over to Mr. Mike Cieplak, Investor Relations Officer for McDonald’s Corporation. Mr. Cieplak, you may begin.

Good morning, everyone, and thank you for joining us. With me on the call this morning are President and Chief Executive Officer, Chris Kempczinski, and Chief Financial Officer, Kevin Ozan. I want to remind everyone that the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website, as are our reconciliations of non-GAAP measures mentioned on today’s call with their corresponding GAAP measures. Following their prepared remarks this morning, we will open a queue for your questions. I ask that you please limit yourself to one question. If you have more than one, please ask your most pressing question first, and then re-enter the queue. Today's conference call is being webcast and is also being recorded for replay via our website. Now, I'll turn it over to Chris.

Thanks, Mike, and good morning everyone. At our Investor Update in November, I talked about the start of something new for McDonald's. It was a moment in which we proudly embraced both what we were going to do to write the next chapter of McDonald's growth and how we were going to do it. We shared our new growth strategy, Accelerating the Arches, and articulated a clear vision of where we intend to make a difference in a world in need of community and connection. We also acknowledged that, between a once-in-a-century pandemic, record economic downturn, and profound societal challenges, it was the most difficult year McDonald's has seen. While a New Year brings new hope, the issues and uncertainty that emerged last year persist. Reflecting on all that has happened even since November, I come back to something Ray Kroc once said: 'Adversity can strengthen you if you have the will to grind it out.' Through all the adversity of the last year, we have seen and done important things that reinforce why we are on the right path. We have seen the incredible courage and resilience of our McFamily. We know how to run great restaurants. Our long legacy of execution prowess comes from the talent of our teams, from franchisees to supply chain partners and employees; I don't think it's an exaggeration to say that 2020 will be remembered as one of the most challenging yet inspiring moments in the long history of this great brand. By making safety and service a priority, by implementing the largest and fastest rollout of new safety protocols in McDonald's history, and partnering with the Mayo Clinic to review and refine our approach, by maintaining supply without interruption, simplifying our menu, and continuing to put our customers and people first, we have embodied our values in the best possible way by living them every day. Our customers have noticed. Global brand scores for consumer confidence in eating at McDonald's have risen significantly since the start of the pandemic. We've seen the love people have for McDonald's and our food. Even while the pandemic forced lockdowns and prevented customers from dining in most of our restaurants, we achieved over 90 billion system-wide sales last year. Tens of millions of people every day continue to choose McDonald's for drive-thru, contactless delivery, takeaway, and curbside pickup, with more and more customers using our app. Despite resurgences of the virus and restrictions on restaurants in the fourth quarter, we continued to see sequential improvement as we delivered our strongest quarter of the year, recovering nearly 99% of 2019 global comp sales. Global comp sales for the full year were down 7.7%. While there were challenges across markets, some of our larger markets achieved positive comp sales for the full year, including the U.S., Japan, and Australia. U.S. delivered its sixth consecutive year of positive comps. The average U.S. franchisee restaurant operating cash flow reached an all-time high in 2020, up nearly $40,000 over 2019 and up about $100,000 over the last three years. Japan achieved five consecutive years of positive comp sales, and Australia posted its seventh consecutive year of positive comps. We have seen the ability of McDonald's to survive hard times and to do so while consistently investing to support both the short and long term. One thing I admire most about our system is that no matter how difficult times get, we never stop thinking about what's next. The impacts of COVID on our industry have been significant. It's been tough. We were sober and realistic from early on while remaining committed to helping every operator and partner survive this crisis. We took prudent, quick action designed to prevent not a single owner-operator from failing due to the pandemic, while we bolstered our cash position early in the year to provide nearly $1 billion in financial liquidity to support franchisees. We also maintained our view on the long term, investing $1.6 billion of CapEx to open nearly 1,000 new restaurants globally and modernized another 900 in the U.S. We provided $200 million in incremental marketing support to accelerate recovery. Together with our franchisees, we invested over $1 billion in technology and digital initiatives, all of which will help drive our next chapter of growth. We have also seen our commitment to feed and foster communities take on new meaning this past year. There are so many incredible stories about how the McDonald's system has stepped up to be there for our neighbors and communities this past year. To name a few, together with our franchisees, we provided more than 12 million Thank You Meals to first responders and healthcare workers in the U.S. We donated extra food from our supply chain to communities in need around the world and gave millions of surgical masks to communities to help protect first responders. In November, we announced our commitment to donate $100 million over five years to help families with sick children through Ronald McDonald House Charities. We were on the ground, working to help local communities solve problems while also looking for ways to use our size and scale to make an even bigger impact. It was an important reminder that brands like ours can help provide stability and even hope during difficult times. Today, brands are working through many societal issues that directly impact our businesses and the economy. We have a unique role to play in ensuring these issues get addressed. That's true of COVID. Hard to imagine it was just a year ago last week that the first case of the coronavirus was confirmed in the U.S. Even while we celebrate a vaccine created in record time, we know COVID is at its worst right now in many parts of the world, where so many of the communities we serve are experiencing record high infection rates. We all must play a role as part of the solution. There is a lot of uncertainty ahead for us as individuals and for this industry. Neither may change for some time, but I'm looking forward to joining with other business leaders and working with the Biden administration and congressional leadership as we have with every U.S. President throughout our 66-year history to address the challenges the country faces. We work to hopefully return to some version of normal. The needs of our customers have changed: dining in less and taking out more, visiting less in the morning and much more for lunch and dinner, interacting with other people and brands less in person and more through digital. Just as the investments and choices we've made have driven broad-based strength, accelerating the arches will enable us to grow even more sustainably through a bottom-up approach to our growth pillars. Our 'M' in MCD stands for maximizing our marketing. Our significant marketing investment remains a true growth driver. We’re improving creative effectiveness and leaning into social and digital to drive customer engagement. Teams remain focused on the right balance of sales activation with brand building as we work to optimize marketing returns. Our marketing efforts made an immediate impression in the closing weeks of 2020 with the launch of our 'Serving Here' campaign in the U.S., celebrating the myriad ways we feed and foster communities. At the same time, many markets drove performance in the fourth quarter with successful sales-building promotions like '30 deals in 30 days' in Australia and 'Monopoly' in Australia, France, and Canada, featuring customers’ core favorites. They are great examples of using our marketing muscle to drive sales without adding complexity to our kitchens. 'C' stands for our commitment to the core menu. Our delicious core is something people rely on and return to again and again. Our core classics comprise roughly 70% of our food sales across our top market. They drive growth and profitability, and we saw that this past year. Developing a reputation for great chicken represents one of our highest ambitions. That's why markets are activating multi-tiered strategies and holistic approaches that integrate great products, strong and sustained marketing, and operations excellence. Rebuilding on the strength of core equities like Chicken McNuggets and McChicken sandwiches, which have seen significant growth as we continue to focus on improving our large chicken sandwich offerings around the world. In the U.S., we are excited about the return of Spicy Chicken McNuggets and the launch of the new crispy chicken sandwich at the end of February. Markets are also making our delicious and popular 100% all-beef burgers even better, with improved cooking procedures and new buns. Russia was the latest major market to roll out these changes in Q4, driving meaningful lifts in hamburger sales. We've also continued to create menu excitement that keeps customers engaged by bringing back limited-time promotions like McRib and introducing new items like our bakery line in the U.S. and the premium mix baguette and signature recipe in France. What's important is that our approach to our menu is thoughtful and judicious. We've seen significant benefits with our streamlined menus and reduced complexity. New items must earn their place on the menu. Lastly, 'D' stands for doubling down on digital delivery and drive-thru. They were the difference maker when the pandemic hit and are at the heart of our combined efforts to create a faster, easier, and better customer experience. Digital sales exceeded $10 billion; we are nearly 20% of system-wide sales in 2020 across our top six markets. We are moving aggressively to bring My McDonald's with mobile ordering, payments, delivery, rewards, and fun promotions like digital calendars to our customers as soon as possible. We are on track to have elements of My McDonald's across our top six markets by the end of 2021, featuring loyalty programs in several of those markets, including a U.S. loyalty launch later in 2021. We have big ambitions. We have already shown we know how to meet big goals, as we've proven with delivery. Over the past four years, McDonald's has expanded the number of restaurants offering delivery to nearly 30,000, and COVID has underscored how meaningful our efforts have been to our customers. Many markets, including Australia, Canada, and the U.S., have doubled their delivery sales mix over the past year. We continue to build out our delivery advantage much like we are expanding our competitive advantage on drive-thru. With over 25,000 drive-thrus around the world, we've made smart investments to bolster foundational elements like staffing, positioning, and order assembly. We've reduced service times each of the past two years, even as a greater percentage of customers went through our drive-thrus during 2020. Each pillar will further extend our leadership. What's especially powerful is the exponential impact when all three pillars come together. The Famous Orders platform in the U.S. is a prime example. In the fourth quarter, we featured favorite menu items of Latin music icon J Balvin and classic holiday characters including Santa Claus and the Grinch. With exclusive deals on our app, customers rediscovered iconic core menu items like Big Macs and Egg McMuffins and tried new items like cinnamon rolls. We drove digital adoption, including significant lifts in app registrations and usage. That's our sweet spot. That's how M, C, and D come together to drive demand, sales, and growth without creating additional complexity. Our ability to navigate the past year would not have been possible without the incredible commitment of our franchisees, our supply chain and agency partners, and our employees who have continued to focus and execute during this extraordinary past year. When I think about everything our restaurant teams around the world have done to provide an essential service at the front lines, serving our customers safely every step of the way, I can't help but believe that this amazing system is proving every day that this isn't just a job to them, and to us, it's something bigger. It's our chance to make a difference for our customers and our communities. I'll now turn it over to Kevin to talk in more detail about our financial results.

Thanks, Chris. Chris talked a bit about our full-year results. So let me spend a few minutes talking about the quarter. Global comparable sales were down 1.3% in Q4. Comp sales were positive in October, as I mentioned on our Q3 call, they returned negative in November and December as a result of the widespread resurgences and the return of government restrictions, particularly across the international operated markets. In the U.S., comp sales increased 5.5% for the quarter, ending the year with six consecutive months of positive comps. Sales grew in all major day parts, including breakfast, and this is on top of prior growth across these day parts. Our strategic investments, including incremental marketing spend, fueled our momentum with strong national promotions, like McRib buy one get one for $1, our new bakery line, and two separate offerings of famous orders. Dinner continued to be our leading day part, with strong sales of core items as customers keep coming back for familiar favorites. The IOM segment comp sales were down 7.4% in Q4, and while performance varied across the countries, nearly all of our major markets grew traffic share. Strong positive comps in Australia and the U.K. were more than offset by negative double-digit comps in France, Germany, Italy, and Spain. Beginning at the end of October, additional government restrictions went into effect across many of our markets, including limited sales channels, reduced operating hours, and dining room closures. Australia benefited from strong menu and marketing news in the quarter, including the successful launch of a new chicken line with McSpicy at its center. Another example of great ideas and products traveling across our markets, as McSpicy has been a customer favorite in China and several other markets in Asia for a while. Since the start of the pandemic, Australia has also doubled their delivery sales. The U.K. has achieved comp sales growth every month since August, despite increased restrictions reintroduced in early November. The quarter benefited from a focus on core menu, as well as phenomenal growth in delivery. Lastly, comp sales in the international developmental license segment were down 3.6% for the quarter, reflecting significant improvement for most markets over Q3. Japan once again delivered strong positive comp sales for the quarter and for the year, as Chris mentioned. The market is meeting customers' changing needs, rolling out delivery and mobile ordering along with running successful LTO promotions, all while further strengthening trust in our brand. In China, results have improved quarter-over-quarter since Q1, and recovery continued at a steady pace with a marketing plan focused on delivery and digital along with new chicken offerings. Despite the challenging year, nearly 500 new restaurants were opened across the market in 2020. Turning to January trends, in the U.S., sales comps continued to be strong and are expected to be up high single digits, with continued growth across all day parts and assisted by consumers receiving government stimulus checks. IOM comp sales are projected to be down low double digits, given the government restrictions that remain in place in most markets. Continued momentum in Australia is being more than offset by double-digit negative comps in France, Germany, Italy, and Spain, and we expect this trend to likely continue until dine-in resumes. Adjusted earnings per share in Q4 was $1.70 after excluding gains on the sale of an additional 3% of our ownership in McDonald's Japan. While global restaurant margins were down as a result of the pressure on sales, the U.S. grew both franchised and company-operated margins, up over $70 million for the quarter. Consistent with the guidance we gave in our third quarter remarks, G&A increases for Q4 were primarily driven by some one-time investments we made in renewed brand activity, including the launch of our Serving Here campaign and our commitment to donate $100 million to Ronald McDonald House Charities, as Chris mentioned earlier. Turning to our outlook for 2021. As Chris talked about, there's still a lot of uncertainty both today and as we look ahead. We're confident in our ability to manage through this uncertainty, and that our Accelerating the Arches strategy will continue to drive growth in the business. We expect 2021 system-wide sales growth of low double digits in constant currencies versus 2020, with new unit expansion contributing about 1%. This reiterates the mid single-digit growth rate of 2019 that we mentioned in November. We ultimately measure overall financial efficiency by our operating margin, as it serves as the most comprehensive gauge of our operating performance. We expect our operating margin percent to be in the low to mid-40s for 2021. In the U.S., we expect higher depreciation expense of about $60 million versus 2020 in franchise margins related to our modernization efforts. Depreciation will continue to be a P&L headwind for the next few years, even though we'll have no impact on future cash flows. In the IOM segment, while we expect improvement in our company operating margin percent over the course of the year, we don't expect to get back to pre-COVID levels in 2021 as a result of near-term sales and cost pressures. Turning to G&A, as we become more efficient with G&A required to run the business, we're able to make strategic investments in areas like digital and technology to drive growth. Looking ahead, we expect 2021 G&A to decrease about 2% to 4% in constant currencies over 2020, which reiterates our expectation that G&A will be about 2.3% of system-wide sales. Looking at other operating income and expense, we expect our equity pickup to be slightly higher for 2021 due to improved results compared to 2020, partially offset by a reduced ownership in Japan. Gains on restaurant sales last year were suppressed due to COVID, and we expect gains this year to be about double 2020. In 2020, we had some one-time items included in the asset dispositions line related to store closings and bad debts. For 2021, we expect that line to get back to a more normal level of expense of roughly $100 million. We're projecting our 2021 effective tax rate in the range of 21% to 23%. Finally, turning to FX based on current exchange rates, foreign currency translation would benefit EPS by about $0.06 to $0.08 in the first quarter and $0.27 to $0.29 for the full year. As usual, this is directional guidance only as rates will likely change as we move throughout the year. Moving to capital expenditures, as we indicated in November, we expect to spend roughly $2.3 billion of capital in 2021. New restaurant development is an important driver of our growth, as we see significant expansion opportunity, especially in the IOM segment. These markets have driven strong growth over the past several years and deliver strong returns on new restaurants. This year, we plan to open over 1,300 new restaurants globally. Of the $2.3 billion of capital, we will spend roughly half of that to open nearly 500 restaurants in the U.S. and IOM segments. The remaining 800-plus new restaurant openings are across the ideal markets, including nearly 500 in China. As a reminder, our strategic partners in these markets provide the capital for restaurant openings. The remaining half of CapEx spend will go towards reinvestment back into our U.S. and IOM restaurants, including about $500 million to modernize approximately 1,200 restaurants in the U.S. We're nearing completion of our U.S. modernization efforts and expect over 90% of projects to be complete by the end of the year. And finally, I want to conclude with our free cash flow profile. With the improvements made to our business operating model over the last several years, and the consistent strength of our global business, our free cash flow grew significantly through 2019. In 2020, even with significant disruption, we generated free cash flow of over $4.5 billion, and free cash flow conversion, which measures our ability to convert bottom-line earnings to free cash flow, was nearly 100%. In 2021, we expect to convert more than 90% of our net earnings to free cash flow and to generate free cash flow near 2019 levels of about $5.5 billion to $6 billion. Our capital allocation priorities remain the same. First, investing in the business to drive growth, this includes both capital expenditures, as well as investments in technology and digital. Second, prioritizing dividends to our shareholders. After that, most of our remaining free cash flow for 2021 will go towards paying down debt to get back to pre-COVID leverage ratios by the end of the year. As we start the New Year, I'm confident that the plans we have in place will position us to continue to deliver sustained, long-term profitable growth for our system and shareholders. Now I'll turn it back to Chris to close.

Thank you, Kevin. Despite the uncertainties we continue to face, one thing is clear. McDonald's is well positioned to emerge from this moment with competitive strength. We're confident we can keep capturing market share as we look to the future. We're confident because we were growing share in most markets before COVID. We're confident because we've continued growing market share during COVID. We're especially confident because we've gained important insights that will bolster the strategic vision we set with Accelerating the Arches. This clarity of purpose and strategy is the reason that in October, we increased our annual dividend to shareholders. Not only did it mark 40-plus consecutive years of increases, it reinforced to our shareholders our confidence in the long-term strategy. Also, the reason we continue directing investments where they make the most strategic sense and build on our strengths. We will uphold McDonald's commitment and legacy as a responsible and reliable choice for trusted, delicious food, and will do so while feeding and fostering community and continuing to create delicious, feel-good moments for everyone. This is the mission that has always and will always animate our work. When it comes to our customers, our employees, our franchisees, and our suppliers, it doesn't just matter what we do; it matters how we do it. And now we'll begin the Q&A.

Thank you. I ask that you limit yourself to one question and reenter the queue if you have another. Our first question to get started is from John Glass with Morgan Stanley.

Thanks. Good morning, everyone. Chris and Kevin, can you talk a little bit more about the IOM markets and the tactics you're using to drive sales? I understand that dine-in is more important. There's less drive-thru structurally, but what are you doing to help sort of bridge this gap to get to easier comparisons in the reopening? Is this a market for example, you might try launching the My McDonald's rewards earlier? Can you talk about maybe the role of delivery and what you're doing to deliver some things that can help obviously bridge this gap when you've got such restrictions in place?

John, this is Chris. Thanks for the question. In the IOM market, as you know, those markets tend to be more of a dine-in business. The biggest thing that we're doing with many of these markets having dine-in closed is we are trying to do as much as we can to drive our drive-thru, delivery, and our digital businesses, and we're having good success with that. Some of it, however, is frankly limited because in many markets, our operating hour restrictions are making it challenging.

The only thing I'd add, John, is, as Chris mentioned, obviously, we're seeing both digital and delivery growing significantly in those IOM markets. In the U.K., for example, over 20% of their sales in Q4 were delivery sales. We're seeing significant growth both in delivery and digital. The other thing I would point out is that this is nothing structural; this is a temporary issue. If we look back at even as recently as October, we were relatively flat in IOM in October. But as the new restrictions came back, that's when we saw comps declining again. So as soon as the markets start opening up again and easing restrictions, we feel confident customers will come back quickly.

Next question is from Eric Gonzalez with KeyBanc.

Hey, thanks for the question and good morning. I was wondering how you think fast-food chains like yourself might fare as the world gets through the vaccine recovery phase. Clearly, there's been a high demand for contactless and whole meal solutions during the pandemic, as evidenced by the increased average check. But Australia, which seems to be a strong performer as of late, might be one area where it seems like consumers are closer to normal relative to the world. So if you could speak to how the traffic ticket dynamics have evolved in that country, perhaps that might give us some clues about how you might perform in some other countries post-vaccine rollout? Thanks.

Thanks, Eric. In Australia, as you note, it has been one of the few markets in the world that has, I would say, relatively unscathed by the coronavirus, as they've done a very nice job of containing the virus. That market is performing very strongly; our franchisees in Australia are going to have record cash flow in 2020. The business is doing high single-digit performance. I think it is a good indication of what the post-COVID opportunity for us can look like. What we are expecting, though, is, and what we've seen as we've gone through COVID and then the resurgence of COVID as recovery is that channels like digital and delivery, like drive-thru, they do remain elevated. We think that is going to be one of the more enduring parts of it. It doesn't mean that there still isn't going to be a sizable dine-in business, but I think the takeaway business will remain elevated post-COVID, including delivery. Those channels, when you look at whether it’s delivery, digital, or drive-thru, tend to lead to higher order sizes. As the mix moves to that, I think this idea of elevated check will continue.

Next question is from David Tarantino with Baird.

Hi, good morning, Chris. There have been a lot of media reports about friction between the franchisees in the U.S. and the company, and I was wondering if you could just comment on the current situation and your plan to resolve some of that conflict as you think about the short-term or near-term?

Sure. Thanks, David. Well, as you know, I know the U.S. market well having run that for three years, and I'd say there are a few things that I learned during my time in the U.S. The first is, we have 2,000 owner-operators in the U.S., and it is very difficult to generalize what the overall sentiment in that market is. You have 2,000 CEOs and Presidents of their own businesses with a lot of different opinions and perspectives. So I would just caution against making any generalizations about the market. The other thing that I would say is, the business is a very decentralized, federated type of model; all the action happens at the restaurant level. The interaction between the company and franchisees remains strong, and I think the evidence of that is just the operating performance that you're seeing out of our restaurants in the U.S. We're putting up pretty strong comps, which, if you look at it on a two-year stack basis, was a 10.1 in Q4 on a two-year stack. The business is performing well, and we're seeing service times improve, but there is absolutely noise, and there are some disagreements that happen right now between the national operator leadership and our U.S. team. I dealt with those when I was in the U.S., and they flare up from time to time. We're certainly in one of those moments now. However, I'm confident that Joe Erlinger and the U.S. team, along with Mark Salibre, who leads the operator group at the national level, will find their way to work through these challenges, and I fully expect that that will be the case in the U.S.

Next question is from Dennis Geiger with UBS.

Great, thanks for the question. Chris, you've outlined a bunch of initiatives in the U.S. and marketing plans and overall strategy for the U.S. this year. Given the strong recent momentum the U.S. has seen, I'm wondering if you could help frame some of those initiatives for the year that you see as most impactful. I'm sure it's sort of a collective effort, but in your mind, what's the most impactful this year to help drive sales and market share gains? Is it the marketing plans? Is it some of the new products that you've highlighted? Aspects of the 3Ds? Just hoping you could contextualize some of that prospect.

Sure, I'll go through kind of the MCD framework. We've got to have great marketing; the great marketing has to come to life on chicken and the loyalty launch—that's where all three of those come together. Our expectation is that chicken and loyalty, not just for 2021, but frankly for a longer-term perspective, those are probably two of the most important things we need to get done in a high-quality manner in 2021, both for this year's performance but also for setting us up for the longer term.

Next question is from David Palmer with Evercore.

Thanks, another question on the IOM. Just wondering how you're thinking about those international operating markets after the vaccine. These markets had most of their sales pre-COVID from on-premise ordering, and some are even in city center locations, perhaps more than the U.S. where you have a lot of suburban drive-thrus. So obviously, more painful today, but I wonder if you think market share gains could be even greater because your competition, which is often local, lacks McDonald's unit economics and the drive-thrus that you have, which are obviously helping your profitability during the pandemic. Could you talk about the outlook for market share gains and if there's any sort of difference in the recovery that you perceive in these markets broadly compared to what we would expect in the U.S.? Thanks.

Yes, thanks, David. I’ll take a shot at it and Chris can certainly chime in. As you mentioned, certainly our percentage of restaurants with drive-thru in the international operated markets is a little bit less than what we have in the U.S. In Australia and Canada, it's more around 80 to 90%, but in France, Germany, and the U.K., it's roughly two-thirds of their restaurants or so that have drive-thrus. The percent of sales that go through the drive-thru, pre-COVID in those international operated markets was less. During the pandemic, we're certainly seeing a higher percentage of sales run through the drive-thru, as well as elevated digital and delivery sales. To your point, we believe we're well set up post-pandemic because while the percentage of drive-thrus is less than the U.S., it's substantially higher than just about any competitor in most of those markets. So the fact that we are well set up with drive-thrus will continue to open up more. There are some city center tourist travel locations that are currently getting hit harder than most of our U.S. restaurants because of the pandemic. However, there's nothing structural in the business that gives us concern that once these markets start opening up post-pandemic, we feel like we should be in good shape to continue picking up market share.

Next question is from Jon Tower with Wells Fargo.

Thanks for taking the question. Just for clarification on the IOM margin, I just want to make sure I understand that guidance you had talked about; I think you said not getting back to pre-COVID levels in 2021. I assume you're speaking about the full year, not just on a quarterly basis. A clarification, that would be great. And then secondarily, on the marketing side, you had the $200 million or so of incremental spend in 2020 across the U.S. and the IOM? How should we think about the company lapping this spend in 2021, meaning, are you anticipating that franchisee sales recovery will fill the void and therefore your presence and dollar spend will be similar year-over-year? Yes, if you could just add a little bit of color there.

I'll start with the IOM margins. Jon, to your point, what I talked about is, yes, annually, I don't expect yet in 2021 that the IOM segment would get back to the kind of 20% margins that we've all been used to pre-pandemic. There's nothing structural that prevents that from happening, longer term. However, we know that in the first quarter, margins are depressed a little bit still because of the sales and the restrictions going on. We do think as the year progresses, margins will improve over where they were in 2020 but likely not get back for the full year to that 20% kind of level that we were used to prior to the pandemic.

And then on the marketing question, I'll start maybe just with the math, which is, as you know, we do fund marketing as a percent of revenue. Certainly, as the business recovers and grows, we expect a nice clip in 2021, which there will be a benefit from an investment size that we can go do in marketing, but it's not going to be to the level of $200 million. I think the bigger thing that I consider is this is a momentum business. When you have momentum in the business, everything seems to work better, including on your marketing side. Our expectation of part of why we put the $200 million in 2020 was to ensure that we could generate some strong momentum coming out of this. When you've got that momentum, you get an outsized effect from what would be even a normalized marketing level. So that's the bet we're making and why we're confident for the back half of the year.

Next question is from Chris Carril with RBC.

Hi, good morning. Thank you for all the detail provided so far and appreciate the detail on the most recent trends in January. I did want to ask about the competitive environment in the U.S. Clearly, a lot has been made around the growing competition around chicken. There appears to be more focus. I'm curious to hear your perspective on just broader industry competitive dynamics, particularly thoughts on breakfast competition and share gain opportunities there. Thanks.

Certainly. Thanks, Chris. It is a competitive market in the U.S.; probably one of the most competitive markets, if not the most competitive, in the world. Back in November, when we had our Investor Day, part of the M within MCD was that we needed to make sure we had a strong focus on affordability. You've seen just as we've entered into 2021 some of the value deals that are out there from our competitors. We've also had some programs that I think have performed well for us. That's going to be a trend that continues all through 2021. Our expectation is that you're going to need to remain competitive on value. I think we've been able to build momentum through the investments we've made in modernizing our state and upgrading our brand attributes, and I think we're in a better position than we were four or five years ago in terms of consumer demand for our brand. This gives me confidence that we won't have to chase it down the rabbit hole, so to speak. Regarding breakfast, our breakfast business is performing well. In Q4, our breakfast business grew. We saw strong performance out of the bakery line. Our expectation as we looked to 2021 is that breakfast will be a good performing daypart as people get back to hopefully returning to work and a more regular routine, which certainly benefits traffic in the morning.

Our next question is from Jared Garber with Goldman Sachs.

Hi, thank you very much. A little bit of a follow-up on the last question, but maybe a different spin. I wonder if you could talk about the state of the consumer in the U.S. and how you're seeing things play out from that perspective. Obviously, given some stimulus benefits, but still high unemployment and challenges related to COVID. To follow up on that point, how you're thinking about the balance of value and premium offerings and limited-time offers throughout 2021? Thanks.

Thanks, Jared. The state of the consumer is something we monitor closely through monthly consumer tracking. Right now, the concern for economic uncertainty is by far the single biggest concern for our consumers, which reinforces why affordability will be a focus for all of us in a prudent way in 2021. The level of stimulus is certainly helping in the short term; I think the restaurant industry is benefitting from that. But the stimulus will roll off, and I don't think we have full visibility to what the underlying health of consumers will be once that happens. Many people have talked about a case shape recovery and the divergence between the stock market and the rest of the real economy, and I think that's real. We're watching closely what happens with the consumer, but this concern about the economy and people's financial health will likely persist through the balance of 2021.

I think it was just the concept of balancing value, premium, and limited-time offers, which is a constant focus for us. We need to ensure that we have offerings for all consumers depending on their budget. If you go to our core menu, that's the primary growth driver for us in 2021, and we think for the next several years. While there will be some limited-time offerings, I think all markets, U.S. and IOM markets in particular, have raised the bar on what an LTO has to do to earn its way onto the menu. You might see, versus perhaps what we had pre-pandemic, a slightly more moderate pace of limited-time offerings due to this focus on the core menu.

Our next question is from John Ivankoe with JP Morgan.

Hi, thank you. I wanted to follow up on the supply question in IOM, but maybe talk about it specifically by country. Many of us have traveled to these countries with you over the years, like Canada, Australia, France, Germany, and the U.K., so we have a fine appreciation of how you define the informal eating out market that you directly compete against. As you define that market uniquely in terms of using the words IEO, informal eating out, how much capacity do you think has come out permanently? I'm asking this in the context of government assistance to restaurants or so different around the world, certainly different than the U.S., which might provide a certain amount of survivability compared to what happened, for example, through PPP here.

Yes, I'll take a shot. Each country is slightly different in terms of demographic, consumer demographics, and competitive environment. High streets in the U.K. are a challenge currently, much broader than our business. There's a question of when and if the high street in the U.K. completely returns to pre-pandemic levels. In general, as I mentioned, right now, there are a lot of outlets closed in many of the markets. The unknown is how many of those are temporary versus permanent. We do believe in many of those countries where someone has one, maybe two outlets that could be a bigger challenge, and it’s likely that several of those outlets will not return. We are seeing that in a number of countries right now. Overall supply will shrink somewhat, which is an opportunity for us to continue gaining market share; that's our expectation and what we're aiming for.

Next question is from Andrew Charles with Cowen.

Great, thank you. Just on the new crispy chicken sandwiches coming next month. Can you talk about the learnings from test markets, particularly, looking to what you observed in sales, even if it's qualitative? Also, how does this compare operationally to three years ago when the McGriddle was launched, where performance was subdued due to longer-than-expected service times? Thank you.

Sure, well, we put it in the test market, and we were encouraged—that's why we're rolling it out. I think our focus in the test was much more on the operation side than having it be sort of an advertised type of test. For us, it was about ensuring that the operation works smoothly and that we're confident in delivering it in a high-quality way. We feel good about that. I know Morgan Flatley in the U.S. marketing team feels optimistic about the campaign we have, and franchisees are excited about it. We are ready as we head into February, despite a lot of activity in this space. We think we're well-prepared to drive consumer demand for this item as they come into our restaurants.

Next question is from Jeff Bernstein with Barclays.

Great, thank you very much. Just a question on the labor side of things, and I guess it's more so for franchisees. You've mentioned working closely with the government on different initiatives. It seems like there are a lot of opposing forces for franchisees, where you have the national minimum wage potentially going up, but on the other hand, you have high unemployment, which historically implies ample labor. With that as the backdrop, I would love your outlook on labor costs and perhaps labor availability. Can franchisees offset that pressure through cost savings, technology, pricing? How are those conversations going with franchisees regarding upcoming labor cost pressures? Thank you.

Thanks, Jeff. The discussion about minimum wage and what that means in terms of cost of labor has been ongoing, and while it's picked up with the change in administration at the federal level, it's been happening at the state level for the last several years. Several states have passed some degree of minimum wage legislation—Florida was the most recent one, introducing a glide path to $15 an hour. We've developed quite a bit of experience handling this as it's been rolling into the states. The positive for us has been that, as long as it's staged and equitable across the entire market, we do just fine managing through it.

I'll give you another example that gives us confidence: there was a significant increase in the minimum wage passed in Canada a couple of years back. That team, working with the franchisees, managed to integrate it into their pricing and productivity. Our view is that the minimum wage will likely increase whether at the federal or state levels and as long as it’s managed properly we expect McDonald's will handle it well.

Our next question is from Lauren Silberman with Credit Suisse.

Thanks. I believe back in June, you talked about drive-thru service times improving in the U.S. by about 25 seconds due to the pandemic. Assuming that 25 seconds still holds, to what extent do you attribute that to the simplified menu versus other changes? Also, how is the dynamic around those checks and larger orders impacting drive-thru time? For 2021, do you see any other opportunities for further improvement? That is a broader rollout of franchise?

Yes, I can give that a try, Lauren. We've continued both in 2019 and in 2020 to reduce drive-thru times by roughly 30 seconds over the past two years in our major markets. I think it's a combination of a few things: one is menu simplification and the more limited menu that you indicated, but also just a big focus on operations around the world. This includes non-sexy stuff like staffing and positioning of our crew, along with certain technology that we've implemented to help the crew monitor the times. So there continues to be significant focus on operating restaurants efficiently alongside the right menu and menu boards. There are still opportunities to further improve service times; I wouldn't say we've hit a ceiling yet.

Okay, we have time for one more question from Gregory Francfort with Bank of America Merrill Lynch.

Thanks for that. Can you maybe talk a little bit about store-level margins in the U.S. and where you see them going over the next few years? The pandemic has helped push that up quite a bit, and I'm wondering how much of those gains you think you can hold onto from an efficiency standpoint? Thanks.

In the U.S., we've seen that store-level margins are up over the last couple of quarters. I believe that's due to a few factors. We've seen higher average check sizes, larger group size orders, and so forth. While we expect that some of this will stick, I think U.S. margins will likely moderate over the next year. Conversely, in the IOM, I think they've been hit harder at store level margins because they haven't had the sales levels needed to maintain high margins. IOM will ultimately get back to pre-pandemic levels, while U.S. is probably a little bit higher than we should expect continuously in 2021.

Thank you, Chris and Kevin, and thank you all for joining. Have a great day.

This concludes McDonald's Corporation Investor Conference Call.