Earnings Call Transcript - MCD Q3 2022

Operator, Operator

Hello, and welcome to the McDonald's Third Quarter 2022 Investor Conference Call. At the request of McDonald's Corporation, this conference is being recorded. Following today’s presentation, there will be a question-and-answer session for investors.

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 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 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. I'm proud to report that our Q3 performance demonstrated our broad-based business momentum against an evolving macroeconomic backdrop. McDonald's unmatched scale and operational resilience powered by our three-legged stool has enabled us to deliver strong results this quarter. Global comp sales were up nearly 10%, and most of our major markets are growing share, which gives us confidence that we are operating from a position of strength even during difficult times. As the macroeconomic landscape continues to evolve and uncertainties persist, we continue to consider a wider range of scenarios as we look ahead. As I've said before, our base case scenario going forward is that we expect to experience a mild to moderate recession in the U.S., and one that will be potentially a little deeper and longer in Europe. That said, we operate in more than 100 countries around the world in varying economic environments. This has provided our team valuable experience as McDonald's has proven to be successful in just about any business environment. I remain confident in our Accelerating the Arches strategy, as our teams around the world continue to execute at a high level. Thanks to the resilience of the system and our continued investments at scale, we're laser-focused on meeting the changing needs of our customers. Before we get into those details, I want to introduce Ian Borden, on his first earnings call as our Chief Financial Officer. Ian brings a wealth of experience to this role, having spent the past several years as a member of our global senior leadership team. He first joined our system in Canada in 1994 and from there went on a bit of a McDonald's World Tour. Over the past 30 years, he has served as CFO for the Asia-Pac, Middle East and Africa region and CFO for Russia and Eastern Europe. He's also held several leadership roles across our markets and regions, most recently as President of McDonald's International. I'm thrilled for Ian to be stepping into this new role, and I'll now turn it over to him to share more on our Q3 results.

Ian Borden, CFO

Thanks, Chris, and great to be with everyone this morning for my first earnings call. So let me start with a few headlines on our overall performance. Our global comp sales of 9.5% for the quarter are a testament to the continued resilience of our business. It goes without saying that we are seeing global macroeconomic challenges that haven't been experienced in many years. Inflationary pressures and related interest rate increases taken by central banks are combining to put significant pressure on the consumer and our industry. Despite the challenging backdrop, our system's focus on accelerating the arches I believe gives me confidence in our ability to navigate these challenges. The power of our strategy is brought to life through our actions against our M, C, and D framework, working together with the customer at the center. In the third quarter, we remained focused on delivering delicious and affordable food with the convenience McDonald's is known for, which is now more important than ever for our customers. This continued to drive our market leadership and strong underlying sales growth across all segments of our business. In our international operated markets, comp sales grew 8.5% for the quarter with positive comps across all markets. This demonstrates the underlying strength of the IOM segment, where we continue to gain market share. In France, we're operating from a position of market share strength, particularly with families as French consumers have resumed more normal routines. We continue to grow loyalty in the market with a record mix of our transactions coming through our mobile app. By utilizing global mobile app offers in combination with traditional value offerings, Germany further highlighted our affordability and accelerated loyalty adoption at the same time. This drove strong growth in digital sales, which now represent more than 50% of system-wide sales in the market. Australia showcased our beef equities with the winter together and Loving It campaign, tapping into the role McDonald's plays in making everyday moments special. The campaign featured both the Angus and Quarter Pounder sandwiches and resulted in a meaningful lift in beef sales. With the UK launch of My McDonald's rewards in July, we now have loyalty programs in place across all of our top-six global markets. The UK built on the successful rollout, driving additional adoption with exclusive app offers throughout the quarter. During the monopoly promotion in September, the team developed an innovative incentive that allowed customers to virtually peel their game board pieces right in the app. The focus on driving digital engagement paid off as our active loyalty members grew to over 3 million in just the first three months. While the expiration of VAT benefits impacted our quarterly comp sales in the market, we continued to grow our QSR market share. Although our business performance has remained resilient, as I mentioned earlier, we recognize that this is a challenging environment. The inflationary impact on costs is putting pressure on restaurant cash flows for our franchisees, particularly in our European markets. Similar to actions that we took during COVID, our financial strength puts us in a position to be there for franchisees that may need temporary and targeted support to ensure our system is financially healthy and aligned on continuing to drive growth. Moving to the U.S., the efforts and investments by our franchisees, employees, restaurant teams, and suppliers over the last several years are paying off. The modernization of our state, combined with strong discipline and execution across our core menu and backed by award-winning marketing, is connecting with customers and driving results. In the U.S., third quarter comp sales were up more than 6%, marking our ninth consecutive quarter of growth and achieving positive comp sales in 22 of the last 23 quarters. Higher average checks supported by strategic price increases and positive guest counts contributed to performance. Loyalty remained a significant growth driver for the quarter, in part fueled by the Camp McDonald's promotion. A year after the launch of My McDonald's rewards in the U.S., we continue to increase digital customer frequency quarter after quarter of the customers that have engaged with the app over the last year; about two-thirds have been active in the last 90 days. Turning to the international developmental license markets, comp sales were up nearly 17% for the quarter, with strong sales growth across all geographies in the segment. Japan delivered strong growth at the dinner day part with popular returning limited-time offerings across both chicken and beef. We also highlighted our off-premise channels, further elevating customer convenience, with an emphasis on delivery. It continues to be a challenging operating environment in China. With ongoing COVID resurgences and government restrictions, consumer confidence remains low. While comps for the quarter were slightly negative, the market continued to grow share, leaning into the strength of our delivery and digital business with the team on track to open about 800 restaurants this year, an all-time high. And now let me turn it back over to Chris.

Chris Kempczinski, CEO

Thank you, Ian. Over the last few months, I've visited markets around the world hearing from employees, franchisees, and restaurant teams about how the challenges we face globally impact our restaurants locally. Three themes came through loud and clear. There is increasing uncertainty and unease about the economic environment, the resilience of the McFamily alongside our scale, and efforts to build a more connected and convenient McDonald's set us apart. Our franchisees remain confident that we have the right business plans to work together and drive growth as a system. We see this in real time. Even as UK customers grapple with cost of living and energy impacts, our customers are coming back to McDonald's because of the value we offer. And in Germany, as customers deal with the highest inflation on record, our teams continue to focus on branded affordability. No matter the issues our customers face, we are dedicated to meeting their needs. As I said before, when we look after our customers, the business will look after itself, and I'm proud that our business can be there to provide a warm space and a hot meal for families when they need it most. Accelerating the Arches is our playbook that is guiding our business and driving growth. By focusing on executing our strategy, I am confident that McDonald's will continue to show up for our customers across our M, C, and Ds. Our foresight to double down on digital and delivery to execute culturally relevant marketing campaigns across the world to highlight our core menu capabilities and to invest in our asset base is really paying off. Our size, scale, and financial results put us in an advantaged position as we head into more volatile times, and we will lean into the strengths of the system. Digital is a primary driver to improve the customer experience, reduce complexity, and drive profitability. In our top six markets, it now represents over one-third of system-wide sales, fueled by over 43 million active customers on our app in the third quarter. In the U.S., our digital business is powered by over 25 million active customers driven through My McDonald's rewards. Our loyalty program is driving growth and exceeding expectations. Delivery also remains a key driver of our business. To enhance convenience, we're integrating a new feature where customers can earn loyalty points while ordering and paying for delivery within the McDonald's app. The streamlined and more rewarding experience is available to customers in the UK and is currently being rolled out in the U.S. Further implementation of this solution will only enhance our strong performance as the third quarter was one of our highest delivery sales quarters ever in the U.S. Each reward a customer redeems and each preference customers share on our app helps power our personal touch. We are using this deeper understanding of our customers to create relevant content and offers through the channels they prefer. By tailoring messages, our customers feel more connected to McDonald's, ultimately driving engagement and increasing frequency. It also gives us more ways to reunite with customers who haven't visited in a while. Our markets are also using digital to drive engagement with our fans through exclusive activations. In Australia, the success of their digitally exclusive monopoly program speaks to the endurance of our marketing platforms and our ability to adapt existing equities to meet our customers where they are. The team incorporated loyalty into the Monopoly promotion in order to make it even more rewarding for consumers, and the promotion drove significant incremental sales for the market. Marketing has been an important growth driver for us. Our creative excellence is making our brand not just more recognizable, but more relevant to our fans. I can confidently say that the McDonald's marketing team is truly firing on all cylinders. Earlier this month, through collaboration with Cactus Plant Flea Market in the U.S., we tapped into one of the most nostalgic McDonald's experiences—enjoying a happy meal as a kid—and repackaged it to make it relevant for adult fans. This promotion re-engaged our fans with our core food, including Big Mac and Chicken McNuggets. It's fair to say that this sentimental experience was a success; 50% of our supply of collectibles was sold in the first four days of the promotion. These increased visits also drove the highest weekly digital transactions ever in the U.S. business, and we expect October comp sales in the U.S. to be in the low double digits. The heart of this marketing idea taps into emotional connections with our fans, adding the fun of collectibles with a relevant artist. All of these campaigns featured our core menu items and built upon our successful marketing platforms, which kept operations simple and brought our customers closer to the iconic menu items they love. Speaking of our food, as we come up with fresh spins on our classics, we're creating new craveable moments for a new generation of McDonald's fans. In Italy, we drove strong comps for the quarter as we highlighted simple yet compelling core menu items paired alongside great marketing with a Big Mac event featuring a Chicken Big Mac and a Bacon Big Mac. We're also focused on growing our business through chicken by leaning into the strength of core icons like Chicken McNuggets. At the same time, we are very confident in new global favorites like the McCrispy Chicken Sandwich, and we will look to bring a select number of these new equities to scale. Canada and Germany launched the McCrispy in Q3, and it launched in our most recent market, the UK, just last week. Australia recently promoted a spice event featuring Spiced McNuggets and the Spicy Chicken Sandwich. Spain promoted Mix Spice in July and is planning future spicy events to bring relevant taste and flavors to their customers. Chicken is a strong growth driver of comp sales in the quarter across our major markets and will remain a focus for us as we continue to grow our global market share in this important category. Our success wouldn't be possible without the incredible dedication of our restaurant teams that I saw in action and heard from directly during my travels. The people that bring the McDonald's experience to life in our restaurants are truly the face of our brand. That's the promise of a new advertising campaign for Best Burger in Belgium that highlights the individuals making our delicious food versus just the juicy burgers themselves. The people in our restaurants are truly our secret sauce and the ingredient we are most proud of. Thanks to the resilience of the system and our continued investment at scale in the M, C, and Ds, we're staying relevant to our customers as their needs continue to change. Now I'll turn it back to Ian to finish walking through the financials.

Ian Borden, CFO

Thanks, Chris. Our strong performance during the third quarter resulted in earnings per share of $2.68. This reflects an adjusted increase of 4% in constant currencies after excluding the prior year gain for the partial divestiture of our ownership in McDonald's Japan. Company-operated margins remain pressured by significant commodity and wage inflation as well as elevated energy costs. We believe these pressures will continue to impact margins for the next several quarters. G&A costs increased about 7% in constant currencies for the quarter, driven by a combination of continued investment in growth-driving initiatives such as restaurant technology and inflationary pressures on costs. For the full year, we now expect G&A to be between 2.3% and 2.4% of system-wide sales. This is primarily due to the inflationary pressures I just mentioned and a stronger U.S. dollar having a greater impact on sales, which are predominantly outside of the U.S., whereas most of our G&A expense is U.S. dollar-based. However, despite these headwinds, our year-to-date adjusted operating margin percentage has grown and is now in the mid-40s. Our effective tax rate was 21.9% for the quarter. The strong U.S. dollar I just mentioned created a foreign currency headwind to third-quarter earnings per share of $0.19. Based on current exchange rates, we expect foreign exchange to impact fourth-quarter earnings per share by between $0.14 to $0.16, with the full year headwind totaling about $0.50. As always, this is directional guidance only, as rates will likely change as we move through the remainder of the year. Transitioning to capital expenditures, we now anticipate spending about $2 billion, an adjustment from our previous guidance due to foreign exchange rates and slightly lower spend. A few weeks ago, our Board of Directors approved a dividend increase of 10%, the company's 46th consecutive annual increase. As we've talked about today, the Accelerating the Arches plan is driving strong financial results and cash flow. As we continue to execute against this plan, we remain very confident in our ability to deliver sustained long-term profitability for our system, all of which is reflected in the recent dividend increase. Before I close and hand it back to Chris, I want to take the opportunity to personally congratulate Kevin on his successful tenure as McDonald's CFO. He's been a great partner to me as I've transitioned into this role, and I look forward to building on the strong foundations that he has put in place. It was a pleasure to meet many of you last month. As I mentioned then, I expect that you'll find a great deal of consistency between Kevin and myself, particularly when it comes to the financial priorities of our business. While the environment remains dynamic and challenging times may lie ahead, I remain incredibly confident in our strategy, our business momentum, and our system. I look forward to meeting and working with all of you. With that, let me turn it back over to Chris to close.

Chris Kempczinski, CEO

Thank you, Ian. Before we close and head into the Q&A portion, I wanted to take a moment to acknowledge that next week marks my third year as CEO of McDonald's. Therefore, my third year of discussions with many of you in this capacity. In some of our first conversations in late 2019, I highlighted three areas that I expected to focus on as CEO: the need to elevate our marketing with programs that are culturally relevant and accretive to our business, the need to develop a digital strategy to drive frequency, retention, and engagement at scale, and the need to ensure that McDonald's attracts and retains the best talent in the world. You saw much of this come to life in our Accelerating the Arches growth strategy, which provided a road map to focus the system across our M, C, and Ds. Since our conversations first began and in the many we've had over the last three years, I'm proud of what McDonald's has accomplished on these fronts, all while navigating an increasingly complicated world. Our investments in digital are keeping us relevant to customers and creating business momentum. In addition to what Ian assured, I'll just emphasize that delivery is now in over 100 countries, and our loyalty program is in over 50 markets around the world, driving growth and exceeding expectations. Our marketing programs have enabled us to recapture the imagination of our customers, bringing new joy and excitement to their interactions with our brand. With fresh approaches, we are staying relevant to the fans we serve across generations who are driving meaningful contributions to our business. When you look at the leadership team at global segment and market levels, I am proud to have welcomed and promoted leaders who infuse new energy, new perspective, deep values, and strong capabilities to the McDonald's system. Looking forward, my focus and responsibility is to ensure that McDonald's uses its position of strength that we find ourselves in today to create even more value for our stakeholders. We will do this by continuing to work collaboratively and effectively in a world that is only moving faster. We will do this by building on our inherent strengths, harnessing our competitive advantages, and investing in innovation that allows us to deliver on our brand promise to consumers. And we will do this by collectively focusing on solving the needs of our customers. That is ultimately how we will ensure that we are unleashing the full potential of McDonald's to those we serve. I'd like to extend a heartfelt thanks to the McDonald's system for these collective successes and everything that we will continue to deliver in the future, and thanks to all of you for the discussions we've had up to this point. Now we'll begin Q&A.

Operator, Operator

Thank you.

Mike Cieplak, Investor Relations Officer

Our first question is from John Glass with Morgan Stanley.

John Glass, Analyst

Thank you, and good morning. Can you hear me okay?

Chris Kempczinski, CEO

Yeah, we can hear you, John. Thanks.

John Glass, Analyst

Great. Good morning. I was curious about the international operational markets and your comments about the economic pressures there. Have you seen evidence of trade down? It wouldn't seem such given same-store sales, but maybe underneath that, is there evidence of consumer strain and maybe it's trade down or what have you? And can you also talk about or update your inflationary expectations for that market? I thought the margins were strong, but you also talked about the need to support franchisees given their cash flow situation. So maybe just an update on where you think inflation in the back half or fourth quarter and early next year leads you to in IOMs.

Chris Kempczinski, CEO

John, it's Chris. So if you focus on our IOM markets, right now, broadly, we are not seeing significant trade down happening in our menu. I think we do believe we're benefiting from trade down that happens as perhaps people coming out of other parts of IOM into QSR. So we do think that we're perhaps seeing some of that benefit. But within our own business in IOM, we're not seeing significant evidence of trade down there. As far as how we're thinking about the market, it's mostly showing up just in sentiment where we're seeing consumer sentiment in Europe remains low. Obviously, a lot of that is driven by the inflation that they're seeing, cost of living increases related to both food but also energy. And so that's what is weighing on our mind. You've seen also the Central Banks in Europe; today, I think this morning, the ECB raised interest rates another 75 basis points. So all of that is factoring into what we think is going to be a challenging environment in Europe. But it's certainly, as we mentioned in our comments, putting some pressure on the P&Ls of our franchisees.

Ian Borden, CFO

Yeah. Thanks, Chris. So maybe just a little bit of a build on what Chris has talked about. I mean, certainly in Europe, we're seeing higher levels of inflation. I think you've heard us talk about that before, in food and paper and also in energy prices, which obviously are impacted, particularly in Europe, knowing that some of the European markets are quite dependent on Russia as an energy source and have had to obviously look for alternative supply. So I think you've got the combination of those pressures hitting some of our European markets. What I would say about Europe is it's a wider range of scenarios because the context is not consistent. There are differences across the European markets that we do business in. I think if I took a step back, though, I just go to the IOM an 8.5% comp in quarter three. I think as Chris talked about, we continue to see strong, broad-based, and consistent momentum across the business. I think we've got some inherent strengths in Europe, as I'm sure you've heard us talk about previously, which is the fact that we've got a modernized asset base. We've done a lot of work, I think, on marketing and around our MCD framework. There is less competitive activity across a number of our European markets. Our business and our brand are in a position of strength. I certainly think that's a strong tailwind for us as we head into this more volatile period that Chris referred to.

Mike Cieplak, Investor Relations Officer

Our next question is from Dennis Geiger with UBS.

Dennis Geiger, Analyst

Great. Thanks for the question. And I wanted to just ask a similar question as it relates to the U.S. If anything different from a behavior perspective and I guess more with your customer. And I guess, more importantly, given you've got positive guest counts in the U.S., maybe one of the only brands seeing that right now and the strength that you've seen over the last few quarters last years. Is there anything more you can say about the customer now? Has the customer evolved at all, Chris, under your tenure? Anything more that you can about that customer, how it may have changed? And what that means going forward? Thank you.

Chris Kempczinski, CEO

Sure. Well, I think the biggest thing that's changed over the last several years with the customer is just this focus on the kind of takeaway part of the business. And that shows up whether it's in delivery and the significant growth that we've seen in delivery. Digital has been a key enabler in that. And so for us, I think that's been the biggest thing that we've seen. Certainly, we still have a dine-in business, but it is less pronounced than it was pre-COVID, and we're certainly expecting that that's going to sustain in terms of just this focus on drive-thru and what we're describing as the 3Ds. So I think that's been one broad-based change that we've seen. Because of the environment that we're in right now and the investments that we've made previously, we feel good about sort of what is the McDonald's value proposition. It shows up when we look at consumer scores around value for money, affordability; we see in the U.S. that we continue to lead in this, and it's allowed us to push through some of this pricing. The strength of the brand and the proposition, as evidenced by the results, seems to be leading consumers to tolerate it. Because of, again, all the other things that we've done to just strengthen our offering, the brand proposition, et cetera, we are confident that, yes, we're going to continue to have inflation into 2023, both food and paper as well as labor, but we like our position relative to competitors in terms of where we stand.

Mike Cieplak, Investor Relations Officer

Our next question is from Eric Gonzalez with KeyBanc.

Eric Gonzalez, Analyst

My question is on the U.S. business. You're clearly gaining share and executing in what is certainly not the easiest macro environment. So just wondering if you could isolate maybe the one or two things that you're doing better than your peers and discuss why you believe that. Is it staffing, your ability to hire and retain talent? Is this about real estate, perhaps speed of service, or maybe any other factors that you think have contributed to your relative performance gap versus peers?

Chris Kempczinski, CEO

Yeah. I'm going to maybe take you back to where we were several years ago in the U.S., where we talked and we were in a different time and performance was in a little different place. We talked about needing to do a number of things to improve our relative position. We talked about needing to invest in our asset base. As you know, we've cumulatively invested about $9 billion over the last five or six years between us and the franchisees in updating our asset base in the U.S. We talked about improving the quality of our food and improving our operations, which we've done, where speed of service is faster today than it was in 2019. We've been able to do that despite a more challenging labor environment. We also talked about the brand and digital. So for us, at least the way I look at it, and I think the U.S. team would look at it, it's not any one thing that is the answer. It's the fact that we've been able to move over a number of years on a number of these things that give us the momentum that the team is driving right now. Of course, I want to acknowledge also just the great partnership we're getting from our franchisees and from our suppliers in the U.S. because it's certainly a team effort.

Mike Cieplak, Investor Relations Officer

Our next question is from David Tarantino with Baird.

David Tarantino, Analyst

Hi. I have a question about Europe. I think you referenced that you may need to provide support to some of your franchisees, and I was hoping that perhaps you could elaborate on what you mean by that and how extensive that support might need to be in the current environment, just to kind of frame up, I guess, the health of the system in general? Thanks.

Ian Borden, CFO

Good morning, David, it's Ian. So thanks for the question. Look, I think what I would start with is part of our strategic advantage as a system is our scale and financial strength. As you heard me talk to in my remarks and Chris alluded to earlier, our franchisees in Europe are seeing elevated inflation, particularly obviously in food and paper and energy prices. Energy prices, as an example, in some of our European markets would be up two to three times from what they were 12 months ago. When you put the combination of all those impacts together, there's a fair bit of headwind in some of our European markets on our franchisee cash flow. So we're using our financial strength to provide support to certain franchisees who may need it in a targeted and temporary way. We think of that obviously to keep our system financially healthy but also to keep the system aligned and focused on the things that are going to drive growth and investing behind those initiatives. Certainly, we think of that as a strategic advantage. You may remember back during the COVID period, we made some decisions around providing temporary and targeted support. I can tell you, just from my old role leading our international business, those were critically important strategic decisions that were key in the acceleration and momentum that our system had as we came out of that COVID period. We have the capability to do that, and if we need to do that, we think that is a strategic advantage that we carry with us.

Mike Cieplak, Investor Relations Officer

Our next question is from Lauren Silberman with Credit Suisse.

Lauren Silberman, Analyst

I wanted to ask about the marketing strategies of Can McDonald's in July, the partnership with Cactus Plant Market more recently. How are these partnerships helping you either reach a new audience or increase engagement with your audience? I guess what changes are you seeing in terms of your consumer base? Do you generally see, once you get the increase in digital utilization of a lot of these programs that they sustain? Thank you.

Chris Kempczinski, CEO

Thanks for the question. For us, one of the things that I've certainly believed about our brand is McDonald's is one of those brands that actually is very much a part of culture. You see it when you look at social media and all the ways that consumers will talk about their McDonald's experience. What we've maybe not done enough of in the past is lean into our relevance and how our brand is a part of culture. Over the last several years, for us, credit goes to the marketing team and our agency partners for finding more ways to connect our equities and our experience to what's going on in culture. Whether it’s Famous Orders or Can McDonald's or now the adult happy meals and the McRib coming back, these different initiatives show us and remind us that we are charged with shepherding and stewarding one of the most fantastic equities in the world. We have to continue finding ways to keep it fresh. The evidence is just in little things. For example, when you see that we're selling out of our adult happy meals in days, not weeks, that's a real proof point. Or when you see people posting on social media about their fun experiences with these promotions. I remind our team that if you have to look with a microscope to see the impact of marketing on your P&L, then it's not big enough. We are starting to see our marketing programs show up as significant meaningful comp drivers for us. That gives us confidence that we're finding that right engagement with the consumer.

Mike Cieplak, Investor Relations Officer

Our next question is from Jared Garber with Goldman Sachs.

Jared Garber, Analyst

Great. Thank you for the question. I wanted to ask about the health of the U.S. consumer. Obviously, the trends you posted remain really strong and encouraging. But I guess two pieces. One, can you help frame maybe the level of price that's running through the system right now as a component of the comp with that encouraging sign of positive traffic? And then I wanted to see if you're seeing any sort of deltas or differences between dayparts as the consumer is increasingly pressured by the macro and if you're seeing any consumer behavior changes related to that just yet. Thank you.

Ian Borden, CFO

Let's have Ian maybe just take the first couple of parts to that, and then I can offer just a few more general thoughts on it. Thanks for the question, Jared. Let me think about the reactions we’re seeing in the U.S., just knowing the U.S. is a little further along, and I think our data is clearer there. You look at our quarter three comp in the U.S. of just over 6%, that was largely driven by average check. But as you noted, we had a slightly stronger positive contribution from guest counts in quarter three than we saw in quarter two. Again, the majority of that check growth continues to come through price. Year-over-year in quarter three, our average price increase in the U.S. was just over 10%. That’s where we expect the full-year pricing in the U.S. to be. We continue to see good flow-through in the U.S., about 70%, which would be close to our historical range. If you think about that price increase of roughly 10% flow-through of about 70%, the difference between that and the average check growth we're seeing is really driven by two factors we’ve talked about previously. The first factor would be less units per transaction, driven mainly by a reversion of ordering channels. So, during COVID, we saw elevated ordering through off-premise channels like delivery and drive-through. We're getting more traffic back in restaurants now, for example, where drive-thru is back to what it was pre-COVID in terms of the percentage of sales. We still see more units per transaction than we were seeing pre-COVID, but we had a reversion to more traditional ordering channels. The second factor, though to a lesser extent, is we are seeing some trade-down. That trade-down is mainly with our lower-income consumers, where we’re seeing a shift from meal purchases to more value-offer items. So those would be the two factors offsetting pricing to get to that net average check growth. Overall, we’re getting pretty healthy continued flow-through; that’s a good sign that we’re getting the pricing balance right with our U.S. consumers. As for day parts, we're seeing strong comps in the U.S. business across all the day parts. Dinner and breakfast would be a little better. But it's pretty consistently strong. That gives us a good indication that what we’re doing resonates with consumers broadly.

Chris Kempczinski, CEO

Nothing to add; Ian handled it all. So I think we're ready for the next question.

Mike Cieplak, Investor Relations Officer

Our next question is from Andrew Charles with Cowen.

Andrew Charles, Analyst

Great. Ian, I appreciate the FX guidance for 4Q, but just given the extraordinary strengthening of the U.S. dollar in recent months and unusual FX circumstances, can you perhaps comment on the impact of current exchange rates on 2023 EPS? Are my estimates around a $0.25 to $0.30 impact? Just want to see if we're thinking about that correctly.

Ian Borden, CFO

Thanks, Andrew. Look, I'm not going to get into talking about 2023 today. To be honest, we're still in the midst of working through our 2023 plans. In fact, we’ve got our managing directors coming into Chicago in a couple of weeks to take us through their plans for 2023. That’s something we can give you more texture around when we get into our quarter four earnings call.

Mike Cieplak, Investor Relations Officer

Our next question is from Chris Carril with RBC.

Chris Carril, Analyst

Yeah. Good morning. Thanks for the question. I did want to ask about the competitive environment in the U.S., maybe both for the burger category and just broader fast food. Specifically, do you see potential for increased promotional activity here going forward? Or do you expect the industry and peers to remain largely rational here given the still dynamic and evolving backdrop?

Chris Kempczinski, CEO

Yeah. Certainly, our expectation is that the industry is going to stay rational from a pricing standpoint. Part of that is born out of self-interest, as everyone is experiencing food and paper inflation, and labor inflation. Some of our competitors, their franchisees are not in the same position as our franchisees. So I think even if there's a desire to get more promotional in some areas to address any traffic headwinds, I think you’ll find a lot of resistance from franchisees who are just not in a position to engage that. Our expectation is that the environment will continue to stay rational. Another important point is the gap between food away from home and food at home. We’re in 2022, and the gap between food away from home and food at home is the widest gap it's ever been. So the industry continues to benefit relative to food at home, keeping everyone smart about pricing. Lastly, our value and affordability are both key indicators, especially relative to the industry. We're historically seen as leaders in value, which gives us confidence as we continue to monitor the landscape.

Mike Cieplak, Investor Relations Officer

Our next question is from Jeff Bernstein with Barclays.

Jeff Bernstein, Analyst

Great. Shifting gears maybe to China, specifically. I think you mentioned opening a record 800 units this year. Wondering whether it's safe to assume that’s accelerating into '23. I think you mentioned that comps were slightly negative. I'm trying to assess whether there's any reason for concern on the underlying fundamentals of the business or if you believe it's purely due to COVID. Any updated thoughts on the region, especially with the most recent political environment in China creating some incremental headwinds? Thank you.

Chris Kempczinski, CEO

Thanks, Jeff. Let me start, knowing in the last role I had, I was overseeing China as part of that. China continues to be impacted by the Zero COVID policy that's in place, which is disruptive, not just for us but consumer confidence in the broader macro environment in China. That's the driver of shorter-term results and challenges in China. We're still gaining share in the market. It's a competitive environment, but we believe we handle the challenges well. The 800 openings should be consistent going forward, which speaks to our confidence in the longer-term opportunity in China. That said, volatility will exist until there's a change in focus on how they handle COVID.

Ian Borden, CFO

The only thing I would add is that in China, there were still 33 cities and about 65 million people in this last quarter that were in either full or partial lockdown as a result of the Zero COVID policy. In the U.S. and our western markets, we are in a different position relative to the pandemic. We sometimes lose sight of the fact that in China, significant restrictions are impacting mobility and ultimately affecting our business. Long-term, we remain bullish on China. We’ll continue to build restaurants aggressively. We expect that in 2023, the situation in China will improve for us.

Mike Cieplak, Investor Relations Officer

Our next question is from John Ivankoe with JPMorgan. You there, John?

John Ivankoe, Analyst

I apologize for that. I was on a different conference call. Thank you. Regarding the G&A level you mentioned, 2.3% to 2.4%, it's evident that while you're spending a significant amount, you're achieving positive results. I wanted to get a sense of future spending levels for both G&A and CapEx. Are we in a period where the company should be seeking efficiencies, or is this an opportunity to invest more to boost future sales and market share in both areas? Thank you.

Ian Borden, CFO

Thanks, John. Let me take those two questions. On G&A, as I mentioned in my commentary, there are really a couple of drivers for this year that resulted in that adjusted outlook. The first is the stronger impact of the strong U.S. dollar. If you think of G&A, about 60% of our sales come from outside the U.S. So we are translating those sales back into fewer U.S. dollars, and 70% of our G&A spend is U.S. dollar-based. That's the first impact. The second impact is general inflationary pressures on costs, which are also playing into our G&A expenses. For my part coming into the role, it's an area of focus. We believe that in terms of G&A for running the business, we should be able to drive efficiency and gain leverage as we grow the top line. That’s important for two reasons: one, the efficiency part, but also we want to ensure we have the G&A capacity to spend on areas like technology and digital or innovation that drive growth. The net result of that should lead us toward leverage in G&A as we move forward. As for capital, we've adjusted down from $2 billion to $2.2 billion to about $2 billion due to the stronger U.S. dollar and slightly less openings due to permit timelines. However, we continue to believe there are opportunities for growth across many of our owned markets, and we see good returns on new restaurant openings.

Chris Kempczinski, CEO

Just a couple of closing thoughts; I appreciate the question. It's the effectiveness of our spend. For the investment in G&A, it's certainly driving performance. However, we have an opportunity to improve the effectiveness of our G&A investments. We need to get faster and continue leveraging our scale. We are still solving the same problems multiple times across different markets instead of finding one solution to share globally.

Mike Cieplak, Investor Relations Officer

Our next question is from Brian Bittner with Oppenheimer.

Brian Bittner, Analyst

Good morning. Thank you. Given your expectation of a U.S. recession and a potentially deeper downturn in Europe, it's noteworthy to remember how well the U.S. business performed during the 2008-2009 recession. Do you believe the business is as strategically positioned today as it was back then? I also wanted your thoughts on the lower-end consumer. Your U.S. performance has been quite strong in the third quarter and into October, especially considering the concerns about declining conditions for lower-end consumers. You've mentioned experiencing a shift as these consumers seek better value. Could you elaborate on that?

Mike Cieplak, Investor Relations Officer

You're breaking up a little bit, Brian. We'll try to maybe answer your question that we could hear.

Ian Borden, CFO

Yes, I'll answer what I could hear. There are lessons from 2008-2009, but also differences. Our business did perform well in that downturn period for several reasons: our dollar menu was a part of our value offering, we also launched McCafe and started to scale that. There are different dynamics now; we have pressure on inflation with food and paper along with labor inflation in a very tight labor market. Our expectation is that we will perform well in the current environment, relatively speaking to our competitors. The brand and asset base is in a better position that gives us pricing power, unlike in 2008 when we leaned in on the dollar menu. We're gaining share among low-income consumers in the U.S. and are well-positioned on value for money and affordability, which will benefit us moving into 2023.

Mike Cieplak, Investor Relations Officer

Our next question is from David Palmer with Evercore.

David Palmer, Analyst

Thank you. Question on Europe and the IOM during this quarter. Coca-Cola mentioned that there was a strong summer in Europe, partially helped by weather, but then weather was negative towards the end of the quarter. I would imagine there might be some noise because of weather, and there might be noise to tease out in terms of COVID comparisons. Are you seeing any real trends in Europe in recent months in terms of sales and traffic? Has there been any slowing in particular markets you would attribute to consumer confidence and discretionary income? Given what you know about rising utilities, what impact do you think these will have on your IOM company restaurant margins and consumer traffic? I know the last part is difficult, but any thoughts would be helpful. Thanks.

Chris Kempczinski, CEO

I think we've seen consistency of strength in our European markets. I don't believe we've been impacted by weather as you mentioned, perhaps as others have. Our momentum there is strong due to the brand strength in Europe, our modern asset base, and strong alignment with franchisees. Our value for money and affordability in Europe make us a leader, which is crucial as we head into a dynamic environment. Regarding margins, food and paper in Europe are seeing inflation that may last longer than what we see in the U.S. Energy prices have also increased drastically. We've focused on pricing capability and are making informed, consumer-facing decisions. Overall, momentum in Europe is positive.

Ian Borden, CFO

One factor to keep in mind is that while we give pricing recommendations, it's ultimately up to the franchisees to adopt those recommendations. We see strong adherence to our pricing recommendations, which indicates confidence in how we approach decision-making.

Mike Cieplak, Investor Relations Officer

As we near the hour, we got time for one last question. From Greg Francfort with Guggenheim.

Greg Francfort, Analyst

Hey, I have a two-part question. I know, Mike, you might kill me for that. But the first one is this really the McRib farewell tour? That's the first one. The second one is a follow-up to John's question from earlier. Maybe can you talk about how you're thinking about accelerating unit growth? You talked a little about delays in permitting, but the confidence in timing and magnitude of getting back to kind of 3.5% to 4% unit growth and when we might expect it to happen. Thanks.

Chris Kempczinski, CEO

The McRib is the GOAT of sandwiches on our menu. Similar to GOATs like Michael Jordan and Tom Brady, you're never sure if they're fully retired or not. Ian, over to you.

Ian Borden, CFO

If you look across our IOM markets and the U.S., you've heard us talk about the strength of the brand and business. We continue to see good returns around unit openings and believe there’s opportunity for growth. We’ll discuss this further as we enter 2023 with our fourth-quarter earnings.

Mike Cieplak, Investor Relations Officer

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

Operator, Operator

This concludes McDonald's Corporation Investor Call. You may now disconnect.