Hello, and welcome to McDonald's Fourth Quarter 2023 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 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 are 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. Please limit yourself to one question and then re-enter the queue for any additional question. Today's conference call is being webcast and is also being recorded for replay via our website. And now, I turn it over to Chris.

Thank you, and good morning, everyone. When we gathered at this time last year, we shared that despite a challenging operating environment, McDonald's continued to deliver historically high levels of growth. While macroeconomic pressures persisted throughout 2023, the resilience and power of our system was on full display, and we are heading into the new year in a position of strength. In 2023, we achieved global comparable sales growth of 9%. Delivered comparable guest count performance of nearly 3% globally with positive traffic across each of our segments, and maintained our leading market share across most of our major markets. These results are a credit to the tireless dedication of the entire McDonald's system. The over 2 million talented people working in our restaurants, the industry's best franchisees and our world-class network of suppliers around the world, all executing with excellence and with an unwavering commitment to serving our customers and local communities. In our restaurants, focusing on the fundamentals of creating an exceptional customer experience has delivered operational improvements, improved service times, and increased customer satisfaction across almost all of our major markets. Our Accelerating the Arches strategy is working, fueling over 30% comparable sales growth since 2019, and our MCD growth pillars enable us to remain agile in response to changing customer needs. For example, we've expanded loyalty to 50 markets around the world and reached over $20 billion in annual loyalty system-wide sales in 2023. Our user base continues to grow with over 150 million users that have been active in the last 90 days, making us one of the largest loyalty programs in the world. Over the last three years, we've also delivered tremendous growth in chicken by developing the McCrispy, a globally consistent high-quality chicken sandwich. With the goal of solving this unmet customer need across the system, it was developed and tested in a few markets first and has quickly scaled to a $1 billion brand across more than 30 markets worldwide. Our chicken category now represents $25 billion in annual system-wide sales, on par with beef. About a year ago, we formed a new business ventures team designed to operate as an entrepreneurial startup within McDonald's. The team quickly identified an opportunity in a $100 billion category across our top six markets that is comprised of beverage-led occasions where our core McDonald's business underindexes. In a little less than a year, the team opened a pilot CosMc's restaurant, and the buzz has been electric. Now let me say this again, we're only talking about a 10-store test. But more than that, we're excited about what this says about our potential to test, learn, and innovate quickly. Each of these examples illustrates our ability to identify opportunities and adopt new ways to surprise and delight our customers. It gives us an incredible amount of resilience as a system, no matter where the customer goes next or what the macroeconomic landscape may bring. In the last year, we also implemented Accelerating the Organization, an effort to modernize the way we work so that we're faster, more innovative, and more efficient. Over the past year, as I've had the opportunity to visit markets around the world, I've witnessed how the principles of ATO have empowered our teams to take the right risks, lead in innovation, and reduce complexity in decision making. Some of the senior leadership team and I recently visited Salt Lake City, and I witnessed firsthand how knowledge sharing across the system is unlocking speed and driving customer lifetime value. This means that the restaurants can take full advantage of Ready on Arrival. In addition to a national average 60-second reduction in wait times for customers that pick up curbside in our restaurant, we see higher customer satisfaction in these transactions. Ready on Arrival benefits the crew by giving the right information to the right person in the restaurant to deliver food faster and hotter. As a result, we've reduced complexity and stress in restaurants, and Salt Lake franchisees are driving higher levels of guest count growth and franchisee cash flow. By removing layers between our people and the restaurants and implementing a One McDonald's way approach, collaborating across the organization is much more intuitive, and teams bring the full breadth of McDonald's resources, skills, and experiences to the forefront when making decisions. As critical as this power of global scale is to our competitive advantage, at our core, we are a global business run by local small business owners that employ thousands within their communities. Since the beginning of our brand's history, McDonald's and our franchisees have been steadfast in the support of our communities in the most challenging times. Whether it was the recent earthquake in Japan, the tragedies that struck Morocco and Hawaii last year, or the war in the Middle East, our focus is on creating a positive impact in the communities we serve. Across the more than 75 markets in our IDL segment, McDonald's is a major employer of local citizens, creating valuable career opportunities for more than 780,000 local employees in both restaurant and office jobs and with more than 1,000 locally owned suppliers. We're proud to grow that footprint. In 2023, the IDL segment opened an average of four new restaurants every single day, creating new jobs for nearly 50,000 people this year alone. By removing barriers for children who need healthcare, Ronald McDonald's House Charities helped provide essential services for over 870,000 families across this segment. For the over 130,000 workers in our Europe, Middle East, and Africa business, our number one priority is keeping our people safe. We recognize that families and their communities in the region continue to be tragically impacted by the war, and our thoughts are with them at this time. McDonald's has always been a beacon in our communities around the world, led by local franchisees who work tirelessly to serve and support. The ongoing impact of the war on these franchisees' local businesses is disheartening and ill-founded. Our values state, McDonald's will always proudly open our doors to everyone. Thinking back on 2023, I can't help but feel tremendous pride in the entire McDonald's system. As we think about our ambitions and the potential that lies ahead, there's never been a better time to be part of the McDonald's brand. As I will continue to say, we believe there's still significant runway in our Accelerating the Arches strategy and we're setting our sights even higher. I'll speak more on the year ahead in a few minutes, but first, I'll turn it over to Ian to talk through our Q4 results.

Thanks, and good morning, everyone. As Chris mentioned just a few minutes ago, core to the Accelerating the Arches strategy is putting the customer at the center of every decision we make, acting with agility in any environment to deliver delicious, feel-good moments at an affordable price each and every day. Our quarter four comparable sales performance of over 4% in both the U.S. and IOM segments and over 3% globally remains a direct result of exceptional execution against this strategy, making it clear once again that our business is resilient despite ongoing macro pressures and challenges. As a system, we've navigated countless challenging environments since we first opened our doors in 1955. This past quarter was no exception, and our thoughts remain with the families and communities impacted by the war in the Middle East. As Chris and I have both mentioned before, the war has meaningfully impacted our IDL segment performance, resulting in fourth quarter comparable sales of less than 1%. Despite this, our business model provides stability in our P&L from the negative sales impact in the region. Among the many strategic advantages of McDonald's are our size, scale, and geographic diversity, translating to incredible resilience as a system. We will continue to stay focused on supporting our people and the local communities in which we operate as we work closely with our development partners in the region. We are extremely proud of the way our system continues to consistently show up for customers in every corner of the world, highlighting time and time again the strength of the McDonald's brand when our system comes together. Providing our customers with affordable options has always been core to our brand, and it's even more important as consumers feel pressure on their spending, particularly the lower-income consumer. We continue to listen to our customers by evolving our value offerings, maintaining strong perceptions in value for money and affordability. Canada, for example, maintained their McMuffin and hot coffee pairing this quarter, providing an affordable bundle during a critical day part and helping to drive market share gains in breakfast. The UK followed a similar playbook by expanding their Saver Meal deals to offer smaller bundles during the morning day part for just a few pounds. Only available through our mobile app, this further cemented McDonald's UK as a destination for great food at great value, while contributing to increased loyalty sales. The UK also combined the strength of the McDonald's brand with its proven history of connecting with customers through successful holiday marketing to create Festive Wins, an elevated in-app experience that leaned into the holiday spirit with a fun and interactive calendar promotion. Through our combination of daily deals, compelling prizes, and exclusive merchandise, Festive Wins boosted digital engagement to an all-time high for the market and generated 4 million active monthly customers. And in Australia, the market brought back its 30-days, 30-deals promotion, where customers enjoyed a daily deal available exclusively in the MyMacca's app. From discounts on our most iconic menu items like the Big Mac cheeseburger or our world-famous French Fries to unique meal deals, the promotion drove remarkable engagement and contributed to a record number of active loyalty members in the market. Beyond maintaining an affordable price point, we're constantly elevating the McDonald's experience, enhancing the overall value proposition of the brand. This was evident as many markets offered Monopoly this quarter, leveraging learnings from across the globe to create highly interactive campaigns and once again igniting our fans' love for McDonald's. The Canadian market tapped into global best practices by offering MONOPOLY with a double peel option for the first time this year. By giving customers a second chance to win in the app, the market continued to amplify the digital experience while maintaining those core qualities of the game that our customers love. Customer excitement was on full display, and the market achieved record-setting results generating nearly 700,000 new app customers in just five weeks and driving significant lifts in mobile app sales. In fact, more than 43 million MONOPOLY codes were digitally redeemed during the promotion. That's more than the entire population of Canada. Germany also experienced record-breaking registrations with their MONOPOLY program by combining iconic peel-off game pieces with the ability to scan to win prizes in the mobile app. For the first time, Germany offered loyalty points as prizes, rewarding our customers and driving additional digital customer frequency. And in France, MONOPOLY drove additional loyalty sales with an interactive redemption experience for our customers. We continue to navigate a difficult operating environment in the market, where results were softened, and comparable sales were negative for the quarter. Moving forward, we're confident that we have the right leadership team in place with the right experience to reset with our franchisees who I know are committed to restoring our strong foundation. We're acting with a sense of urgency to address our opportunities while maintaining a growth mindset in critical areas like value, core menu, and delivery. Our One McDonald's Way approach to marketing extends beyond MONOPOLY as we continue to drive brand strength, building cultural relevance, and connecting with our customers and crew in new and exciting ways. This quarter, we once again tapped into the nostalgic McDonald's experience of enjoying a happy meal as a kid and recreated it for our adult fans, featuring our core menu favorites at the center. Originally launched in the U.S. in 2022, we brought back the campaign to the market in December partnering with artist and creator Kerwin Frost and scaling it to 15 additional markets including Canada. The excitement for the return of this event was evident, driving significant social media engagement across many of our channels. By encouraging our customers to trade up with a full margin promotion, we feel top line growth with a strong average check. In an environment where our customers are looking for familiar favorites, those core menu items have never been more relevant or beloved. At the center of our core menu are an iconic portfolio of brands, $17 billion brands in their right, including four different chicken equities that are each $1 billion brands. We continue to stay aggressive on chicken this quarter, making further progress towards our ambition of developing a reputation for great chicken. Germany re-hit the McCrispy chicken sandwich with strong results driving a lift in chicken sandwich sales and building additional customer affinity for the product. The UK built on its market leadership in chicken by extending the McCrispy brand with a limited-time offering, the McCrispy Smokehouse, combining new and exciting flavors and ingredients with our core chicken offerings. In China, with slowing macroeconomic conditions and consumer confidence near record lows, the market continued to build brand equity by combining our delicious food with culture and community through a collaboration with local streetwear designer Verdict. The campaign not only featured access to exclusive merchandise but placed our delicious chicken at the center and drove incremental traffic into our restaurants by offering customers a discount on a second order. Turning to our P&L, our top line growth drove adjusted earnings per share of $2.95 for the quarter. This is an increase over the prior year of 11% in constant currencies, excluding current year charges of almost $140 million for write-offs of impaired software no longer in use and charges related to our Accelerating the Arches growth strategy. Foreign currency translation positively impacted fourth quarter results by $0.07 per share. For the full year, adjusted operating margin was just over 47%, reflecting higher restaurant margin dollars across all segments. Despite the significant P&L pressures that we've discussed throughout the year, top line results generated $14 billion of restaurant margin for the year, an increase of about 10% in constant currency. 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 $2.4 billion, with more than half invested in new unit development across our US and IOM segments. After reinvesting in the business, our free cash flow conversion was in the 90% range for the year. Now with that, let me turn it back over to Chris.

Thanks, Ian. As we look to 2024 with elevated absolute prices and muted consumer confidence, we believe that consumers will continue to be more discriminating with their dollars, but we expect our focus on our MCD's will continue to drive growth across our business. From a historical perspective, we know our resilience is rooted in our ability to adapt in any environment. McDonald's is one of the world’s most recognized and beloved brands, providing delicious meals at an affordable price and showing up when and where customers need us. By building a One McDonald's way of a marketing and creative excellence, we will continue to scale the best ideas globally through common tools and processes that help us maximize return on investment and shine a light on what people love about McDonald's. We're creating an environment that embraces bold creative, remaining connected to culture, and tapping into the moments, memories, rituals, and behaviors that people have with our brand. McDonald's position on value is a competitive advantage with a strategy rooted in customer behaviors and insights. We are optimizing price while limiting customer resistance. As we continue to attract millions of new loyalty members, we can get even smarter with our pricing methodology and tailor our digital offers to our fans, making them even more personalized. Looking ahead, we'll also continue to make our core menu even more enticing. With initiatives like Best Burger, we've made small changes that are adding up to a big difference that our customers are really noticing. Best Burger is now deployed across more than 70 markets, including the U.S., and we're excited about the potential for growth as it deploys to nearly all markets by 2026. We're looking to build on our leadership in beef, addressing an unmet customer need across markets for larger high-quality burgers. We're working horizontally across the system to innovate. As we test and learn, we'll be working to understand how the new offering will complement our already established burgers like the Double QPC or the Big Tasty. We're also excited to further build on our success in chicken by continuing to invest in beloved icons like McNuggets and McChicken, while further scaling the emerging favorites like McCrispy and McSpicy. These four equities are the building blocks of our growing chicken business, and we see the potential to add another point of chicken share by 2026, in part through an expansion of our McCrispy platform into wraps and tenders. We've made incredible progress across our 4Ds by taking the things our customers love about McDonald's, from convenience to personal connections with our brand, and enhancing them even better. For example, Ready on Arrival will expand across our top six markets by the end of 2025. While we've built one of the largest loyalty programs in the world in just a few years, over 150 million active users today represents only a fraction of our total customers. We aim to reach 250 million active users and $45 billion in annual loyalty system-wide sales by the end of 2027. As you heard during our investor update, the world's largest restaurant company plans to grow even faster over the next four years. We know our ambition to reach 50,000 restaurants by the end of 2027 is a compelling opportunity, and we've done our homework. We've identified key areas with high population growth and lower store density across both our IOM and U.S. segments, and that's where we're starting. These opportunities before us in the near term are compelling, but as we plan for long-term growth and solidify McDonald's leadership position, we've introduced three new platforms that will become part of Accelerating the Arches to build on our competitive advantages, cement our place in culture, and stay one step ahead of the next generation of digital customers. This includes building one of the largest consumer platforms in the world to attract and retain highly valuable digital and loyalty customers. The easiest and most efficient restaurant operating platform that puts intuitive technology in the hands of our restaurant teams and drives a better experience for both our customers and our crew, and the company platform that unlocks speed and innovation. We believe our biggest opportunity to advance and acquire new customers and build more meaningful customer relationships that result in greater frequency and spending is continuing to aggressively invest in digital and technology as a three-legged stool. For our customers, we will better leverage the data we have across our loyalty programs to provide targeted offers and personalized experiences, building relationships with the customers that we serve every single day and ensuring that they enjoy a more familiar, consistent experience no matter where they go or how they order. For restaurants, it's investing to put the most intuitive technology in the hands of our restaurant teams that makes their jobs easier and empowers them to provide amazing hospitality while serving hot and accurate orders to customers even faster. For the company, it is building the systems, processes, and tools that will enable our people to be more efficient and innovate with speed and agility. As I've said before, these are bold plans, but our success tomorrow has always depended on our ability to stay ahead of our customers' changing needs while reimagining what a restaurant can be. We're building the engine that will power McDonald's ability to unleash the full strength of our global scale where it counts. I’ll now turn it back over to Ian to talk through our 2024 financial outlook.

Thanks, Chris. As we've discussed, we continue to operate in a challenging environment with varying levels of headwinds across our markets. Looking ahead to this year, we anticipate these headwinds will continue as the current macro dynamics weigh on both our consumers and our business results along with the war in the Middle East. As we navigate these ongoing challenges, continuing to execute at the highest level with a laser focus towards growing market share will be critical. It's clear that we've had exceptional success over the last four years with strong broad-based momentum and global comparable sales of over 30% when compared to 2019. This is truly remarkable. However, as we’ve mentioned, we anticipate 2024 comparable sales growth will continue to moderate as we return to a more normalized level of growth, with expectations closer to historical averages of between 3% and 4% in our U.S. and IOM segments. In IDL, we do not expect to see meaningful improvement until there is a resolution in the Middle East. We expect our net restaurant expansion in 2024, along with restaurants opened in 2023, will contribute nearly 2% to system-wide sales growth as we begin to accelerate our new unit development and make progress against our target of 50,000 restaurants by 2027. With expectations of moderating sales growth and ongoing inflationary headwinds, we expect our company-operated margin percent will remain pressured in the near term and that the full year 2024 company-operated margin percent will be relatively in line with 2023. Turning to G&A, the financial strength of our system enables us to invest in areas that will drive long-term efficiencies for our people and our stakeholders. We expect 2024 G&A as a percentage of system-wide sales to be about 2.2%, which reflects elevated investments in technology, digital, and global business services or GBS. Through these investments, we aim to run the business more efficiently over time, ultimately freeing up more resources to drive long-term growth. Despite headwinds throughout the P&L, we anticipate an operating margin of mid to high 40% in 2024, driven primarily by top-line growth and franchise margin performance. We're projecting interest expense this year to increase between 9% and 11% compared to 2023 due to higher average debt balances and interest rates, and we expect our effective tax rate for the year to be between 20% and 22%. Transitioning to capital expenditures, we plan to spend between $2.5 billion and $2.7 billion this year, more than half of which will be dedicated to new unit openings across our U.S. and IOM segments. Globally, we plan to open more than 2,100 restaurants this year, with about 500 of these openings in our U.S. and IOM segments, where we continue to see strong returns. We also expect to open more than 1,600 restaurants in our IDL segment this year, including about 1,000 in China, where we recently completed the acquisition of Carlyle's 28% stake in McDonald's China. We're excited to have increased our minority ownership to 48% in our second largest and fastest growing market and believe it will enable us to further benefit from the market's long-term potential. Overall, we anticipate about 4% unit growth, driven by more than 1,600 net restaurant additions in 2024. Finally, we expect to generate strong cash flow in 2024 with free cash flow conversion in the 90% range. Going forward, our capital allocation priorities remain unchanged. First, investing in the business to drive growth, which includes both capital expenditures and increased cash investments in technology, digital, and GBS. Second, returning all remaining free cash flow through dividends and share buybacks over time. While the macro environment remains challenging, we believe that our Accelerating the Arches strategy is the right playbook, and we continue to maximize our growth pillars to drive strong results. We have confidence that our competitive strengths and our ability to continue to evolve to stay ahead of the customer positions us to succeed in any economic environment, delivering long-term growth for our system and our shareholders. Now let me turn it back over to Chris to close.

For nearly 70 years, the McDonald's story has been one of growth—a first job for millions, the best franchising opportunity in the world, and a familiar beacon of support for the over 40,000 communities we serve. In fact, our U.S. business generated 1.4 million jobs and contributed $108 billion to the U.S. GDP in the last year alone. Even as the world around us continues to change, the power of our brand has stood the test of time. That’s because McDonald's continues to reinvent itself and stay one step ahead of our customers. While our Accelerating the Arches strategy is working, we will only keep growing when we continue to take smart risks and operate with a long-term mindset. Ray Kroc said it best, 'the only way we can advance is by going forward individually and collectively in the spirit of the pioneer and in the pride of accomplishment.' Even with all that we've accomplished since the launch of Accelerating the Arches, I am confident that there is so much more that we can achieve. I look forward to coming together with all three legs of our stool at our upcoming worldwide convention this April to share how we will reimagine our future together. Thank you to our franchisees, suppliers, and employees whose passion and dedication is central to bringing the McDonald's experience to life for our customers each and every day. With that, we'll take questions.

Thank you.

Our first question is from David Palmer with Evercore.

Thanks. I have a couple of questions. First, do you believe there is any effect from boycotts on IOM results, even if minimal? Secondly, the multi-year trends this year have remained stable for much of the time, particularly since the second quarter. The U.S. has shown a strong multi-year trend, so it's not concerning that these have stayed stable. I'm curious if you think there is potential for those trends to gain momentum again, or if there's a lesson to be learned here, especially since we are navigating some unpredictable months with weather and other factors in the fourth quarter and into January. I'm interested in your perspective on this, particularly regarding the possibility of reacceleration in the multi-year trend for 2024 and how best to achieve that. Thank you.

Hi, David. It’s Chris. Thanks for the question. First on your question about the Middle East. Obviously, the place that we are seeing the most pronounced impact is in the Middle East; we are seeing some impact in other Muslim countries like Malaysia and Indonesia. As far as IOM impact, it depends on the country. In a country, for example, France that has a larger Muslim population, we are seeing some impact. It depends very much on where the restaurant is located and if it's in a Muslim area. But we are seeing some impact there. In other countries, like Spain and Italy, we're seeing no impact. It really depends very much on the country. The most pronounced impact that we're seeing is in the Middle East and in Muslim countries like Indonesia and Malaysia. Also, as we mentioned in our prepared remarks, our outlook is that, as long as this conflict, this war is going on, we're not expecting to see any significant improvement in this. It's a human tragedy what's going on, and I think that that does weigh on brands like ours. Back to your other question about potentially a reacceleration, as we also said in the prior remarks and we also talked about it at Investor Day, we're expecting 2024 to be normalizing comparable sales growth in that range of 3% to 4%, which is where we've been historically. We certainly had great performance over a two-year horizon, a four-year horizon, at over 30% on a four-year horizon, and about 14% on a two-year horizon. So, feel great about that, but I think we are moving into 2024 that's going to look more like what you would have considered a typical year prior to COVID.

Our next question is from John Ivankoe with JPMorgan.

Hi, thank you. The question is on France, and France has obviously been a leading market for McDonald's in a lot of ways for a couple of decades now, and in some cases it has actually been a leading indicator of positive performance in other markets or things that were done in France that were then successfully copied by others. So it did sound like you had some self-help in France: value, core menu, and delivery. I mean, did you find yourself, I guess, kind of catching up from behind in some of those metrics? I wanted to understand a little bit more, maybe what you could have done differently in the fourth quarter to improve results? And do you think possibly there could be some leading indicators in France that are happening now within the market, of course, excluding the Middle East sentiment, that maybe we can apply to other markets to ensure those markets don't dip negative in the near term?

Sure, thanks for the question. You're right in pointing out that France has historically been one of our best markets. We have some of our highest customer satisfaction in that market. We have some of our highest franchising cash flows in that market. We're not happy with our performance in France right now. If I were to isolate two areas that we are focused on to improve in France, the first is that we did get off sides on value there. The team has done a very nice job in pivoting and just put in place a new value program there that we're seeing great early success with that. But certainly, that was a reaction and we don't want to see that. The second is that we continue to have operations opportunities in France, and that's something that we've been having a lot of engagement on with our franchisees. When I think about IOM, certainly there are lessons there. On the positive side, France is under pressure right now, but I feel very good that we're going to get that business back on track and continue to have the performance that we've become accustomed to in that market over many years.

And maybe, John, I'll just build on a bit on Chris's comments. I mean, I think two things. One is, as we talked about in our prepared remarks, we've got almost an entirely new leadership team in place in the market, a team that has a tremendous amount of McDonald's business experience and we have confidence in that team and the experience they bring to drive the right catalyst. I think when you have a market that is a little bit off track, you look to see if you've got the right people with the right experience to drive change. On both of those fronts, we feel good. It's going to take a moment to get momentum going back in the right direction. But I know together with our franchisees in France, we're going to be aggressive to go after the opportunities that exist.

Our next question is from Jeff Bernstein with Barclays.

Great. Thank you very much. Chris, question as we think about 2024. First, I just wanted to clarify, I think you mentioned 3% to 4% comps in the U.S. and IOM. I'm not used to seeing such specific guidance, so that's encouraging. I'm wondering if you could share any thoughts on the components of that between pricing, which we get the sense is easing versus traffic. More broadly, the operating margin guidance from mid to high 40% range let's say, is fairly wide, about 500 basis points or so range. I'm just wondering if you can help narrow or perhaps talk about what would lead margins to be at the upper versus lower end of that wide range. Thank you.

Good morning, Jeff. It's Ian. So let me take that. As we talked about on the comps in our opening remarks, we've been talking about it consistently over the last couple of quarters that as inflation levels have come down, our pricing is broadly coming down in line with inflation, getting back to more normal levels. This is why we talk about comps getting back to more of that historical norm average of 3% to 4% in both the U.S. and IOM this year. The only texture I'd give you there is that we had a slower start to the year due to a really strong start to 2023. There were two important reasons for that. Firstly, we are lapping against incredibly strong results from 2023. Secondly, there has been abnormally mild weather that was a benefit at the beginning of 2023 in both North America and Europe, so we are working against that as well. If I was to think about the year, I see the back half of the year probably being slightly stronger than the front half. I expect some macro factors impacting us in 2024 could ease towards the back half as we proceed through the year. On operating margin, over time, we've demonstrated that we will continue to be able to drive leverage and operating margin as we grow strong top-line growth. If you go back to 2019, we were in the mid-44% range and ended last year at over 47%. I think that's proof of our ability to continue to grow margins as we look forward on a percentage basis. We have some headwinds to work through, but we feel confident about our ability to continue to grow margins over time.

Our next question is from David Tarantino with Baird.

Hi. Good morning. My question is on the impacts you're seeing in the Middle East. I guess two questions: One, could you help quantify your estimate on how much that impacted your sales in the fourth quarter? And then secondly, could you comment on the health of your franchisees in the areas that have been most impacted, and whether you think some temporary assistance will be needed as you move through 2024?

Hey, David, it's Chris. Just a couple of things and then let Ian clean up whatever I missed. We're not going to get into specific numbers on the Middle East. Suffice it to say, as you see in our IDL results, you can infer that the impact is meaningful, as I said also in our employee note at the beginning of this year. In terms of health of the franchisees, we're fortunate in that we have strong, well-capitalized franchisees in the Middle East. However, as we have historically done, we work with franchisees to support them during difficult periods, which sometimes can be deferrals or other forms of support. Those are ongoing conversations that we'll have with our franchisees. We believe that working in partnership with our franchisees through good and bad times has been the way we've been successful over time. It will be a situation-by-situation approach in the Middle East, but the impact right now is significant. Ian, I'll pass it off to you for anything else you want to add.

Yes. Thanks, Chris. Maybe just a couple of builds to that. I mean, David, you know that, as I've talked about before, we have an incredibly resilient business model. We've had to work through several external challenges, and I think the geographic breadth, the size and scale of our business means we're in a strong position to navigate any of these challenges, including the current one in the Middle East. Regarding support for franchisees or partners, as I've mentioned before, providing support is part of our business model. We always work together with our franchisees when there are conditions outside of their control warranting support. But when we do that, it's targeted and temporary and designed for owner-operators who are most in need. As Chris said, we've got strong partners in the Middle East, most of them have been with us for over 20 years. We've worked through challenges before, and we'll continue to focus on supporting our team members in the region and working closely with our partners to navigate through this together. I am confident that we will do that.

Our next question is from Eric Gonzalez with KeyBanc.

Hi. Thanks for the question. I'm wondering if you could comment on China specifically. I know it's not a huge part of your profit today, but you do have some big growth aspirations in that country. If you could comment on some of the macro challenges you're seeing and how they're impacting results in that country, and talk about how the brand is positioned to gain share in that market? Thanks.

Sure. Overall, we had a very good 2023 in China. We were happy with how our business performed in China. We're seeing strong growth there, and we built 1,000 restaurants in China. So we're on track from our development aspirations and we would expect to do something similar in 2024. So overall, the headline is we feel good about what we're seeing in China and the growth progress. Certainly, in China, as you've read, consumer sentiment in the country is more under pressure right now, leading to a more promotional environment. We didn't follow that, but the environment is indeed becoming more promotional. Our focus is on ensuring that we remain competitive. We believe we'll continue to see good comparable performance in that market as consumer wealth and GDP grow in mid-single digits. We see opportunities to build out development and penetration in that market to many places where we currently don't have McDonald's presence, so overall, our outlook on China remains robust, which is why we increased our stake.

I'd like to add a couple of things to Chris's comments. First, I want to acknowledge our team in China. We opened just over 1,000 restaurants in 2023, an all-time high for us. For those interested, we completed the acquisition of the additional 28% to take our stake to 48% at the end of January. We remain optimistic about the long-term opportunity there, and our increased stake will enable us to benefit from the long-term potential of that market. We aim to reach 10,000 restaurants by the end of 2028, which is a significant milestone as we look forward.

Our next question is from Brian Harbour with Morgan Stanley.

Yes. Thank you. Good morning. Maybe I'll just ask about the U.S. Are you willing to say kind of where pricing was in the fourth quarter and also into the first quarter? Any color you can provide by daypart? I think we've heard some other companies talking more about late-night or if you have any comments on breakfast recently?

Sure. I’ll give some macro comments and then have Ian add any details. We continued to work through pricing in the U.S. as we looked to offset inflation. We saw, I would describe, mid to high single-digit price increases last year, which varied a little by region in the country. We are seeing, as I mentioned on prior calls, that particularly among the low-income consumer, there has been some transaction size reduction. We're also seeing some trade downs. However, as we look at 2024, inflation is expected to be less, likely in the low single digits, and that will be consistent with where we end up on pricing. From a daypart standpoint, I’d say it's pretty balanced. Breakfast is competitive; there’s a lot of activity in breakfast. Our business, as you know, is dominated around lunch. That's our single biggest daypart, and that daypart continues to do well. So nothing particularly noteworthy in dayparts, but Ian may have additional insights.

I think you covered all the bases, Chris, but just a couple of additions: Overall pricing for the year was about 10%. In the fourth quarter, that level of pricing came down in line with inflation and was in the high single-digit range. We continue to see a consistent flow-through with pricing, which is important because it ties back to what we've implemented to ensure effective pricing strategies. As we head into 2024, knowing inflation has come down a fair bit, we expect pricing will follow suit. We know consumers are weary of pricing, and we will continue to be consumer-led in our pricing decisions going forward.

Our next question is from Dennis Geiger with UBS.

Great. Thanks. Chris, I wanted to just follow up on some of the color you just gave on the U.S. consumer and then some of that lower-income consumer. I think, managing the check a little bit. I'm curious if you could elaborate anything more there on the consumer in the U.S. Is that check management largely consistent with what you've seen in recent quarters? Or are you seeing any incidents or intensity pick up? Ultimately, what does that mean as you think about promotions and the evolving value options that you talk about in the U.S. this year?

Sure. I think consistent with what we talked about on the prior call, the pressure with the U.S. consumer is on that low-income consumer, particularly at or below $45,000. This consumer is pressured. From an industry standpoint, we've seen that cohort decrease in the most recent quarter, particularly as eating at home has become more affordable and the pricing environment has adjusted. Middle and high-income consumers don’t show any real behavioral changes; we continue to gain share with those groups. The battleground is with the low-income consumer, and I think we will see more focus on affordability, which suggests that a lower absolute price point will resonate more than value messages that might have focused on bundled pricing. We are well-positioned to address these needs, with our D123 platform. I expect you will see local-level activities targeting good value for that low-income consumer.

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

Thank you. I wanted to ask about G&A. It came in just below the 2.2% of system-wide sales you guided to, which is true despite the fact that I suspect that system-wide sales were lower than expected in the fourth quarter, given the implications in the Middle East. I was curious to what extent you're able to flex your G&A. I know you usually guide to percentage of system-wide sales, but trying to understand whether internally you forecast more along the lines of dollar spend? Are you tracking any improvements perhaps because of Accelerating the Arches? I'm curious to what extent you have flexibility there.

Sara, it's Ian. Let me take that one. The way we think about G&A is in two broad buckets. Firstly, we want to work to run our business as efficiently as we can. We know we have some opportunities in that area. We want to continue investing strategically to drive greater efficiency. A lot of that will be led by the Global Business Services organization that we stood up to drive transformation efforts in areas like HR, finance, and tech, as well as decreasing spending in indirect sourcing. Part of our focus is to make those strategic investments to drive efficiency so that we can drive growth. Over time, we do believe we'll gain leverage in G&A as a percentage of sales. But in the short term, our focus will remain on the highlighted areas.

Our next question is from Chris Carril with RBC.

Thanks. Good morning. On McOpCo margins, I believe you mentioned you expect them to be relatively in line this year versus 2023. Can you expand on some of the factors surrounding this outlook? Any detail on U.S. versus IOM, your cost inflation outlook? If you see opportunities for company margin upside?

Good morning, Chris. Yes, you're right; we expect our 2024 company-operated margin percent to be roughly in line with where we ended for 2023. A few things are going on, so I’ll talk about U.S. and then International. In the U.S., our commodity inflation for 2024 is expected in the low single-digit range, while wage inflation will be in the mid to high single-digit range, partly because of significant wage increases coming into effect in California. Internationally, we expect commodity inflation to match the low single-digit range and wage inflation to be in the low to mid-single-digit range. We still face current inflationary effects and carryover from much higher inflation levels faced in 2023. However, we remain confident in our ability to drive leverage as sales continue to grow, supported by our plans and strategies.

We have time for one more question from Lauren Silberman with Deutsche Bank.

Thank you. Just a follow-up. Given the modest pricing in 2024 in the U.S., do you expect positive traffic then? My actual question is on the digital side. Can you talk about any changes related to your approach, specifically to value offers as you look ahead into 2024 in the U.S.? A lot of promotions on the app are also driving higher tickets, frequency. Just to what extent is digital marketing accretive to franchisees? Any thoughts there? Thank you.

As you know, we don't give traffic guidance, so we won't provide specifics there. However, it's fair to say that success in this industry is about maintaining balance; you need both traffic growth and price growth for long-term success. We are set up well for that balance. Our brand is in great shape globally, and we are achieving some of our highest customer satisfaction scores around the world. Operations in nearly every country are improving as we execute our Performance and Customer Excellence program. In Q4, we saw service times improve by 10 seconds, and we have good alignment with our franchisees. In most of our major markets, franchising cash flows are healthy despite price headwinds. We're positioned positively to achieve that balance as part of our long-term focus.

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

This concludes McDonald's Corporation Investor Call. You may now disconnect, and have a great day.