Hello, and welcome to McDonald's Fourth Quarter 2022 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. Please limit yourself to one question and reenter the queue for any additional questions. Today's conference call is being webcast and is also being recorded for replay via our website. And now, I'll turn it over to Mr. Mike Cieplak, Investor Relations Officer for McDonald's Corporation. Mr. Cieplak, you may begin.

Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Ian Borden. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website as our reconciliations of any non-GAAP financial measures mentioned on today's call, along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. Today's conference call is being webcast and is also being recorded for replay via our website. And now, I'll turn it over to Chris.

Thank you and good morning, everyone. When we gathered at this time last year, we expected 2022 to be a year of recovery from the pandemic, particularly in Europe. Little did we know there would be another challenging year and nobody could have predicted the extent to which the war in Europe would disrupt businesses around the world and the macroeconomic impact that would follow. Despite continued volatility in nearly every corner of the globe, McDonald’s delivered exceptional growth throughout 2022. We achieved full year comp sales growth of 10.9%, delivered strong guest count performance with 5% growth globally, and saw our momentum strengthen as the year progressed with double-digit comp sales growth across all segments in Q4. These results are a testament to the resilience of the McDonald’s system and demonstrate that our Accelerating the Arches strategy, which we unveiled in the early days of the pandemic, is working. This strategy is anchored by three growth pillars also known as our M, C, and D’s: maximize our marketing, commit to the core menu, and double down on the 3Ds. Our 2022 performance demonstrated the continued potential of each growth pillar. You've heard me say McDonald's is one of the world's greatest brands. In the last year, we've unlocked even more ways to elevate our marketing through creative excellence. Our scalable insights are helping us tap into our fans' love for McDonald's and create culturally relevant campaigns that resonate across markets and drive growth. That momentum continued into Q4. In October, our collaboration with Cactus Plant Flea Market in the U.S. brought together our adult fans' love and nostalgia for the Happy Meal with one of the most on-trend brands in culture. Customer excitement was palpable, and it's fair to say the program exceeded expectations. This program drove the highest weekly digital transactions ever seen in the U.S. To celebrate the FIFA World Cup, we launched our largest global marketing campaign ever with more than 75 markets participating worldwide. Want to go to McDonald's? Brought to life yet another fan truth: whatever the culture or language and whatever the outcome of the game, we can all unite under the Golden Arches. Our aim was to support fans that were watching the FIFA World Cup at home through relevant and meaningful McDelivery promotions, regardless of the time zone that their team was playing in. During this campaign, we saw double-digit increases in delivery sales across our top 10 markets. Just a couple of weeks ago, the UK launched their Raise Your Arches campaign, which has generated significant excitement with our customers. Even though the campaign never shows our food, never shows our restaurant, and never mentioned our brand name, it's nonetheless instantly recognizable as only McDonald's. Imagine that, a brand so powerful it requires no introduction. The campaign has been quickly picked up by over 30 other markets, demonstrating our system's ability to quickly scale compelling ideas across the globe. Throughout 2022, some of our most successful campaign platforms brought our customers closer to the core menu items they love. The strength of our brand goes beyond the Golden Arches themselves and includes our iconic products such as our world-famous French Fries, the Big Mac, Chicken McNuggets, and the McFlurry. Each of these products are billion-dollar brands, and in total, McDonald's possesses 10 of these billion-dollar brand equities. In an environment where our customers are looking for the simple and familiar, our core menu items have never been more relevant or beloved. Throughout the year, we continued to step up our game on the favorites that build our heritage. We're delivering hotter, juicier, more delicious burgers and building on the success of emerging equities like the McCrispy Chicken Sandwich. As a result, we are gaining market share in both chicken and beef. When customers want to enjoy our classic favorites, they are increasingly looking for even more personalized and convenient ways to get their meals. Through our focus on digital, we are transforming from a brand that serves billions all the same way to one that serves each of our billions of customers uniquely as individuals with customized products, offers, and experiences. By doing this, we strengthen our customers' love and loyalty for McDonald's. These investments are paying off. In the fourth quarter, digital represented over 35% of system-wide sales in our top six markets. In 2022, the McDonald's App was downloaded over 40 million times in the U.S., greater than the total downloads of the second, third, and fourth brands combined. Through our loyalty program, which we've expanded to over 50 markets and counting, customers are feeling more connected to McDonald's, which in turn increases visits and frequency. As we closed the year, we had almost 50 million active loyalty users in our top six markets. The success of Accelerating the Arches has put McDonald's in an advantageous position. Since the start of the pandemic, we've grown system-wide sales nearly $20 billion despite closing over 800 restaurants in Russia. Our brand is clearly in the strongest position it's been in years, attributable in part to our best-in-class marketing engine. Service times and customer satisfaction are both improving, a testament to the dedication of our restaurant teams. Our success is fueling even greater ambitions. While we feel good about our strategy and the growth potential in each of our M-C-D pillars, we've been asking ourselves two questions: is there anything we should add to Accelerating the Arches? And is there anything that could get in the way of the success of Accelerating the Arches? The answers to these two questions led us to evolve our Accelerating the Arches strategy, which we announced a few weeks ago. We'll continue to double down on our M-C-D's while adding a fourth D, restaurant development, to our 3D's growth pillar. Our strong comp and brand performance has given us the right to build new units at a faster rate than we have historically. We also announced accelerating the organization, an effort to modernize the way we work, so that we're faster, more innovative, and more efficient. Work is now underway to further build out these initiatives and quantify their contribution to our long-term financial algorithm. We'll share more details with all of you at an investor update in Chicago sometime in late 2023. To expand further on how Accelerating the Arches drove success in 2022, I'll now turn it over to Ian.

Thanks, Chris. By putting our customers at the center of Accelerating the Arches, we're driving top-line momentum and broad-based global strength for our brand. Global comparable sales were up double digits for the fourth quarter, and we continue to gain share across most of our major markets. Our performance is a direct result of executing against our strategy, making it clear that we're operating from a position of strength and proving once again that our business remains resilient despite the dynamic macro environment. In our international operated markets, we leveraged our digital channels and highlighted our core menu delivering comp sales growth of nearly 13% for the quarter. As our big five international operated markets continued to recover from COVID throughout the year, we consistently created delicious feel-good moments for our customers, achieving strong performance across each of these markets. The UK continued their focus on chicken with an early fourth quarter launch of the McCrispy Chicken Sandwich. This emerging global equity builds on iconic core favorites like Chicken McNuggets and drove a meaningful lift to the chicken category. The UK market also leaned into the power of our brand with the popular Reindeer Ready holiday campaign returning for the sixth consecutive year. The fourth quarter also brought the return of McDonald's monopoly to the Canadian market, but this time utilizing our app to elevate the experience. We leveraged learnings from recent UK and Australia activations, where we combined the nostalgic peel-off game pieces with the option to digitally scan and track progress on our app, which helped accelerate top line momentum and sales through our digital channels. Fueling digital growth was also central to Germany's strong performance with the market's first My McDonald's branded affordability campaign. This promotion featured daily offers alongside mobile order messaging to drive full digital platform engagement. It was followed by the launch of Digital Monopoly in the market, which helped grow digital to over 60% of total sales. It's examples like this that once again highlight the power of the McDonald's system, allowing us to tap into proven successes in one market and then scale those ideas. In Australia, we continued to leverage the strength of our McCafé brand with an iced coffee promotion in the summer months. This campaign built upon our coffee leadership in the market as we continue to drive share gains. And we maintained our market leadership in France with always-on family messaging and a fully integrated chicken campaign highlighting our iconic Chicken McNuggets paired with unique and trendy sauces. Moving to the U.S., comp sales were up over 10% for the quarter, a testament to our work together with franchisees over the last several years, which has created a strong foundation. The collective decisions to put brand at the center of our marketing, along with simplifying our menus, strengthening our digital business, and recommitting to our core have resonated with consumers and are continuing to drive growth. Strategic calendar planning from marketing to restaurant execution has enabled our teams to stay laser-focused on what truly matters most for our customers. Higher average check supported by strategic price increases as well as positive guest counts contributed to our performance this quarter. Memorable marketing campaigns, including our collaboration with Cactus Plant Flea Market, Blue Buckets, and McRib brought nostalgia to our customers fueling top line momentum with limited added complexity in our restaurants. Turning to our international developmental license markets, comp sales were up over 16% for the quarter, with strong sales growth across all geographies in the segment. Japan achieved an impressive 29th consecutive quarter of positive comp sales with continued strength at the dinner day part. A focus on driving digital affordability helped increase the frequency of our most loyal digital customers. Recovery in China, however, remains challenging as COVID-related government restrictions were still in place for a majority of the fourth quarter, resulting in some temporary closures and limited operations. While comp sales in China were negative, we focused on showcasing our strength in beef with the Big Mac Best Burger launch and continued to gain traffic share in a shrinking QSR market. And despite the ongoing operating challenges, we opened over 700 new restaurants last year, which is an all-time high. Turning to our P&L, company-operated margins were just over 15% for the quarter, reflecting the continued pressure from elevated commodities, wages, as well as higher energy costs. Foreign currency translation negatively impacted fourth quarter results by $0.16 per share, with earnings per share of $2.59 for the quarter. For the full year, adjusted operating margin was nearly 45%, reflecting higher restaurant margin dollars across all segments. Despite the significant P&L pressures that we've discussed, top line results generated restaurant margin dollars of over 13 billion for the year, an increase of nearly 1.5 billion in constant currency. Franchise restaurants, which now represent 95% of our global portfolio, contributed nearly 90% of our total restaurant margins, reflecting the stability of our business model. Lastly, before I hand it back over to Chris, I want to touch briefly on our capital expenditures and free cash flow profile. Our CAPEX spend for the year was approximately 1.9 billion, which included remaining reinvestment to substantially complete our Experience of the Future efforts in the U.S. market. Over the last few years, we've invested billions of dollars in modernizing our estate, and it's clear in our results that these investments are paying off. After reinvesting in the business, our free cash flow conversion was nearly 90% for the year. And with that, let me pass it back over to Chris.

Thanks, Ian. As we look ahead to 2023, macroeconomic uncertainties will persist and we expect to continue to face headwinds. Our base case for a mild to moderate recession in the U.S. and one that will be a little deeper and longer in Europe is unchanged from what we shared on our Q3 earnings call. We also expect inflationary costs to continue to pressure our margins, which Ian will discuss in greater detail. In this environment, we must maintain our disciplined approach to pricing. We need to balance passing through our pricing on our menus while maintaining our strong position on value with our customers. Our positive guest count performance in 2022 demonstrates our success so far in balancing these competing demands, and we need to remain judicious with pricing actions. Ongoing communication with our franchisees regarding the magnitude and pace of pricing will remain essential. Our franchisees are focused on the long term, and time and again that approach has been rewarded. As long as we continue to do the right things for the customer, we can always work through short-term challenges. McDonald's understands that customers' perception of value is made up of more than just the price of our food. It's also about the experience we provide. Our modernization efforts have had a significant impact on improving our customers' experience, and this is also improving how our customers think of our brand. Now that we are nearly fully modernized, our attention is turned to being laser-focused on our operations and running great restaurants. In 2022, we reengaged most of our system on maintaining operational excellence in our restaurants through our Performance and Customer Excellence program, also known as PACE. This restaurant assessment and consulting tool, which is currently deployed in 30 markets, was suspended during COVID. Along with providing new tools, this represents a new way of working for our field teams that help us market target organizational and restaurant support for key growth drivers. This renewed focus will help protect McDonald's brand standards for an outstanding customer experience every single day. Restarting PACE in 2022 led to strong operational improvements in several key markets as a result of more dedicated consulting and coaching time to support lower-performing restaurants. For example, the UK saw improved customer satisfaction, speed of service, and overall experience for these restaurants. In Spain, restaurants that had the lowest customer satisfaction scores in the drive-thru improved to be at the same level as top-performing restaurants by the end of 2022. Additionally, as a result of this program, France saw increases of 30% in customer satisfaction scores at locations with the lowest scores. PACE clearly drives operational improvements, which provides a better customer experience that in turn drives business performance. This month, the U.S. also restarted PACE, and we expect to see similar operational benefits in our largest market in 2023. I'll now turn it back to Ian to talk in more detail about our 2023 outlook.

As Chris just discussed and as I talked about last quarter, we continue to operate in an extremely dynamic environment. Looking ahead to this year, we anticipate macro-related pressures will continue to weigh on both our consumers and our business. With significant inflationary headwinds across commodities, labor, and utilities, our company-operated margin percent will be hampered in the near term, and we expect full year 2023 company-operated margin percent will be slightly lower than our quarter four results. This elevated cost environment is also impacting restaurant cash flow for our franchisees, particularly in our European markets. As we've previously mentioned, our financial strength and scale gives us the ability to provide temporary and targeted support, ultimately keeping our entire system aligned on proactively investing to drive long-term growth. We estimate that these efforts will have an impact of between $100 million to $150 million in 2023. Turning to G&A, the digital and technology investments that we've made over the past few years have been strong contributors to our top line growth. Moving forward, focusing on our evolution of Accelerating the Arches, and in particular accelerating the organization, will enable us to work more efficiently and effectively, harnessing our scale and reallocating resources to drive growth in the future. In 2023, we expect G&A to be between 2.2% and 2.3% of system-wide sales. Despite the cost pressures throughout the P&L in 2023, we anticipate an operating margin of about 45% driven primarily by strong top line growth and franchise margin performance. We're projecting interest expense this year to increase between 10% and 12% compared to 2022 primarily due to higher average rates on our debt balances. We expect our effective tax rate for the year to be between 20% and 22%. We anticipate currency translation will negatively impact earnings per share of between $0.07 and $0.09 in the first quarter. As of now, we expect currency translation to be a slight tailwind for the full year, but as you have seen, currency rates have been fluctuating quite a bit recently. So we'll continue to keep you posted on the anticipated impact to our results. Transitioning to capital expenditures, we plan to spend between $2.2 billion and $2.4 billion this year, about half of which will be dedicated to new unit openings. Globally, we plan to open about 1,900 restaurants with more than 400 of these openings in our U.S. and IOM segments, where we continue to see strong returns. The remaining 1,500-or-so new restaurants, including about 900 in China, will be across our IDL markets. As a reminder, our strategic partners provide the capital for these restaurant openings. Overall, we anticipate almost 4% unit growth from about 1,500 net restaurant additions in 2023. We expect this will contribute along with restaurants opened in 2022, nearly 1.5% to system-wide sales growth. As Chris mentioned, work is underway on our fourth D, restaurant development, within Accelerating the Arches. We'll have more details to share later this year, but we're excited about the opportunity to accelerate the pace of our new unit openings moving forward. And finally, we expect to generate strong cash flow in 2023, enabling us once again to convert more than 90% of our net income to free cash flow. Going forward, our capital allocation priorities remain unchanged: first, to invest in new units and opportunities to grow the business along with reinvesting in existing restaurants; second, to continue growing our dividend; and third, to repurchase shares. It's times like these that highlight the strength and scale of our McDonald's system. Although 2023 will bring short-term pressures, I'm confident that the resilience of our business and our strategy will continue to deliver long-term growth for our system and our shareholders. Now let me turn it back over to Chris to close.

The McDonald's global system is executing at a high level, and I'm optimistic that our Accelerating the Arches strategy offers us a long runway of growth despite the headwinds that we've discussed on this call. The McDonald's brand is in great shape, and yet there's so much more we can do. In my travels throughout our global system, I sometimes like to ask our people, what exactly does McDonald's Corporation sell? As you might imagine, this usually prompts a lot of puzzled looks, and a brave soul or two will raise their hand and say, 'Well, we sell great-tasting food or we sell burgers and fries.' Of course, that's technically true. But as a largely franchised business, ultimately, McDonald's Corporation is in the business of selling a brand, so that others can sell burgers and fries. And while some may see it as a trivial distinction, I see it as fundamental. As goes the McDonald's brand, so goes the health and economic value of our company and system. Our Accelerating the Arches strategy is designed to build our brand to make McDonald's more relevant to more people more often. Our M-C-D growth pillars are driving system-wide sales, and the recently announced Accelerating the Organization initiative will help us unlock further growth by enabling our system to be even faster, more innovative, and more efficient. Through Accelerating the Organization, we'll sharpen our priorities and increase our investments against our biggest opportunities. I want to congratulate the McDonald's system on a terrific 2022 and thank all three legs of the stool: our franchisees, our suppliers, and our company employees for their dedication and passion for our business. A global pandemic, record-breaking inflation, a war in Europe, the McDonald's system continues to execute and deliver no matter the challenge, and I'm excited to continue our success into 2023. With that, I'll turn it over to Mike to begin the Q&A.

I want to congratulate the McDonald's system on a terrific 2022 and thank all three legs of the stool: our franchisees, our suppliers, and our company employees for their dedication and passion for our business. A global pandemic, record-breaking inflation, a war in Europe, the McDonald's system continues to execute and deliver no matter the challenge, and I'm excited to continue our success into 2023. With that, I'll turn it over to Mike to begin the Q&A.

Our first question is from David Palmer with Evercore.

Thank you. A big-picture question tied into some of the stuff you were talking about in the U.S. It's been fascinating to see how McDonald's traffic in the U.S. has largely declined, most years at least, even as you've added about $1 million in sales per unit. And your customer satisfaction scores and the external stuff that we see, it's been stubbornly and surprisingly low. It's almost like the consumer is being more honest with his or her spending rather than these surveys. So I'm wondering, in your work, where do you see the customer satisfaction opportunity in the U.S., whether that's in convenience and speed or food or other? And do you think the U.S. will have a different same-store traffic outcome over the next year or decade based on some of the stuff that you're doing? Thank you.

David, it's Chris. Thanks for the question. Well, I think starting with — we've talked about on a number of calls over the last several years that guest count is a very imprecise measure, and it's imprecise because of what we've seen with delivery, but also what we've seen with digital, where we're now getting multiple orders. And so while it's important for us to always be attentive to guest count, I think also recognize that the complexion of how customers are experiencing the restaurant has changed. So from that vantage point, we look at things from a relative perspective and we feel very good about our relative performance on that as evidenced by our strong traffic growth that we had in the U.S. this year. I think your larger question about the health of the brand, there are lots of different surveys. Ultimately for us, we have our own internal surveys, and customer satisfaction with McDonald's is strong. I think our brand clearly is resonating as you've seen in our marketing communication, the fact that we have a modernized restaurant estate, I think, has been huge for us in terms of improving customer perception of the brand. And so I feel very good about that. But for us, going forward, the opportunity for us to continue to make our brands more and more beloved is going to be on this digital opportunity. And as I mentioned in the opening comments there, digital gives us such an unlock to get more tailored in the experience, the offer, the products that we're delivering to our customers. So I think for us, if we can get there on digital, that's going to be a big opportunity. And we've made a lot of progress. As you heard in the opening comments, about 35%, I think it's 36% in Q4, were digital transactions. And by the way, half of those digital transactions are known digital transactions, where we know the customer. Imagine if that number — I'll just use as one outlier, close to 90% of our transactions in China are digital transactions. And imagine if most of those are known transactions, you can start to imagine what that can mean for the brand in the long term. So I'm optimistic about where we're at.

Our next question is from David Tarantino with Baird.

Hi, good morning. I had a question about the investments you're making in the franchisee system. I think, Ian, you mentioned it was $100 million to $150 million for this year. I'm just wondering if you could elaborate on why that was necessary given the strength you're seeing in the top line or the franchisees presumably are seeing in the top line and also some signs that maybe the cost environment has not been as bad as feared? And then maybe as part of that question, if you could just comment on where franchisee-level cash flows are today versus maybe where they were a year ago, that would be helpful? Thanks.

Great. Good morning David. Thanks for the question. Well, I think as you've heard us and particularly me speak to, I think particularly in Europe, we're seeing some quite strong headwinds due to the levels of inflation on things like commodity costs, energy prices, and of course, labor. And I think the pace and scale of inflation mean that those headwinds are creating relatively significant levels of short-term impact to our margins and then, of course, to our franchisee cash flows. And I think one of the competitive advantages that we have as a global franchisor with our size, our scale, and our brand strength is that we're able to provide that temporary and targeted support for our franchisees, which we always, of course, direct to where it's most needed. I mean I would use the UK as a bit of an example and Europe. I mean, I think — obviously, we've seen significant levels of food inflation, significant levels of energy inflation, even though energy maybe hasn't gotten to the peak of where some were predicting because Europe's had a warm or milder winter so far. I mean still significantly above where it was 12 to 18 months ago. And I think, again, just the pace and scale of that impact is creating quite a bit of pressure on margins and cash flow, as I said. And our size and scale, as I said, just allows us — puts us in a position to provide that support, directing it to where it's most needed. I think honestly, that's nothing new for McDonald's. I mean it occurs from time to time around the world when conditions warrant. It's just a little bit more significant now just due to the broader nature and scale of some of those short-term impacts that we're seeing. And if you remember, during COVID, we did provide support to our system. It was critically important because it allowed all of our systems to stay focused on our plans and was really fundamental to the accelerated momentum that we saw through and then coming out of the pandemic. This is a very similar situation. I mean our system is highly aligned, it's confident, and it's focused on our strategic plans and is continuing to proactively invest against the opportunity areas that we have. So I think it's this that's really going to help us stay focused on the category-leading momentum we have and make sure that as we get out of these headwinds, we're in the strongest possible position.

Our next question is from Eric Gonzalez with KeyBanc.

Hey, thanks for the question. Maybe if I can ask one about unit growth, if I can. I'm not sure you already finished 2022 on a gross basis. But I'm guessing based on the year-end CAPEX number that it was maybe slightly below your expectations. And then this year, you're expecting development to be a bigger focus and an uptick in unit openings to about 1,900. So maybe if you can comment on where you're starting to see maybe some improvement in the construction and permit timing and also what you're seeing in terms of build-out costs, perhaps directionally new unit economics given those higher costs and presumably the lower margins that you're signaling with your guidance? Thanks.

Good morning, Eric. Yes, thanks for that. I think for sure, in 2022, we had some impact just from that — coming out of COVID, some of the impacts on just getting permits approved. I mean, as you've heard us talk about in our outlook for 2023, we think we're going to open on a gross basis about 1,900 locations, about 1,500 on a net basis. If you look specifically at the U.S. and IOM segments, we're planning about 400 openings there. That's up about 25% from where we landed on in 2022. So I think that's a sign of the confidence we have and the opportunity that we've got in those segments to begin to start accelerating openings as we've talked about adding that 4D development. For sure, I think there's certainly some inflation on the construction and development costs like we're seeing across almost every sector today. But we also know we've got an opportunity, I think, to be more efficient and effective in our investments that we're making in some of the restaurant formats and how we can get more efficient and effective as we bring those formats up. And so feel really good about the returns that we're continuing to generate, particularly in the U.S. and our IOM segments, and feel confident in the opportunity we've got to add more units as we go forward.

Yes. I would just add a couple of things. I mean think about the U.S. for a moment. We haven't added new units in the U.S. in eight years. I mean 2014 was the last year that we actually grew restaurants in the U.S. So we've had eight years where we have been focused largely on a remodel program. And in that same period of time, I think everybody would agree, our U.S. business is in significantly better shape today than it was back then. And so you look at our three-year stack, our three-year stack in the U.S. is 25%. Our global three-year stack is also around 25%. We've grown the business to a great degree, and what we haven't done is we haven't kept up with the new unit pace, particularly in our owned markets, U.S. and IOM. And so we're spending the time right now to get a very granular look at where we would build, at what pace, and what types of restaurants, and that's the — what we plan on sharing with you at the end of 2023.

Our next question is from Jeff Bernstein with Barclays.

Great. Thank you very much. Just a question on the U.S. and Europe. Clearly strong double-digit comp performance. I'm just wondering as you kind of look beneath the top line, any sign of slowing macro impact in the consumer or perhaps any concern of consumer pushback on the outsized menu pricing or maybe just looking more broadly, any color on McDonald's versus the industry in terms of market share in key markets since we know everyone is being more aggressive on price, any kind of color you could provide would be great? Thank you.

I think overall, we're still seeing the consumer is resilient, and it plays to our strengths as a system in terms of being well positioned on value. We lead in every market around the world on affordability and value for money. And so that puts McDonald's in a strong position. We've talked about on prior calls, there is a little bit of a decrease in units per transaction that we're seeing. We're seeing a little bit of trade-down. But I got to say, these are probably on the margin that we're seeing this. Overall, the consumer, whether it's in Europe or the U.S., is actually holding up better than what we would have probably expected or maybe what I would have expected a year ago or six months ago. So I think the question is as we go into 2023, there is going to continue to be inflation. The environment is going to continue to be challenging, I think, from a macro standpoint. And so do you reach a point where maybe it does start to materialize around the consumer? Certainly, consumer sentiment out there remains depressed in many markets. But we're not seeing it right now. I think it goes back to what I said in the opening though; we have to be very judicious. And our franchisees have been great about the pace of pricing, where we're just making sure that we're keeping the customer engaged and coming into our restaurants as we're working through the menu pricing. And we're today still seeing flow through on pricing in line with our historical numbers. So not seeing any big resistance right now.

Maybe I'll just hook on to that a little bit because I think, as Chris touched on, we're laser-focused on those two consumer-facing metrics: value for money and making sure we've got those affordable choices across our menu. I think, as Chris said, we're in a leadership position across the majority of our top markets in both of those metrics. And we know that even though those metrics have probably come down a little bit over the last 12 months or so on the back of higher pricing, the gap to the competitive set that we have has remained consistent. And so as Chris talked about, I think we've had a good discipline around pricing and making sure we keep that strong value for money in place. I think the other thing that's important to highlight is we know that we're continuing to gain share across all of those key markets. And so another proof point of, I think, how we're navigating and continue to resonate with consumers. I mean, I think at the end of the day, value for money is about the experience we deliver over the price we charge. And I think it goes back to what Chris touched on earlier that we've made a lot of investments over the last couple of years in the experience. We've got a fully modernized estate. I think we've upped our game in terms of our marketing, creativity, and execution. We've invested a lot in our digital capabilities and interaction with consumers. And I think all of those strengths are coming together now. Our focus as we head into 2023 is really on making sure that each and every time consumers choose to come into one of our restaurants, we deliver them a great experience and continue to ensure that we earn those visits each and every time.

Our next question is from Brian Harbour with Morgan Stanley.

Yes, thank you, good morning. Maybe I'll just ask about the kind of 45% operating margin outlook for the year and the components of that. Do you think that as a result of kind of the Accelerating the Organization strategy that there will be some savings in G&A over time or is this just perhaps a reallocation? Would you expect to continue to see some leverage on the franchise margin side, for example, I guess I'm just trying to think through some of the drivers of that?

Good morning Brian, yes, thanks for the question. Well, let me talk about, I guess, a couple of the pieces. I mean, when you think about operating margin, for sure, there are a couple of specific pressures that we're working through that we believe are short term in nature. Obviously, we've got that pressure on our company-operated margins from the inflationary pressures that we're working through. And so that's an impact. Obviously, we've got the incremental support we're providing to franchisees, which is an impact focused on 2023. So we'll have both of those pressures to work through this year. I think in regards to G&A and ATO, as you heard in my opening comments, we expect G&A for the year to be between 2.2% and 2.3%. Any outcomes from ATO are focused on our ways of working, which the output is how do we get more efficient, how do we reallocate resources against innovation and growth, and how do we make sure we're moving faster as an organization. So any of the outputs of ATO are included in our 2023 guidance for G&A. I think certainly, the best way to work through any kind of short-term pressures is to continue to make sure we're driving strong top line momentum, which I think our quarter four results reflect, and it's certainly our focus for 2023. And as we get through these short-term pressures, we certainly believe that strong top line momentum will mean that we're beginning to drive greater leverage and operating margin and anything that's dependent on sales as we go forward like G&A. And so I think we certainly expect to see that beyond 2023.

Our next question is from Lauren Silberman with Credit Suisse.

Thank you very much. So obviously, very strong U.S. comps. Can you talk about specifically what you saw with traffic and average check in the quarter and performance across dayparts, if there's anything notable there? And then just as it relates to share gains, what are you seeing with the lower-income consumer versus the high-income consumer? Thank you.

Yes. So focusing just on the U.S., I think what we saw from a performance standpoint was very balanced growth across the dayparts. So nothing particularly noteworthy there. Late night for us continues to be the opportunity just because of some changes that we've made around operating hours due to the staffing environment. But around kind of our core dayparts, that's been very strong. We're also seeing strong growth on our core menu, particularly on chicken, where we've been gaining quite a bit of share. We've gained about a point of share on chicken in the last year. And then if you think about beef, we're also continuing to grow our share in beef despite having a very strong presence in that already. So nice balanced growth with the U.S. Digital and delivery, of course, are driving outsized growth. So digital, if you look at digital transactions, up close to 40% in the U.S., which is above the 10% growth that we saw in Q4. And then on the low-income consumer, I'd say the only thing that is probably noteworthy there is while the units per transaction is maybe down slightly, we're seeing a little bit of an uptick in frequency of visits. And so I think that's maybe something where the customer is coming in, being a little bit more cautious about how much they're ordering. They're probably spending to an absolute dollar amount, but we're seeing a little bit of an improvement around frequency with that low-income consumer.

Maybe just I'll hook on a couple of additional kind of pieces of texture. I mean, I think if you look at the full year in the U.S., we were up about 10% from an average pricing standpoint. And as Chris talked about a little bit earlier, a couple of partial offsets to that. One is we continue to kind of see this reversion of order channels more to the kind of pre-COVID behavior. So of course, while delivery is still elevated, it's come back a little bit as customers kind of revert to more typical ordering channels. And then as Chris also touched on, you've got that maybe that more value-conscious discerning kind of choice-making that consumers are making. I think two things that are really important. I mean, value for money and affordability, which we've already talked to, we know we're in a really strong leadership position in the U.S. business. And I think the second thing is that on a comp basis, we continue to gain share. And I think those are both strong proof points of the fact that we're well positioned and the fact that we are in a position to ensure that we are affordable and accessible for our consumers despite their individual circumstances as we go forward.

Our next question is from Dennis Geiger with UBS.

Thank you. Chris, following all the momentum in 2022 and really in recent years, could you talk a bit more about the biggest opportunities that you see as it relates to continuing to drive that guest count momentum in 2023 and perhaps beyond? I don't know if it's the same in the U.S. as key global markets, but just curious how you'd kind of think about or rank order some of the opportunities that you've spoken to on the call? Thank you.

Yes. It really just goes back to the pillars that we have in our strategy. It's marketing for menu and now the 4Ds. I think each of those still has quite a bit of runway for growth. I'm encouraged by what we're doing from a brand standpoint. But there's a lot more we can and will be doing on that to continue to strengthen our brand and marketing excellence. And we're still not as good as we could be around lifting and shifting great ideas around the world, and so we're going to get better at that through this Accelerating the Organization effort. On core menu, chicken for us is a big opportunity as is coffee. I think on burgers, we're very well developed. But chicken and coffee, in particular, offer us, I think, a good growth opportunity. And we're going to be focused on that with some very specific products, as opposed to having that maybe be something in the past that was a little bit more left to individual markets to kind of chart their course. And then on the 4Ds, I think all of those for us have growth. So it's not a different playbook than what we're talking about with Accelerating the Arches. It's very much the same playbook. And what we're adding into the U.S. this year, as I mentioned in my comments in the opening, is on the operational side. With PACE restarting, I've been very encouraged to see how PACE has been driving customer satisfaction when we put that in, and we're seeing improvement around service time. So you take all of the top line-driving initiatives related to the MCDs and you overlay on top of that improved operations or improved execution at the restaurant, and that gives me confidence in the outlook.

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

Thank you. I wanted to sort of just ask about some of these initiatives in the context maybe of McDonald's history, which is to say, when you mentioned, Chris, that it's been since 2014 since you had unit growth in the U.S. As I recall, unit growth had picked up a few years before then, but same-store sales slowed. And so there has — historically, it seems like there's maybe a trade-off there. So that was one sort of piece that I wanted to ask about and how you think about that balance? And then related, Chris, when you joined, there was an initiative, I think, around reducing some of the management layers and really streamlining and making the lines of communication clear between the markets and the headquarters. I guess, what's happened since then or it feels like it's maybe a renewed initiative to do that, so if you could just compare perhaps where you were to what you're doing now and where the reinvestments might be this time versus the last time? Thank you.

Sure. I think on your first point around unit growth versus comp growth, we have to walk and chew gum. It's not one or the other. It's the two of them in combination. And I think the big difference is when you want to be growing units is when you've got strong comp sales because that reflects the underlying health of the business. I'm always very leery when I see someone out there putting a strong unit growth number without strong underlying comp sales because that's historically not been a good recipe in our industry. And so for us, I think we've got, as you've seen in our results, strong comp sales. I feel very good about the outlook. And so that now gives to me permission to put on top of that some unit growth. But we need to be very smart about where and how we do that. And I think sometimes in the past, we were looking at just putting units and looking at an absolute number and not maybe looking at the quality of the site. And so that's why we want to take some time this year to make sure we feel confident about the exact number, the pacing, the quality of the site so that when we do roll that out that we've got the ability to continue to drive both comp sales as well as unit growth. And then your question about the organization, there's maybe some similarities with differences. I think if you go back to what was done in — I think it was 2016 or thereabouts, I mean that was savings that largely came about through refranchising a big chunk of our restaurants. And so that was — as we took McOpCo percentage down and we moved more of that to the franchise side, that gave us some benefits from a G&A standpoint. There were some changes that happened in terms of delayering at the senior level. But what — that effort was not about is ways of working. That was much more kind of what I would say are just business model approaches as opposed to ways of working. And what I've seen in my time in this job and also what I've seen in the U.S. when I was in that role is that we have a lot of opportunities to get faster, more innovative, more efficient. And it's because we have historically been very decentralized in some areas where we reinvent the wheel way too often. And I think the other thing that we've seen is we haven't been as sharp around our global priorities, and so there's been proliferation of priorities that sometimes happen at the market level. I would just give you an example. As we're going through this ATO exercise and learning about where we have the opportunities, we're uncovering all sorts of interesting things, like, for example, one market that has 300 priorities. Well, of course, you can't have 300 priorities, and you can't resource 300 priorities. And so as we discover and learn these things, this is all going to be about making us better. So the difference of today versus what we did maybe back in 2016, I think that was much more a structural change related to our franchising model with some delayering at the senior level. This is much more fundamental about changing ways of working that I think ultimately are going to make us better both on the top line, but I think are also going to give us efficiencies that flow through, as Ian was talking about with G&A leverage.

Our next question is from Jon Tower with Citi.

Great, thanks for taking the question. Just curious, I know we've spoken quite a bit about some of the cost inflation and stuff like that running through the business across the globe in 2023. Curious if you can give us an indication on your thoughts regarding pricing versus the inflation expectations for the full year and how you're working with your franchisees across the globe to address that? And then second, if you could talk about the quarter-to-date industry data, particularly in the U.S., it's been quite strong to start the year. Curious to know if some of the strength that McDonald's saw in the fourth quarter has carried over into the first quarter? Thank you.

Good morning Jon, let me start on that one. And maybe just to give a bit of texture to my answer, I'll talk about it in a couple of pieces. I'll start with the U.S. and then talk a little bit about IOM but maybe with a focus on Europe. I mean, I think in the U.S., we would say we're past the inflation peak and kind of heading on that downward slope. But certainly, we had high inflation, mid-teens in 2022 from a food and paper perspective. I think in 2023, we think our food and paper inflation is going to be kind of mid to high single digits. So still obviously very elevated from where it's been for a long time. And so in combination with that, you've also got energy prices that are up and interest rates and things like that that are impacting us. I think if you move to IOM with a focus on Europe, I think we're still working through the peak period of inflation. I don't think we expect inflation in Europe to start to ease probably until mid-2023. In fact, we'll see some markets in Europe with higher levels of inflation in 2023 than we saw in 2022. And so I would say, on an IOM basis for 2023, we probably expect food and paper inflation to be kind of in that mid-teens, not substantially lower than what we saw in 2022. So I think that gives you an indication of the level of inflationary pressure. Of course, energy prices in Europe, maybe while they haven't hit the peak, as I was talking about earlier because we've had a warmer winter in Europe so far, I mean, the underlying tensions aren't fully resolved yet, and inflation levels and energy prices are certainly up significantly from where they were 12 months or so ago. And so I think from a pricing perspective, what we're trying to do is be very disciplined and be very consumer-led in our thinking. You may have heard me talk in the third quarter call just a little bit about the investments we've made over the last couple of years to really improve the tools, the data, and the analytics that our advisers use to provide recommendations to the business. Of course, as always, our franchisees make their own pricing decisions. But I think as Chris talked about, we feel good that we're being very disciplined around the pricing we're taking. We're using a long-term mindset, knowing that what we want to continue to do is drive strong top line momentum so that we have that momentum through these pressures and then, of course, out of the pressures and begin to kind of recover margins and gain leverage as we go forward. And we think our system has done a really good job on that because when we look at our value for money and affordability scores, we continue to maintain those leadership positions. And so I think 2023 is kind of a moment in time where we're seeing kind of the peaks of those pressures, but feel really good as we get out of 2023 that the momentum that we're going to continue to drive will keep us in a really strong position to start gaining leverage again.

Yes. I just would add, I mean, I've seen some of the industry reports on the momentum heading into 2023, and we feel good about how our business is performing. But I think Ian touched on one thing, just keep in mind, we've got Omicron, that's a tailwind. We've got good weather, not just in Europe, but there's favorable weather in the U.S. So there are some things there that are helping, I think, industry-wide, but we feel very good about the momentum we're starting the year off with.

Our next question is from Andrew Charles with Cowen.

Great, thanks. Chris, you expressed the same macro concerns in Europe as last quarter. But within IOM, strong 4Q comps, the UK, France, and Germany, you called out really standout performers. And so you spoke about a few country-specific operating highlights. But can you talk about the degree that Europe is benefiting from trade-down from higher-priced dining and how you're positioning the business to sharpen the focus on value in 2023 while recognizing franchisee profitability in Europe is seeing the greatest challenge? And if I could just squeeze in one quick housekeeping question, how will the $100 million to $150 million of 2023 franchise relief show up in the income statement and if you anticipate that to be front half or back half-weighted or spread evenly throughout the year would be helpful?

Why don't I have Ian cover the housekeeping item, and then I'll get to your broader question about Europe and the consumer.

Yes, hi Andrew. So just on the $100 million to $150 million, that obviously is directed to support franchisees. And so it would show up through our franchisee revenue in the income statement as we work through that. I'll give it back to Chris for the rest.

Yes. And to the question about trade-down and the benefits of that, we're seeing good balanced growth in Europe and in our IOM markets. So I wouldn't say that we are disproportionately benefiting from some sort of trade-down to the degree that we have visibility kind of at the different strata of the consumer, we're continuing to see that hold up well across all consumer segments.

I have time for one last question from John Ivankoe with J.P. Morgan.

Hi. Thank you for that question about capital expenditures and the overall financial requirements of the business. I appreciate the guidance for fiscal 2023 at $2.2 billion to $2.4 billion, which includes 400 new units in U.S. markets. There are a couple of aspects to consider. Is the 400 unit figure a reasonable target for developed markets moving forward, or could it increase? Additionally, you mentioned the completion of EOTF in the U.S. mostly in 2022. Are there any large projects in the IOM markets that might take the place of existing unit capital expenditures? Lastly, the release mentions McDonald's achieving 90% cash conversion. Is that the net earnings ratio you anticipate maintaining annually, possibly providing a preview for your analyst meeting later this year? Thank you.

Yeah, good morning John, thanks for all that. So I think on the 400 openings, as Chris said, we'll have more to say on that later in the year. But I think what we've done well over the last couple of years is really build demand for the brand by investing in the brand, I think in doing a good job to resonate with consumers. And so certainly feel there's opportunity ahead. I think from a quantification standpoint, we'll talk about that, as I said, more later in the year. On 2023, the $2.2 billion to $2.4 billion of CAPEX, about half of that is going to go towards new unit growth. I would say one of the things as we work through COVID and dealt with kind of consumer shifts in behavior was we certainly understood there was an opportunity for us to deal — obviously, we've got a lot more ordering channels coming into restaurants. I think that's certainly — and with the demand and volume that we've created has created some challenges just in managing the capacity and the volume of customers we're dealing with in some of our restaurants across our owned markets. And so some of that reinvestment CAPEX is just going to us kind of working through these new ordering channels like delivery and digital and just enabling our restaurants to be better set up to deal with the volume of business that they're handling and to make sure that they can continue to grow volume by having more capacity available as we go forward. And so some of that capital is going there. I think on the 90%, I think you should feel good that that's something that we feel will be in place going forward, as we've talked about in 93 in terms of converting our net income to free cash flow.

Thank you, Chris. Thanks, Ian. Thanks everyone for joining. Have a great day.

This concludes McDonald's Corporation investor call. You may now disconnect. Have a great day.