Earnings Call Transcript - MCD Q2 2023

Operator, Operator

Hello, and welcome to McDonald's Second 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.

Mike Cieplak, Investor Relations Officer

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 reenter the queue for any additional questions. Today's conference call is being webcast and is also being recorded for replay via our website. And now I’ll turn it over to Chris.

Chris Kempczinski, CEO

Thanks, Mike, and good morning. Last quarter, I talked about consistency, consistency in our numbers, consistency in the drivers of our business and consistency in the excitement across the system about the opportunities ahead. This quarter, the theme is, if I'm being honest, the theme was Grimace. Grimace has been everywhere the past few months, all over the news and more than 3 billion views on TikTok. Not bad for a 52nd birthday. This viral phenomenon is yet another proof point of the power of marketing at McDonald's today. Aside from Grimace, what really stood out about this past quarter was our continued consistency. In Q2, we delivered yet another quarter of strong performance, achieving global comparable sales of 11.7% with double-digit comparable sales across each of our segments. We're operating from a position of strength and continuing to gain share in most of our major markets despite headwinds and a challenging macro environment. The reason for this continued consistency is simple; our Accelerating the Arches playbook is working to help create a better customer experience. Renewed focus on the fundamentals, in part fueled by the reintroduction of the PACE program, has led to operational improvements and continued increases in customer satisfaction across most of our major markets. To further strengthen our foundation of running great restaurants, we recently created a Chief Restaurant Officer role in markets to keep our market teams focused on driving our strategic plan, execution and performance. Market CROs will also help ensure that innovative ideas generated in local restaurants can be leveraged in markets across the globe. Our success is fueling even greater ambitions. We're continuing to double down on our existing growth pillars while evolving our strategy through accelerating the organization to stay front-footed with an eye towards the future. As we've previously shared, accelerating the organization is an initiative to reimagine how we work to bring the full breadth of McDonald's skills and experiences together to come up with the best solutions that can be scaled. We're bringing this to life through One McDonald's Way, horizontal ways of working and digitizing the organization. While we're just beginning to change our ways of working, we're already seeing early benefits. I've often said that the next great solution will come from our markets and in our restaurants. As I recently visited markets like China, Italy and Germany, I continue to be inspired by the entrepreneurial spirit of our system and how market teams are embracing these principles even more consistently. Visiting China truly brought to life the power of a highly digitized economy and our potential for global growth moving forward. With about 90% of our business currently coming through digital channels in that market, it was remarkable to see how the market has forged digital relationships with customers. China is also making tremendous progress in running the restaurants more efficiently, all with the use of data and technology. This will provide great learnings for the rest of our system. Our Canadian team is implementing a rigorous initiative review process to relentlessly prioritize work to actively stop projects that are less important and focus on solving the most meaningful problems for our customers. Using a new framework, the team has already cut their number of key business projects in half. We intend to learn from and scale this process to other markets as well. Additionally, our UK and Ireland team recently traveled to Germany to learn best practices from the market's best burger rollout. This is a prime example of the agile scaling of solutions and horizontal ways of working. And finally, last November, we launched our largest globally unified marketing campaign ever, Wanna Go to McDonald's, to celebrate the FIFA Men's World Cup. We're thrilled to extend this award-winning brand platform with the FIFA Women's World Cup and write a new chapter in the story to meet this iconic cultural moment. This campaign will be brought to life in 28 markets through fully integrated social, digital streaming and content strategies that tap into local fan excitement. These are just a few examples of how a One McDonald's Way approach to common challenges will drive greater connectivity and efficiency worldwide. Key to enabling the company's scale solutions with speed and agility is the work of our new Global Business Services business unit, or GBS. GBS will unlock further efficiencies and capabilities of our people and resources. We will do this by developing digital tools for the organization, making data and insights more accessible across the system and growing our future talent pipeline. We'll continue to keep you updated on how our ongoing investment in this area will benefit the enterprise in the years to come. In addition to our accelerating the organization efforts, we're also focused on evolving our approach to capturing incremental customer visits. Central to that is restaurant development, also known as our fourth D. Our strong performance and strength of our brand has earned us the right to begin accelerating the pace of restaurant openings in our major markets over the next several years. While our primary focus is on opening traditional units, we are always testing and learning new ways to meet the needs of our customers. One example is the takeaway only restaurant in Fort Worth, Texas that opened in 2022. The restaurant site is considerably smaller than a traditional restaurant and as the way customers order and receive their food has changed dramatically over the past few years is geared toward customers based on their need state wherever they are. Another recent example of innovation I was able to see firsthand during my visit to China is the use of food lockers at busy locations with high in-store traffic. Upon arrival, delivery couriers can quickly unlock the designated locker and grab the customer's order without even entering the restaurant, removing friction for both the kitchen and the courier. And our new business ventures team is in the process of developing a new concept we will call CosMc's, which we will test in a small handful of sites in a limited geography beginning early next year. CosMc's is a small format concept with all the DNA of McDonald's but its own unique personality. We look forward to providing you with more information about our development plans and new format innovations at our Investor Day at the end of the year. Finally, before I hand it to Ian, I want to recognize our teams and business partners in France who have handled the unrest in the market with remarkable strength and grace. It has been extremely disruptive to the business on top of an already challenging operating environment. Thanks to everyone connected to McDonald's brands for your dedication and commitment to the business as well as your efforts to keep everyone safe during this volatile time. I'll now turn it over to Ian.

Ian Borden, CFO

Thanks, Chris, and good morning, everyone. As Chris mentioned, the second quarter was yet another demonstration of consistently strong performance, guided by our Accelerating the Arches strategy and fueled by our outstanding execution. We're delivering delicious feel-good moments to our customers in new and exciting ways by doubling down on our creative excellence and highlighting our core menu, all with the value and convenience our customers expect. Our performance speaks for itself and is a testament to the passion and dedication of our entire McDonald's system. With global comparable sales of 11.7% and consistent performance across our segments, it's clear that the McDonald's brand has never been stronger. In fact, the brand was at the center this quarter as we engaged with customers in authentic and culturally relevant ways with campaigns rooted in consumer insights. As Chris touched on a few minutes ago, we took the nostalgic experience of celebrating birthdays at McDonald's and repackaged it for a new generation with none other than Grimace at the center. It quickly became one of our most socially engaging campaigns of all time with millions of reactions on our social media posts, a true demonstration of how the power of our brand emerges in organic and creative ways in our fans. It contributed to the strong double-digit comparable sales growth for the quarter in the US. The passion for the brand was also evident in Italy with the launch of a truly unique creative platform. It celebrated the most loved and best-selling beef burger in the market by asking customers, 'What would you do for a crispy McBacon?' The answer came in the form of customers getting tattoos of their favorite McDonald's sandwich, driving brand affinity and elevating share gains. I've certainly seen a lot in my 30 years at McDonald's, but this was a new one for me. Truly remarkable. As I’ve mentioned before, our chicken equities remain at the core of our growth strategy. The UK celebrated the 40th anniversary of another fan favorite, the Chicken McNuggets, by offering limited-time sauces to reconnect with the Gen Z consumer. This was coupled with compelling media that showcased the fan truth that sharing your nuggets isn't guaranteed, even with your best friends. China also highlighted the Chicken McNuggets anniversary in a creative way with an integrated marketing campaign. Featuring our 20-piece nuggets, it quickly went viral on social media and generated significant positive buzz among consumers. Spicy McNuggets, one of our most popular line extensions, were offered across various markets this quarter, including Australia and Germany. It is yet another example of how we modernize our core menu, adapt it to meet changing customer taste profiles and scale these new ideas across the globe. Both markets achieved significant lifts to the McNuggets line as a result, and Spicy McNugget sales reached an all-time high in Australia. Our ambition on chicken includes further scaling emerging equities across markets. The McCrispy Chicken Sandwich, for example, has now scaled to over 10 of our largest markets, including Spain just this past quarter. The sandwich is already resonating with our customers, bringing attention to our chicken portfolio and driving significant chicken share gains. A recent addition to our portfolio of billion-dollar brands, the McCrispy continues to be an important catalyst of chicken growth for many of our markets. The UK, for example, has achieved market share leadership in chicken, a remarkable growth over the past few years with the launch of both the McCrispy and the McSpicy Chicken sandwiches. We look forward to further scaling these new global favorites to customers around the world. A challenging macro environment including rising interest rates and elevated costs continues to create volatile consumer confidence levels and put pressure on consumer spending. Providing customers with an affordable option has always been core to McDonald's. But in these challenging times, it is even more important for us to remain agile, proactively meeting the needs of our customers. Germany continued the success of its McSmart menu. Initially introduced last quarter to provide entry-level affordable meals, it's contributed to our best sales quarter ever in the market and lifted value perceptions with consumers. The UK unveiled a similar offering with its new Saver Meal deals in June, and the early results are encouraging. A permanent addition to the menu, it aims to provide consistent everyday affordability and ensure customers can still enjoy their favorite treats like the Double Cheeseburger despite the rising cost environment. Maintaining our leadership position in value is crucial to future success, and McDonald's holds the number one position in good value for money and affordability across most of our major markets. This shows that even in the most challenging of environments, our customers know that they can rely on McDonald's to provide an affordable destination for the food that they love. But we know that customers’ perceptions on value are made up of more than just the price of our food. It's also about the experience that we provide. We've continued to enhance the customer experience, providing the seamless and memorable interactions our customers have come to expect. Last quarter, we introduced an enhanced ordering process through our app in the US with the goal of delivering a faster and more enjoyable experience for the customer. While we're still learning from this deployment, early results have been extremely positive with elevated sales initiated through the app, increased customer satisfaction, and improved service times. Canada also introduced new experiences in the app with the launch of the Frequent Fryer program. Tapping into Canadians’ passion for travel, the digital campaign celebrated McDonald's fries and the opportunity to taste them in other countries. This creative approach to re-engage with our loyalty members resulted in lifts to both digital acquisition and digital customer frequency during the campaign. Now in over 50 markets across the globe, we're continuing to build stronger relationships with our loyalty customers and fueling growth of our digital sales in the process. In our top six markets, digital sales represent nearly 40% of system-wide sales and our loyalty members remain highly engaged with over 52 million 90-day active members across our top six markets. As our relationships with these customers continue to grow, we will unlock additional customer needs and explore investments for continued digital innovation at a scale that only McDonald's can achieve. Strong execution across all elements of Accelerating the Arches is creating additional customer demand and share gains across most of our major markets. But we recognize that we're operating in a challenging macro environment where costs remain elevated, customer discretionary spending is limited, and industry traffic is pressured. In line with industry trends and as inflation begins to normalize later in the year, we expect top line growth to moderate. Turning to the P&L. Our strong top line performance across each of our segments drove adjusted earnings per share of $3.17 for the quarter, an increase over the prior year of 25% in constant currencies, excluding other charges and gains in both periods, as well as a prior year tax settlement. Our company-operated margin performance for the first half of 2023 is in line with our expectations and remains hampered by continued cost pressures. As we look to the remainder of the year, we expect macro headwinds will continue. Total restaurant margin dollars grew by nearly $450 million in constant currencies or nearly 14% for the quarter. Strong franchise sales performance continues to be offset by targeted and temporary franchisee assistance provided mainly to our European franchisees where elevated costs continue to pressure restaurant cash flows. We're still anticipating that these efforts will have an impact of $100 million to $150 million for the year. G&A for the quarter decreased 6% in constant currency, primarily driven by prior year costs incurred for our worldwide convention last April and timing of anticipated current year spend. We are pleased with our strong adjusted operating margin of just over 47% for the first half of the year. This was driven by the continued strong top line growth that I mentioned and timing within our G&A spend. For the full year, we now expect adjusted operating margin to be about 46%, reflecting heavier G&A spend in the back half of the year, along with an expected property gain in other operating income in quarter four. And our adjusted effective tax rate was just over 18% for the quarter. And with that, let me turn it back over to Chris.

Chris Kempczinski, CEO

Thanks, Ian. As I've said before, McDonald's Corporation is in the business of selling a brand. Our investments through Accelerating the Arches to create cultural conversations and develop industry-leading innovations have increased the value of our brand and kept us relevant. In June, McDonald's earned an impressive 18 lions across 10 markets at the Cannes Lions International Festival of Creativity. Additionally, our team in the UK and Ireland was awarded the prestigious Marketing Society's Grand Prix, which recognizes the best marketer in the country. The McDonald's brand also rose to the number five spot in the 2023 Kantar BrandZ Top 100 Most Valuable Global Brands report, behind only the leading tech industry brands. As we've upped our marketing game, it's also been interesting to see how our food quality scores with customers have continued to increase. The more customers love our brand, the more they love our food. Beyond the great brand stories created by our marketing teams and agency partners are the thousands of franchisees around the world who create real-life brand stories every day in the restaurants with our customers. Our franchisees and crew bring the McDonald's brand to life with great hospitality, convenience, and service. The best brand in the industry backed by the best franchisees has been our value creation formula for decades. We're always looking ahead to what is next and asking ourselves, how do we continue to create the world’s greatest franchising opportunity for the world’s greatest franchisees for generations to come? This requires making decisions for the long term to earn our success rather than expecting it or assuming it. Our Accelerating the Arches strategy is focused on just that, setting up the company and our franchisees to continue to prosper. Laying the foundation for the future also involves strongly defending the franchise system and independent ownership rights, a position echoed by the National Franchise Leadership Alliance, the elected representative voice of McDonald's franchise organizations across the US. I'm confident that the system is focused on the right priorities and is well positioned to meet the customer needs of tomorrow. Thank you to the over 2 million talented people working in our restaurants, our thousands of franchisees, and our entire network of suppliers around the world who bring the McDonald's experience to life each day. I'll now turn it over to Mike for Q&A.

Operator, Operator

Thank you to the over 2 million talented people working in our restaurants, our thousands of franchisees, and our entire network of suppliers around the world who bring the McDonald's experience to life each day. I'll now turn it over to Mike for Q&A.

Mike Cieplak, Investor Relations Officer

Our first question is from Eric Gonzalez with KeyBanc.

Eric Gonzalez, Analyst

My question is about your expectations for the US consumer. I think last quarter, there was some discussion about your base case that the US would expect a mild recession. And I think you called out that you're starting to see some evidence of trade down in your check management at that time. So I'm wondering, has there been any change in your current thinking and whether those consumer behaviors have intensified or moderated in the last quarter?

Chris Kempczinski, CEO

I'd say, overall, there hasn't been dramatic change in the US consumer. Sentiment is actually improving a little bit, but we're still far off of where we were back in 2019. As we look at our spend by different economic cohorts, we are gaining share in the segment of incomes under $100,000. We're actually doing quite well there, which suggests that we're getting some benefit from trade down from full-service dining and casual dining, etc. Even if you go to incomes of $45,000 and less, our business is performing well there. What we're seeing with that group is we are seeing a little bit of a decrease in order size, but it's being offset by a continued strength in traffic. So I think, net-net, when you look at all of it, there is certainly concern with the US consumer that shows up in their sentiment. But our business, and particularly I think our value positioning in the market, has put us into a good position to be able to weather that and continue to drive the share gains that you're seeing.

Ian Borden, CFO

I just might add a little bit to Chris' comments. I think we've talked, if I just focus on the US over the last couple of quarters, about these two broad areas of consumer adjustment that we've seen. I would say the first one is we are seeing some consumers that are trading down from those more premium items in the menu to more core and value. And then I think as Chris said, we have consumers that continue to visit but probably are just buying a little less. So their basket sizes are a little bit smaller than what they've been previously. I think the context is that those two factors have been really consistent. So we're not seeing any further deterioration, which is encouraging. And as Chris touched on, I think, speaks to our leading value for money and affordable positioning in the US business, which we know is industry-leading and where we've maintained a really strong gap to the competitive set. I mean, the consumer still remains under pressure, obviously, with the macro context and all of the inflationary impacts they’re seeing on their basket of goods and the rising interest rates. But we had positive traffic growth in the quarter in the US business, continuing to outperform the broader sector. As Chris touched on in his opening remarks, we continue to focus on the experience, and we know based on the feedback from customers that we're delivering an improved experience. I think that’s a credit to the US business and our franchisees.

Mike Cieplak, Investor Relations Officer

Our next question is from David Tarantino with Baird.

David Tarantino, Analyst

Ian, I wanted to follow up on your comments about sales moderating as the year goes on, which is understandable given the starting point here. But specifically, I was hoping you could perhaps break down the guest count growth versus the check growth in the US and if you have it in IOM as well for the second quarter. And then how do you expect the check growth component to moderate as the inflation environment gets a little more moderate?

Ian Borden, CFO

Well, look, I think to give you the broad brush factors to consider when we talk to our expectation of a moderation in our top line as we work through the back half of the year. I think there are three factors I would call out. Firstly, we believe that the substantive COVID tailwinds are fully behind us as we move into the back half of the year. The second piece is that we certainly are seeing inflation start to gradually come down, which has been the case in the US business probably starting at the end of last year. It’s obviously still elevated, but we are seeing that gradual decline. In our international markets, we expect to start seeing a decline as well as we head into the back half of the year. As inflation begins to come down, I would expect our pricing levels to also start to come down. The third factor is, as Chris mentioned, a number of our top markets have challenging macroeconomic conditions. We know there continues to be pressure on consumers and that consumer sentiment is impacted. We expect the broader sector to decline as we go through the back half of the year. If I spoke specifically to the US, I think we're looking at kind of one-year comparability but also comparing back to 2019, and I think that moderation will be more pronounced in the back half than in the front half. But if you look at the quarter two results, we had positive traffic across each of the three operating segments. We are laser-focused on what we feel is the most important metric: that we are continuing to gain market share in the majority of our top markets. We feel really confident about how our Accelerating the Arches strategy resonates across all markets we operate in and the strength of our underlying momentum.

Mike Cieplak, Investor Relations Officer

Our next question is from Jeff Bernstein with Barclays.

Jeff Bernstein, Analyst

Just looking at the guidance that you provided. I think you mentioned that operating margins are now expecting at 46% for this full year, seemingly raised from the 45% prior. Just wondering if you can perhaps offer some color as to what you believe are the primary drivers of that? And how should we think about that operating margin looking out one, two, or three years? Is it reasonable to assume that continues to grind higher, or is there a certain level you would expect that to top out?

Ian Borden, CFO

Well, let me start with that one. So let me start with 2023. As you touched on, we started the year with an operating margin guidance of about 45%. We've updated that to say about 46%. We’re pleased with our performance in the first half of the year where we were about 47% from an operational margin standpoint. This connects to what we've talked about, which is we believe that over time, as we continue to drive top line growth, we can gain leverage in our operating margin line. I think we saw that in the first half. As we head into the second half, there are a couple of factors that are specific to the full-year guidance. Firstly, inflationary pressures and margin pressures will continue. I mentioned earlier that we expect our G&A spend for the year to be more back half weighted. Also, we expect a one-time property gain in the fourth quarter, which is included in the guidance. Looking forward, we believe that as we continue to drive that top line growth, we can gain leverage in the operating margin line, and I think it's something we'll discuss further at the Analyst Day at the end of the year.

Mike Cieplak, Investor Relations Officer

Our next question is from David Palmer with Evercore.

David Palmer, Analyst

I would love to hear more detail about the IOM trends and insights from those countries. Where are you seeing relative strength and weakness, and what do you ascribe those trends to? I ask partly because we're still dealing with post-COVID dynamics in some of those markets that are perhaps greater than the US with some back to travel and back to work in center cities. But I'd also be interested to hear about macro headwinds you're seeing in the business. You mentioned the value menu launches in Germany and UK, so wondering if you are doing those as proactive launches or perhaps reactionary?

Chris Kempczinski, CEO

Overall, our IOM business put up very strong performance, and it’s a credit to the team and how they're executing against that. Our IOM, particularly our European markets, are facing even more significant inflationary pressures, UK in particular, than in the US. The teams there have done a really nice job of putting in the pricing they need to ensure we're protecting margins – franchisee margins, but at the same time, maintaining affordability and value-for-money leadership in those markets. Our measures continue to hold up well. Each country has a little bit of a different nuance. In France, the unrest I mentioned in my opening comments has challenged the business. We've had a number of restaurants affected by protests that we've had to take offline, and they will need to be rebuilt. There is pressure from a macro standpoint in France. The UK is experiencing arguably the worst consumer sentiment in Europe, which is putting pressure on the business too. Overall, our UK business is performing well. Each market has its own approach to value, but we’re seeing that being more of an orientation in those markets as we build our second half plan. We're very pleased with how our IOM, particularly our European markets, are performing. We continue to see growth on multiple fronts, including chicken growth and the benefits of digital, and with 52 million people in our top six markets now in our loyalty program, we see a steady increase in frequency among our loyalty members.

Mike Cieplak, Investor Relations Officer

Our next question is from John Ivankoe with JPMorgan.

John Ivankoe, Analyst

In the context of value, you discussed some success with the McSmart value menu and the Saver menu. I'm hearing a lot about global solutions. As we think about ways to drive traffic and sales at the expense of margins, does it make sense to consider the return of dollar-style menus in the US, Canada, France, Australia? Is a value menu part of what you see the big offerings to consumers to be? Is that something that is on the front burner?

Chris Kempczinski, CEO

I think the starting point is to emphasize that we're winning on value. The programs we have in place are working and delivering for us. It shows up not just in our overall performance, but also in driving both check and guest counts. It’s reflected in our consumer sentiment scores where we maintain leadership in affordability and value-for-money. So there's nothing broken from a value standpoint that you would need to change from my perspective. The value programs we have are driving success. The only thing teams might consider is emphasizing awareness of existing value programs when communicating in the back half of the year. We feel great about our current value programs, and I wouldn't expect changes from what we have.

Ian Borden, CFO

I’d like to build on that. What we feel good about in the business is how our teams continue to be proactive and agile amidst a volatile external environment. The examples in both the UK and Germany of what the teams introduced are great instances of learning from one another, maintaining consistency in value programs, while innovating them to be relevant in local settings. This is about staying close to consumers and addressing their needs as they navigate broader macroeconomic challenges. We believe this strategic element of our business resonates with consumers in a relevant way across individual markets.

Mike Cieplak, Investor Relations Officer

Our next question is from Brian Bittner with Oppenheimer.

Brian Bittner, Analyst

I wanted to ask about store-level margins. Clearly, your same-store sales were impressive this quarter, over 10% comps in the United States. But store-level margins in the US were still down about 70 bps year-over-year in the quarter. Can you talk more specifically about what is causing the drag on margins despite such strong top line? And as the top line potentially slows moving forward, as you talked about, is there a scenario where store-level margins can start to show improvements, or do you anticipate that store-level margins will feel more pressure for longer?

Ian Borden, CFO

I would start with the headline that the best way to drive sustainable margin improvement is to focus on driving strong momentum in the business. The US business is a good example. While we see pressure from food and paper inflation and labor inflation, the strength of our momentum in the US actually results in owner-operator cash flow being up year-over-year in a continued challenging environment. Our focus is on sustainable margin dollar cash flow growth for ourselves and our franchisees. From a percentage basis, you're right. There are pressures we're seeing, but we’re confident in our ability to drive both margin dollars and margin percentage growth over time as we continue to maintain that strong top line momentum.

Chris Kempczinski, CEO

As mentioned in my opening comments, I've talked to franchisees in several markets. They recognize the importance of maintaining leadership in value and affordability while also considering how to rebuild margins after the inflationary spike. Conversations revolve around exiting the year with strong margins while understanding short-term impacts. The perspective from our franchisees is commendable and shows in our overall performance, explaining why we’re gaining share in almost all our major markets.

Mike Cieplak, Investor Relations Officer

Our next question is from Dennis Geiger with UBS.

Dennis Geiger, Analyst

I wanted to ask just a bit more on how you're thinking about maintaining some of the underlying momentum and the share gains you've seen in the US. As you think about some of the key drivers in place across the three Ds, the operational execution, newer ready-on-arrival stuff, etc. Can you unpack how you think about the most impactful traffic and sales opportunities in the next year and in the years to come?

Chris Kempczinski, CEO

It all goes back to the strategy of Accelerating the Arches. When we laid out this strategy, we focused on great marketing, our core menu, and executing the three Ds, and now the four Ds. My confidence in the strength and resiliency of our business is that it’s broad-based, not reliant on one-off promotions or silver bullets. It’s backed by consistent execution across our entire strategy. We're continuing to see strength in brand scores due to improved marketing, and our brand has never been in a better place. Our focus on core menu is gaining share in both chicken and beef, which has numerous benefits. Digital is creating a virtuous loop, making business sustainable and with app downloads, we're way ahead of others in the industry. Positive changes in restaurant service times and improvement in customer satisfaction scores—thanks to the PACE program—are pivotal. Nothing is attributed to one thing; it’s our holistic execution. The fact that we have momentum is crucial and continues to contribute positively to our operations.

Mike Cieplak, Investor Relations Officer

Our next question is from Chris Carril at RBC.

Chris Carril, Analyst

Chris, I know you touched on this in your prepared remarks, but could you expand a bit more on the development outlook as we think about the second half of this year as well as beyond 2023? You've seen strong top line momentum, improving margins, and you've made organizational changes to help support development. What are the key unlocks or next steps going forward to accelerate new restaurant openings?

Chris Kempczinski, CEO

We will share more details at the Analyst Day at the end of the year, so I won't dig into specifics. However, one key focus is looking at our opportunity with traditional restaurants. Over the years, our global focus has been primarily on reinvestment. We haven’t grown unit count in the US since 2014, and several of our large IOM markets have seen anemic growth compared to available opportunities. We’re taking a detailed look at what development opportunities exist in each market, using the US as an example. We’re also considering small format concepts that could open new real estate sites that weren’t accessible under traditional models. Growth in digital and delivery creates significant opportunities for us to look at sites previously considered off-limits. We're collecting all this information to project new unit potential for the years ahead. This won't yield benefits until 2024 or 2025 but may provide advantages in 2026 and beyond, and we hope to share more at Analyst Day.

Mike Cieplak, Investor Relations Officer

Our next question is from Andrew Charles with Cowen.

Andrew Charles, Analyst

I wanted to ask about the reiterated $100 million to $150 million of targeted and temporary rent relief in Europe. Recognizing the numerous macro challenges, the brand is certainly successfully navigating these with impressive top line strength in the first half of 2023. When combining this with better-than-expected IOM and McOpCo margins in Q2, could you help level set how much of that $100 million to $150 million has been spent? What do you need to see to reduce the outlook for relief?

Ian Borden, CFO

Providing support to our franchisees is a normal part of our operations. The difference this year has been the pacing, scale, and breadth of the pressures, particularly in Europe. We decided to provide some more extensive support at the end of last year, always targeted and temporary based on facts and needs. We reiterated our expectation of spending between $100 million to $150 million for the year, and there’s been no difference in our expectations. The momentum we’re seeing in IOM is connected to this as it keeps our system aligned and focused on growth opportunities. This strategy is a key reason why we continue to outperform even in difficult macroeconomic conditions.

Chris Kempczinski, CEO

Speaking from my visits in several markets, franchisees have expressed gratitude for our support, stating it has helped them focus on long-term strategies rather than just pricing challenges. When we make decisions for the long term, the benefits often prove to be the right approach. I feel confident about the program we have, and it fits our temporary and targeted mandate.

Mike Cieplak, Investor Relations Officer

Our next question is from Sara Senatore with BofA.

Sara Senatore, Analyst

A couple of questions around the margins, please. First, on the G&A, could you talk about the spending in the back half? You seem to come in below the guidance. Just trying to understand what the step-up might be and how to think about that G&A as a percentage of system sales in the future. Could you also provide color on pricing and commodity basket inflation for US and IOM markets, particularly how much price is on the menu?

Ian Borden, CFO

I think our normal cycle of spend is more back-half weighted. This year, that's more pronounced. We're investing heavily in technology and digital, aiming to drive growth and return. Our digital and technology investments are opportunities for us moving forward. We're also focused on our global business services organization, which seeks to drive efficiencies. We expect G&A to be in the 2.2% to 2.3% of sales range, and I believe we'll be closer to the higher end of that. On pricing, it varies by market, but in the second quarter, we were at a low double-digit pricing level. As we move through the year, I anticipate we’ll remain in that low double-digit pricing range. Much of the pricing was carryover from 2022. We’ve also seen consistent trade-down behavior that reflects on our traffic growth in the US and how well our value-perception remains.

Mike Cieplak, Investor Relations Officer

We're at the bottom of the hour. That completes our call. Thank you, Chris. Thanks, Ian. Thanks, everyone, for joining. Have a great day.

Operator, Operator

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