Hello, and welcome to McDonald's Second Quarter 2025 Investor Conference Call. At the request of McDonald's Corporation, this conference is being recorded. I would now like to turn the conference over to Mr. Dexter Congbalay, Vice President of Investor Relations for McDonald's Corporation. Mr. Congbalay, you may begin.

Good morning, everyone, and thank you for joining us. With me today on the call are our Chairman and Chief Executive Officer, Chris Kempczinski, and our 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 well as 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.

Thanks, Dexter, and good morning, everyone. In the second quarter, McDonald's delivered global system-wide sales growth of over 6% in constant currency and global comparable sales growth of nearly 4%. This includes driving positive comparable guest counts globally despite a challenging backdrop for the industry. In this landscape, the power of McDonald's value and affordability platforms, exciting marketing and menu offerings, and world-class execution are working together to drive comparable sales results and guest count growth as we also accelerate new restaurant development. Our Internationally Operated Market segment's comp sales increased by 4%, with all markets driving positive comp sales growth. Our International Developmental Licensed Markets delivered comp sales growth of more than 5.5%, led by Japan and with positive comps across all geographies. The results speak for themselves. When we get our value proposition right and execute with excellence, good performance follows. As we shared last quarter, all of our big 5 IOM markets now have both meal bundles and everyday affordable price or EDAP menus in place. Our EDAP menus feature a variety of sandwiches, snacks, and beverages, typically priced below $4, pounds, or euros. Value and affordability scores improved across the majority of our major IOM markets as these offerings as well as offers available through the McDonald's app continue to gain traction and awareness with consumers. Despite continued high inflation across most of Europe, our IOM markets are being prudent about pricing actions, knowing the continued challenging environment for many of our consumers. I recently visited Germany and saw firsthand how the market is executing our playbook and outperforming the competition. McDonald's Germany is defining good value in the market with a clear EDAP menu, McSmart Snacks that just launched a few months ago. They've paired this EDAP menu with compelling meal bundles, giving them a strong 1-2 value punch. At the same time, Germany launched exciting marketing and full margin menu innovations such as the Chicken Big Mac, which hit record high sales in the market during its first full week of launch. As a result, this quarter in Germany, we drove positive sales and guest count gaps versus nearing competitors and gained market share despite what continues to be a challenging industry environment. Turning to the U.S. business. Comp sales were up 2.5% in the quarter. We outperformed near competitors on both comp sales and comp guest counts. Certainly, overall QSR traffic in the U.S. remained challenging as visits across the industry by low-income consumers once again declined by double digits versus the prior year period. Reengaging the low-income consumer is critical as they typically visit our restaurants more frequently than middle- and high-income consumers. This bifurcated consumer base is why we remain cautious about the overall near-term health of the U.S. consumer. In this environment, we will continue to remain agile with respect to our value offerings to ensure the U.S. strengthens its leadership in value and affordability. Overall, we've made good progress with our value offerings. The $5 Meal Deal continues to resonate with consumers as we recently celebrated the 1-year anniversary of the program. We've also continued to see incrementality from our McValue platform which also includes our Buy One, Add One for $1 deal, which launched at the beginning of this year. And of course, we're excited to welcome Snack Wraps back onto the menu after a 9-year hiatus. We launched Snack Wraps with an attractive $2.99 nationally advertised price point and early results are encouraging. Our franchisees also recognize the importance of the $2.99 price point, and we're excited to announce that they recently voted to extend this advertising through the end of the year. But we recognize that consumers' value perceptions are most influenced by our core menu pricing. We're working closely and collaboratively with our U.S. franchisees on this opportunity, and we're developing ideas for how we might address this as an entire system. In combination with strong value, we're also unlocking growth across our most important menu categories of beef, chicken, and beverages. Ian will discuss beef and chicken shortly, but I'd like to touch on beverages. The work of our beverage category team is rapidly moving forward. As we recently announced, exciting things are brewing with an upcoming test in about 500 restaurants in the U.S. with a beverage lineup that includes a variety of options from cold coffee and fruity refreshers to crafted soda and energy. We've been able to quickly embed CosMc's key learnings into our McDonald's core business, demonstrating the speed, scale, system prowess, and efficiency of our cross-functional category teams. We're finding new ways to tap into what customers want, and believe no one is better positioned than McDonald's to deliver more of these moments to our fans. Finally, central to our Accelerating the Arches strategy is aligning our greatest assets, our iconic brand and unmatched size and scale, with the power of data and technology. It's happening in 3 distinct ways. We're reimagining how we improve the restaurant experience, transforming how we engage our most loyal brand fans, and modernizing the employee experience. Our progress to digitize the Arches is unleashing the full potential of our size and scale, all while strengthening our foundation, such as increasing the reliability of our systems. As I said during our investor update in late 2023, when we first introduced the restaurant, consumer, and company platforms, we believe they can create a step change in our sales and margin trajectory over time, slowly at first, with increasing speed and impact as we scale like no other brand can. We're excited to see this start coming to life. In our restaurant platform in partnership with Google, we're developing edge computing, which extends the cloud to our restaurants. Edge is the digital foundation for the next generation of restaurant innovation that powers AI and Internet of Things-enabled restaurants. The expected benefits are many: increased restaurant uptime and enhanced customer and crew experience; improved food quality and cost savings opportunities. We're currently live with edge in hundreds of U.S. restaurants and are beginning to deploy it internationally. Running great restaurants is just one component of serving up great customer experience. Our fans want greater personalization, convenience, and value. And bringing millions more consumers into the McDonald's digital universe is how we're ensuring customers feel seen and satisfied with each and every visit. In 2023, we set a goal to reach 250 million 90-day active loyalty users by the end of 2027. As of this quarter, we've reached more than 185 million 90-day active users across 60 loyalty markets. In the U.S. alone, on average, the same customer visits 10.5 times in the year before joining the loyalty program and then 26 times in the year after joining. They are earning points in the app and using them to unlock exclusive deals. And thanks to our recent partnership in the U.S., customers were able to extend rewards to new experiences like the Snapchat+ subscription with premium features. Fans ordering on the app are already saving time with ready on arrival. Our geofencing technology can let our restaurants know when to start your order. In the U.S., restaurants with ready on arrival can reduce wait times for food pickup by more than 50%, and in many cases, eliminate them altogether. Ready on arrival is deploying in restaurants across 5 of the top 6 markets and we're on track to launch in the last of the top 6 later this year. Finally, we're applying new technology across the company that will change our ways of working. We're moving from hundreds of legacy systems to standardized modern global platforms to help our employees be more efficient and make data-driven decisions while increasing the speed of innovation. We took a couple of big steps towards improving processes by going live with a new finance system in the first wave of markets just a few weeks ago. Rolling out a new HR or human capital management system in the second wave of markets this past quarter. We're modernizing McDonald's at a pace that will enhance not just the customer experience but provide new capabilities for our system. With that, I'll turn it over to Ian.

Thanks, Chris, and good morning, everyone. Our performance in the second quarter shows that customers continue to choose McDonald's as a trusted destination for the food they love, that's delivered with the quality, convenience, and value they expect. Our financial results in the quarter were largely in line with our expectations. Global comparable sales increased 3.8% with comp sales growth up sequentially from the first quarter's low point. Importantly, the sequential improvement was broad-based with comp sales and guest count performance accelerating in each segment. Our ability to adapt within a challenging environment remains a core strength. Execution of our Accelerating the Arches strategy and our agility to implement and scale necessary adjustments drove positive results in the quarter, including market share gains across a majority of our larger international markets. For example, in France, we've continued to widen our positive comp guest count gap versus nearing competitors. This was supported by the successful launch at the end of March of a new EDAP platform, which we paired with compelling meal bundles that are resonating with value-conscious consumers. The EDAP platform includes several à la carte offerings, each under EUR 3. We've seen an increase in take rates for all items and continued increases in customer value and affordability perceptions and overall customer satisfaction scores. In addition, in early April, we introduced the Big Arch, which was our top-selling large burger in France following its launch, and that trend continued after the media campaign ended. We followed the Big Arch's rollout in France by launching it in the U.K. in mid-June. Early results are meeting our expectations, fueled by a positive response to the marketing campaign and social media buzz, and we're looking to build on Big Arch's success as we continue efforts to improve the U.K.'s overall performance. While we recognize that restoring sustained positive performance in the U.K. will take time. As we've demonstrated most recently in France and Australia, we have a solid track record of identifying areas of improvement and executing turnaround plans that deliver results. In addition to launching Big Arch in France and the U.K., we're working to unlock growth in beef by continuing to implement Best Burger across the globe. Today, it's currently in more than 80 markets, and we expect it will be in nearly all markets by the end of 2026. Chicken also remains a significant opportunity. It's a larger global category than beef and continues to grow at a faster rate. In the second quarter, we increased chicken market share across our top 10 markets. And we remain on track to grow our global chicken share by 100 basis points by the end of 2026, in line with the target we shared at our investor update in late 2023. Chicken was key to driving sales growth and overall market share gains in Australia in the quarter. The market saw its first share gains in a couple of years thanks in part to the Hot Honey Chicken campaign featuring both McCrispy and McSpicy options that worked in conjunction with the strong foundation of value and affordability that has now been put in place. Australia also introduced McWings in early June as a permanent menu item with performance to date exceeding our expectations, further strengthening our chicken portfolio. Chicken also helped to drive our performance in China in the second quarter, where we gained market share, not only in the category but in overall QSR as well. While we're pleased with our relative performance in China, the near-term macroeconomic environment remains challenging. Despite these headwinds, we remain confident in the long-term potential of the China market and remain on track to deliver on our new restaurant opening target there this year. In addition to our commitment to the core menu and exciting innovations, we leveraged the One McDonald's Way approach to creative excellence this quarter. This drove positive comp guest count gaps to near-end competitors in the U.S. and across the majority of our major international markets. The centerpiece of this One McDonald's Way approach was the marketing campaign in partnership with A Minecraft Movie, our largest global campaign ever with participation by more than 100 markets. The consumer response to this campaign was incredibly strong. It boosted guest counts in each of our major markets, most of which sold out of the Minecraft collectibles ahead of the intended promotion window. In the U.S., in addition to leveraging One McDonald's Way to marketing, we're staying agile, and we'll continue to focus on strong execution to drive market share growth. We launched McCrispy Strips in May and saw an initial groundswell of excitement and high levels of customer satisfaction. We followed it with the highly anticipated Snack Wraps in mid-July at a $2.99 nationally advertised price point. We've been encouraged by the positive consumer response so far, which we believe comes from pairing the right product with the right value proposition. We have also recently updated our McValue meal offerings by introducing the Daily Double, a new burger meal that provides customers with more entry-level meal options. McValue now has 3 meal deal offerings, and customers can continue to find a $5 meal at their local restaurant. The U.S. leadership team and our U.S. franchisees are confident about the calendar for the remainder of the year, which includes exciting news across all levers of our plan: value, menu, and marketing. However, as Chris noted, U.S. restaurant traffic, especially for the QSR industry remains challenging. Accordingly, we will leave no stone unturned when exploring ways to drive guest count-led growth and strengthening our value leadership. As Chris mentioned, we're working closely and collaboratively with our U.S. franchisees to evaluate the opportunity to improve upon our core menu offerings. We know what it takes to win. And as a market leader, we plan to leverage our size, scale, and financial strength to deliver for our customers. Turning to the P&L. Adjusted earnings per share were $3.19 for the quarter, an increase of about 5% versus the prior year quarter in constant currencies. Adjusted operating margin was nearly 47% for the first half of the year, highlighting the durability of our business model. Despite continued pressure on consumer spending, top line results generated nearly $4 billion of restaurant margin for the quarter. That's an increase of about 5% in constant currency, driven primarily by franchise margin performance. With respect to the remainder of the year, the headwinds facing our business and consumers in the U.S. and our top international markets remain largely the same, while cost pressures in some markets, most notably in Europe, have become more challenging. Nonetheless, we continue to target a full year adjusted operating margin in the mid- to high 40% range and above the 46.3% adjusted operating margin in 2024. This includes the expected impact from tariffs that are currently in place. However, we're adjusting our full year margin target for company-operated restaurants to be around the 14.8% that we delivered in 2024, which we had previously targeted to increase slightly. We're still targeting G&A as a percentage of system-wide sales to be about 2.2% for the full year. We continue to remain disciplined with investments in our strategic growth priorities, including digital, technology, and our transformation efforts led by our global business services organization. Below the operating line, we're projecting our full year interest expense to increase by about 4% compared to 2024. That's at the low end of our previous estimate of 4% to 6%, largely due to lower-than-expected increases in average interest rates. We continue to target a full year effective tax rate of 20% to 22% with some quarterly volatility. We currently estimate the tailwind from the impact of foreign currency translation on adjusted earnings per share to be about $0.15 based on current exchange rates. That's up from our previous estimate of about a $0.05 tailwind. As always, our updated estimate is directional guidance only as rates will likely change as the year progresses. Finally, we remain on pace to open approximately 2,200 restaurants globally this year and continue to target about 1/4 of these openings to be in our U.S. and IOM segments. We expect to open more than 1,600 restaurants in our IDL markets, including about 1,000 in China. In total, we continue to expect slightly over 4% unit growth from the nearly 1,800 net restaurant additions in 2025. Overall, despite the ongoing industry headwinds, McDonald's is well positioned due to the resiliency of our business and our overall financial strength. We're on track to deliver our financial targets for the year and remain confident in our ability to drive long-term profitable growth for the system and to create value for our shareholders. We remain confident in our Accelerating the Arches strategy and believe with strong execution, it will continue to deliver. As shown in the majority of our IOM and IDL markets in the second quarter, having a solid foundation of value and affordability is critical. And when we get the value menu and marketing to work together, consumers increasingly choose McDonald's. And with that, let me turn it back over to Chris.

Thanks, Ian. I want to take a moment to reflect on what continues to set McDonald's apart. Seven years in, we remain one of the most culturally relevant brands in the world. Our recent global Minecraft Movie campaign is just the latest example of the strength of our brand and a reminder that McDonald's isn't just a restaurant; we are a part of people's lives, their routines, and their favorite moments. McDonald's was once again named as the Most Valuable Global Restaurant Brand by Kantar. It's a testament to the trust that we've built with customers and the consistency of our brand experience around the world. That legacy is intentional. We recently brought together our top leaders from around the world as part of our routine planning process to shape our plans for 2026 and beyond. One thing was clear throughout our time together. When we make a commitment to value and affordability, and couple that with world-class marketing and menu innovation, we can drive strong results. Our continued opportunity lies in the ability to execute with discipline at a scale that only McDonald's can deliver. We know that when we focus on what we can control and execute, we win. We're seeing that internationally, and I'm confident that we're taking the right steps to get value and affordability right in the U.S. Time and again, McDonald's has demonstrated its ability to remain agile to meet the moment by focusing on what we do best: delivering great food, exceptional value, and memorable experiences. With the dedication of our franchisees, the passion of our crew, and the power of our global scale, McDonald's is uniquely positioned to lead the industry we help define today and into the future. With that, we'll take your questions.

Thank you for joining us today. McDonald's is committed to ensuring value and affordability in the U.S. We have consistently shown our agility by concentrating on our strengths: providing excellent food, outstanding value, and unforgettable experiences. Thanks to our dedicated franchisees, passionate crew, and our global reach, McDonald's is in a unique position to lead the industry now and in the years to come. We are now ready to take your questions.

Our first question today is from David Palmer from Evercore.

It sounds like you're still exploring ways to bolster value perception in the U.S. ahead of anything there. Could you just speak to where you think McDonald's value and affordability scores are today in the U.S., perhaps before and after Snack Wrap in your recent McValue menu changes, where is the consumer perception today versus McDonald's in the past and versus nearing competitors and maybe even fast casual competitors? And if there's a difference between the U.S. perception in terms of value versus other key IOM markets, I would love to hear about that as well.

Thank you for your question, Chris. When discussing value, it's crucial to consider the specific consumer segments. I'll begin with our most loyal customers, particularly those in our loyalty program, which accounts for about a quarter of our U.S. business. These loyalty members report excellent value and affordability scores. This is evident in the increased visit frequency among them, rising from around 10 visits to 26 visits. Thus, we're in a strong position regarding value perception among our most dedicated customers. Moving on to our McValue program, it's performing well, particularly the $5 Meal Deal, which serves as its cornerstone. Additionally, the Buy One, Add One for $1 program complements it. Interestingly, only about 8% of consumers are utilizing both offers, which cater to distinct occasions and user groups but provide value to both segments. While I'm confident about our loyalty program and McValue offerings, we recognize that these account for roughly 50% of our business. The challenge lies with the remaining 50% who are not currently engaging with our restaurants or programs, highlighting the opportunity we have regarding core menu pricing. Currently, many consumers are encountering combo meals priced over $10, negatively impacting value perceptions. We need to address this issue. We're having constructive discussions with our franchisees, as the overall consumer perception of McDonald's value is primarily influenced by the menu board. We still have work to do in the U.S. In contrast, our international markets are faring better due to a robust EDAP program, which provides affordable pricing in local currencies. This addition has strengthened our value offerings. Additionally, our operators in these markets have maintained competitive core menu pricing, as international markets tend to be less competitive than the U.S. This gives us an advantage in representing good value overseas. Ian, do you have anything to add? No? Then let's move on to the next question.

Our next question is from Dennis Geiger.

I wanted to ask a little bit more about the U.S. and what sounds like encouraging momentum into the third quarter given the positive response to Snack Wraps. Can you talk a little more about how you think about the U.S. sales trajectory and underlying momentum over the coming quarters given the exciting value menu and marketing news that you mentioned on the way, but also relative to the challenged industry traffic trends that you noted?

Ian here. Let me begin, and Chris will definitely add more at the end. As you mentioned, the industry environment is still quite challenging. We observed a decline in overall fast-food traffic in Q2, which aligns with Q1 trends. Chris touched on consumer behavior, and if we consider the consumer landscape, lower-income consumers continue to face pressure, with their visits to fast food down significantly in Q2. Middle-income consumers saw a slight increase in visits compared to Q1, while higher-income consumers have continued to increase their visits. This reflects a divided consumer environment, and we anticipate that these trends and challenges will persist for the remainder of the year. However, we feel optimistic about the aspects we can control. As we discussed earlier, we are confident in the marketing and menu strategies we have planned for our U.S. business for the rest of the year. Looking back at Q2, we started strong with the global Minecraft activation, generating significant momentum despite running out early. However, sales moderated through Q2 due to ongoing headwinds. We stated at the beginning of the year that we believe the latter half of the year will perform better than the first half, and we still hold that view. Specifically, we expect Q4 in the U.S. to outperform Q3, mainly because we are moving past last year's food safety issue. In Q3, we will be comparing against the launch of the $5 Meal, which was our first notable initiative focusing on value and affordability. In summary, we are confident in the elements we can control and are exploring opportunities to enhance our value proposition as discussed earlier. Nonetheless, we do expect consumer challenges to continue throughout the rest of the year.

Our next question is from David Tarantino.

I was hoping you could unpack the key drivers for the IOM segment this past quarter. And in particular, I guess, what drove the strength? And do you think that this is more structural in nature and something that can be sustained as you look forward? Or were there some maybe just successes on the promotion side that might have helped the most recent quarter? Anything you can offer there would be helpful.

David, I'll begin, and then I'm sure Chris will add his thoughts. We've discussed this consistently, and over the past 12 to 18 months, we've put significant effort into establishing solid foundational elements of value and affordability in IOM. This includes our everyday affordable price platform and a selection of entry-level items now present in all of our major international markets, along with entry-level value meals. We've laid a strong foundation in value and affordability, and we've noticed significant improvements in our scores across all these key IOM markets. This indicates that our efforts are resonating in a challenging environment. With this foundation established, we're able to drive stronger momentum paired with effective menu and marketing execution. For instance, in Q2, we had impressive menu and marketing execution across our key IOM markets. The quarter kicked off with a successful Minecraft activation, followed by the Chicken Big Mac in Germany, which achieved record promotional results. We also launched Big Arch in both France and the U.K. During this quarter, Australia saw success with the Hot Honey Chicken activation and the introduction of McWings, which has surpassed our expectations. Overall, these three fundamental pillars of our Accelerating the Arches strategy are coming together, backed by our strong emphasis on value and affordability, which is effectively addressing consumer needs in a challenging external environment.

Yes, I would just add a couple of things. I think Ian touched on this, but we talked about value, menu innovation, and marketing. And in this environment, you got to go 3 for 3. If you go 1 for 3, if you go 2 for 3, you're not going to be putting up the kind of performance that I think we would all aspire to in terms of being able to really have outsized share gains. And so credit to our international teams that they're going 3 for 3 right now. And of course, it's on us to continue to execute and make sure that we're doing it. The other thing I would just note is we've had significant inflation in our international markets, particularly in Europe. Beef prices, you've probably seen some of the headlines here, but beef prices are up by 20% in Europe, for a number of different reasons, but primarily it's a supply issue. And in the face of what in most markets is high single-digit inflation, our franchisees are being disciplined on pricing. The pricing taken is low single digits. So I think our franchisees recognize that even in the face of continuing high inflation on inputs, continuing inflation around labor, being disciplined and making sure that we're leading on value and affordability is the foundation for what we're seeing in our international business.

And maybe just one final look, David. I think it's always important because it reflects the essence of what we do. Our operational execution metrics continue to improve, and the result of that, along with our efforts on value and affordability, is that our overall customer satisfaction scores are also improving across all key markets. We're implementing all these initiatives and providing better execution for the customer, which is crucial as customers are becoming more selective with their choices.

Our next question is with Brian Harbour.

I guess just, Chris, you talked a lot about some of the technology initiatives and stuff like that. And I know it's early days on some of those, but how should we sort of gauge the success of those? I mean, are you already seeing some cost benefits, for example, on the corporate side? Do you think that those are driving sales in some markets? Or do you think that that will be the case as you deploy them? How should we think about the success of those?

Thank you for the question. I'll address the three platforms we've discussed in relation to technology and the benefits we've observed as well as those we expect in the future. For the consumer platform, our goal is to reach 250 million 90-day active loyalty members, and I believe we're making significant progress toward that. We're noticing that our loyalty program significantly boosts customer frequency, which is crucial since 80% to 90% of people visit McDonald's. Increasing the number of consumers participating in our loyalty program is essential for driving business growth through frequency. I'm optimistic about this, and we have many enhancements planned for the consumer side in the coming years to further enrich the consumer experience with McDonald's. Regarding the restaurant platform, we're still in the early stages. We've implemented ready on arrival, which has led to faster service and improved customer satisfaction while simplifying tasks for our crew. We're beginning to see the advantages of this system. We're also exploring more advanced concepts, such as automated order taking and utilizing the Internet of Things to alert shift managers when equipment needs servicing. Additionally, we're developing an AI-enabled capability for shift managers, known as Boost. These initiatives are still in their infancy, with rollout expected over the next few years. As these innovations come into play, I anticipate a synergistic effect that enhances the restaurant experience for customers and crew members alike while delivering cost savings and productivity for franchisees, facilitating further investments. On the corporate side, we've launched our finance and HR systems and established global business centers in India and Mexico. This will enhance our capabilities and speed up operations, ultimately leading to cost savings reflected in our G&A line as a percentage of system-wide sales. All these initiatives are progressing, with the consumer side being the most advanced. In the coming years, you can expect to see the benefits from the restaurant and corporate platforms emerge as well.

I'd like to add a couple of points to what Chris mentioned, just as reminders. In our investor event at the end of 2023, we discussed these being tech-enabled platforms. This signifies a shift from our historically decentralized business model, which has led us to become very disaggregated. The focus is on transitioning to common platforms and standard infrastructure that facilitate scaling innovation rapidly. We're beginning to realize the advantages of our size and scale, which allows us to leverage scale for greater efficiency. I want to reiterate that 2025, 2026, and early 2027 are expected to be significant investment years as we develop these platforms and capabilities. Beyond this investment phase, we anticipate seeing more benefits from efficiency, and we can elaborate on how these benefits will materialize at that time.

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

Actually, 2 quick clarifying questions. The first is, I think last quarter, you had said that the middle-income consumer was seeing declines similar to the low income. Does that persist? I'm just trying to understand if you're still seeing maybe a broader weakness. And then on the loyalty, maybe you can help reconcile the sort of going from 10.5x to 26x is more than doubling transactions. And yet, I suspect it looks like your transactions in the U.S. were down kind of low single digits. Maybe it's just the loyalty membership. Is it big enough yet? I know you combined it with $5 Meals and said that was 50% or maybe it's just the over-indexing to other lower-income consumers is offsetting that. But I wanted to sort of think about how loyalty because it's such a huge lift could drive going forward if you expand that loyalty program. So 2 questions there.

Sara, it's Chris. The middle-income segment has shown improvement in Q2 compared to Q1, moving to slightly positive numbers. Regarding loyalty, it simply isn't large enough yet. At the same time, we are experiencing significant declines among low-income consumers, which is important since we, along with the industry, have a strong focus on that demographic. This is why we are concentrating on increasing our 90-day active users; as we bring more consumers in, we expect to see benefits in frequency. Currently, about a quarter of our consumers in the U.S. are part of the loyalty program. In markets like China, where participation can reach around 90%, we anticipate significant advantages. Our goal is to achieve that, but for now, it's still early to realize the full benefits you are inquiring about.

Our next question is from John Ivankoe from JPMorgan.

The industry has been talking about weakness in the consumer base and lower-income consumer base really since at least the second half of 2023. So it's been quite some time. So I'm really hoping for some diagnostics, I guess, at this point in terms of why that's happening. If I were to take a step back and look at your compression of pricing versus grocery, year-on-year total employment, gas prices, some of the normal pressures that would be affecting quick service traffic, quite frankly, don't exist, I mean, at least from a macro perspective. So can you explain, I guess, what's happening in the U.S.? And is U.S. potentially a leading indicator for other major markets? Or might other major markets in some ways be a leading indicator for the U.S.?

Well, I think if I had an easy quick answer to that, I'd probably be working in the government because I think that is a big question for all of us to try to unpack. But I would just note a few things. With the low-income consumer, despite improvements in wage gains, real incomes are down. So real incomes are down with the low-income consumer; that absolutely is going to put pressure on visits into the QSR industry. The second thing is there is a lot of anxiety and unease with that low-income consumer. I think we could all speculate the reasons for that, probably tariffs and the impact that that might have, questions around employment situation. But it's clear from the data that there's also, beside real incomes being down, that sentiment is being is down. And the result of that is you're seeing people either skip occasions, so they're skipping a daypart like breakfast, or they're trading down either within our menu or they're trading down to eating at home. So those would be sort of my simple kind of read on what's going on. But I'd say that's as much conjecture as it is being able to point to specific things. It's a big question for the industry.

I believe the main takeaway from Chris' comments is that internationally, we are experiencing similar trends. One additional point we've mentioned before is that families are feeling pressure due to needing to support larger households. They are very price-conscious and facing similar pressures to what Chris mentioned. The notable difference internationally is that we face less competitive pressure, which allows us to stand out as the preferred choice. We are still succeeding due to our focus on value and affordability. However, we must continue our efforts to ensure we remain appealing to all consumers, including those with lower incomes.

Our next question is with Jon Tower from Citi.

Great. Maybe a clarification and then a question. First, on the G&A spend for the balance of the year, I think based on where it's trending year-to-date, it implies effectively a nice uptick in spend in the back half relative to system sales. So maybe you can clarify what's going on there. And then secondly, just curious, Chris, you hit on the idea that beverage is a fairly large opportunity. You're investing a lot of time and energy and testing it right now. Curious how you see that hitting on the menu going forward, assuming much of it runs through the test well. Is this something that's going to be core to that value platform, specifically that everyday either McValue platform or Meal Deal platform? Or do you see it kind of playing well across the premium and the everyday value platforms in the U.S.?

Jon, let me clarify the general and administrative expenses first, and then I'll allow Chris to address your question about beverages. The typical pattern for G&A spending tends to be heavier in the latter half of the year, especially in the fourth quarter. This often reflects the time required for many projects to achieve full momentum. As we've mentioned previously, we have significant activities related to transformation and various technology and digital initiatives. This spending pattern is what we expect for this year, which is common, but likely more concentrated in the second half than in previous years.

On beverages, I would just say, obviously, what we've talked about in the past is just the big opportunity that we see in beverages. It's a really large market opportunity. It's growing, and it's more profitable than food. So there's a lot of things to like, which is why us as well as, I think, a few of our competitors are also excited about this. What we learned through the CosMc's test that we've talked about previously is it's not nearly as complicated as we thought, because what we discovered is actually the consumer isn't looking to design the beverage from sort of a blank slate; they actually want to be given a recipe and then they just want to make adjustments around the edges on that. And so what we've got with our beverage test that we're doing now is we're bringing a much more expanded lineup of beverage offerings into the market to see what resonates with customers. I think on your question on value, certainly, there's always going to be parts of the beverage opportunity where we'll have on the value menu. As you've known from the past, coffee has been a great way for us to drive traffic. They've done $1 coffee in Canada for a long period of time. I imagine you're going to continue to see that there will be some beverages that continue to live on the value menu. But I think the bigger opportunity for us is you can actually get a lot of full margin products from these beverage offerings. And so that's what we're getting after. I think that's why we're excited in the franchisees because you're not going to have to discount all of these. Now there's actually, for us, a benefit because a lot of these are priced with some of our competitors, which gives us an area to come underneath that. But relative to what we do from a value menu standpoint, we're not going to have to go all the way to putting everything on the value menu.

Our next question is from Lauren Silberman of Deutsche Bank.

I wanted to follow up on the menu architecture. It seems like it's been a bit more difficult perhaps in recent years to get franchisees to coalesce around national price points given some of the differences in costs across markets and reading into some of your commentary regarding your current efforts on the core menu. I guess what can actually be done to solve some of those challenges? Is it more about adding items with entry-level price points like Snack Wraps, more national price points? Anything more you can share there would be helpful.

Certainly. There has been pricing pressure due to inflation in the U.S. and in IOM, which has affected the franchisee profit and loss statements, making it challenging to implement pricing to counter that. This situation has also disrupted existing value programs, prompting our efforts over the past 18 months to address these issues. There's a clear need for and benefits from having nationally advertised price points. We know that these price points drive significantly more incremental business than if each franchisee sets their own prices. For example, the $2.99 Snack Wrap has received franchisee endorsement to maintain that price for the year, showing good alignment on the importance of nationally advertised price points. However, wage rates across the U.S. vary significantly, so we need to navigate these differences with franchisees to find solutions that benefit everyone's financial performance. While it's challenging, we've proven we can come together on initiatives like the $5 Meal Deal and the $2.99 pricing. Achieving these goals requires ongoing discussions and collaboration with the franchisees.

Our next question is with Christine Cho from Goldman Sachs.

You've reiterated your plans to open 2,200 stores this year on track to growing stores around 4%. But are there any factors that you're closely watching that could impact the development pipeline for 2026 and beyond? Any shift in margin dynamics or store economics your franchisees are seeing that could change the demand for opening new stores?

Christine, let me respond to that. We are really confident about achieving our goal of 2,200 gross openings this year, supported by a strong and robust pipeline. We are currently accelerating our pace of development and aim to reach approximately 1,000 gross openings a year in our owned markets by 2027, as we committed at the end of 2023 to reaching 50,000 restaurants. Ultimately, our decisions are based on the returns we generate, and it's vital for us to ensure we start with a solid foundation. We closely monitor the performance of new locations in their first year, but we also consider the expected long-term returns. We continue to see positive starting points for new restaurants and returns that align with our expectations. Naturally, when we accelerate, there is a risk of quality slipping, and we are monitoring that closely. This all ties back to the thorough groundwork we laid before making our commitment at the Investor Day in 2023, where we analyzed the opportunities and identified promising areas for development. We will continue to keep an eye on quality while maintaining our confidence in meeting our outlined goals.

And the only thing I would add on that, when we were all together with our leadership, our market leadership in late June, we looked at pipelines for the next few years, and our pipelines are in really good shape. I feel very good about that. And I'd say when you're doing development, the first year or 2 is maybe a little bit more challenged because it takes a while to get the pipeline filled. But as we look now to the out years, we're in great shape on our pipeline.

Our next question is from Andrew Charles at TD Cowen.

Chris, with the upcoming specialty beverage test in the U.S., what are you monitoring for to decide if this is something you're looking to expand further? And if you could also just touch on the timeline, if this is something that is that you're finding to be successful, could you see the pilot expand into more stores beyond the initial 500 later in 2025?

Thanks for the question. We're focused on observing consumer reactions and the sales uptake for these products, as well as how they integrate with our existing menu. We need to gauge whether these items will serve as add-ons to our offerings. We're confident in the operational aspects of our current test, which we believe will be effective. Ultimately, this will help us assess the scale of the opportunity and decide how aggressively and quickly to pursue it. I don't envision a gradual increase from 500 to 1,000 restaurants; rather, we are considering when we can fully tap into the market potential.

Our next question is from Danilo Gargiulo from Bernstein.

I wanted to double-click on the comment that you were making earlier, Chris, on consumers being more discerning with their dollars, also in the breakfast daypart, perhaps consuming coffee at home a little bit more. So I'm wondering if you can share what is the breakfast mix today? And how does it compare versus the pre-COVID? And then the real question is, how are you strengthening your foundations in the daypart? And how much does that depend on your kind of results on the new beverage lineup versus strengthening the value for consumers?

Yes. Thanks for the question. Well, as you note, and I would agree the breakfast daypart is the most economically sensitive daypart because it's the easiest daypart for a stressed consumer to either skip breakfast or choose to eat breakfast at home. And we as well as the rest of the industry are seeing that the breakfast daypart is absolutely the weakest daypart in the day. So I think that's confirmation of the economic stress that we've talked about, the weakness overall in the industry in the breakfast daypart. That said, I think this is still an area for us where if you've got the right value programs in place, you can drive and get that consumer to come into your restaurant. And so the U.S. earlier in the year, as you know, started going back and advertising breakfast nationally, which is something that we haven't done for a period of time. There's also conversations around what more we might be able to do with breakfast value. So for us, breakfast is still a big part of the business. It's one that we think we have a right to win in, but it's one that right now is under pressure because of the economic issues that I've cited, and there's work underway to figure out what else we need to do to restimulate growth there.

Next question is from Jeff Bernstein over at Barclays.

Great. Chris, franchise sentiment seems like it's critical as they're key to so many of these initiatives. No doubt, I assume their health and volumes and profits are still industry-leading, but perhaps down year-over-year. So I'm just wondering, as you mentioned, you're working closely with them to improve the menu offering, the value of the core. How would you describe those discussions with franchisees especially around value in the U.S. and unit growth outside of the U.S.? It does seem like you're focused on accelerating those growth components and the partnership with franchisees is critical. So I'm just wondering how those relationships are going relative to past quarters or years?

Sure. The relationship with our franchisee partners is crucial because the execution in the restaurant drives the business. It's challenging to generalize with our 5,000 franchisees globally, as it often varies by country. However, the same concerns affecting consumers are echoed by our franchisees. The more anxious consumers are, the more our franchisees will feel that anxiety as well. Our franchisees are particularly experiencing notable cost inflation in Europe, with ongoing labor inflation in the U.S. This overall situation leads to some unease among franchisees. Regarding development, it really depends on the market. In regions where consumer visits are declining, it raises questions about the appropriate pace for development. Throughout this, McDonald's success has been tied to our focus on value and affordability. If we continue to excel in these areas through our brand and menu innovation, we will be able to gain market share and subsequently grow cash flow. That is the conversation we are having with franchisees — cash flow growth is achievable if we follow our strategies. In terms of unit development, we are focusing on areas with low penetration, so the impacts may not be as significant as some franchisees might fear. Currently, we have no issues finding franchisees willing to take on new restaurants globally, which indicates their confidence in our development plans.

Thanks, everyone, for joining us today. If you have any follow-up questions, please shoot me an e-mail, and then we can schedule a call for some time today or in the coming days. Again, thank you, and have a good day.

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