Earnings Call Transcript - MCD Q3 2023

Operator, Operator

Hello, and welcome to McDonald's Third Quarter 2023 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. 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. Just one other piece of housekeeping today before I turn it over to Chris. As many of you are aware, we'll host an investor update at our McDonald's headquarters on Wednesday, December 6, where Chris and Ian will be joined by members of our senior leadership team to provide an update on our strategic priorities followed by a Q&A session. I ask that you please be mindful of this with your questions on the call today and focus questions on our quarterly results in the current year. We'll spend more time on 2024 and our strategic priorities in December with plenty of time for Q&A on that day. Details for the event and how to tune in can be found on the Investor Events section of our website. 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. Over the past quarter, we've seen yet again the broad-based momentum across the McDonald's business despite continued headwinds and a challenging macro environment. Around the world, we're operating from a position of strength as the industry's market share leader. In Q3, we achieved comparable global sales of nearly 9%. As we expected and as we mentioned in prior earnings calls, our top line growth, while strong across each of our segments and at an elevated level versus historical norms, has continued to moderate. However, we continue to outpace our competitors, thanks to our system's outstanding execution of our Accelerating the Arches strategy. Over the past year, we've been more intentional about sharing and scaling world-class ideas that drive impact globally. Central to our continued strength is how we maximize our marketing to stay relevant to customers. In August, we launched 'As Featured In' in over 100 markets, making it our largest global campaign to date. The campaign celebrates the most memorable McDonald's references across the world of entertainment with over 20 integrations that span across Hollywood, Bollywood, anime, and independent film. It's also another proof point of the impact and power that a One McDonald's Way approach to marketing can have to drive engagement, allowing our markets to remain globally consistent but locally relevant. Celebrating our core equities, 'As Featured In' demonstrates that McDonald's and our iconic menu is a cultural touchstone that immediately connects fans to characters and stories with over 85% positive consumer sentiment and in the top 30% of campaigns for customer engagement. As I recently visited Australia and New Zealand, I was energized to see other examples of One McDonald's Way in action or One Macca's Way as our friends down under call it. It was clear that our continued menu discipline and reduced restaurant complexity across these markets is driving operational improvements. By creating a One Macca's Way approach to the crew experience by utilizing consistent comprehensive resources, we're creating a better customer experience as a result. Speaking of One McDonald's Way, Australia was our first market to launch Best Burger and with resounding success. Great-tasting burger perceptions continue to grow, and the Macca's team has reached an all-time high in beef burger share. And now Best Burger has been scaled to over 70 markets around the world, building on learnings from the original launch in Australia. Australia is also a good example of a market that has room to grow through new restaurant openings. We expand our footprint in the market from a position of strength. We're also enhancing existing restaurant capacity by introducing delivery rooms and integrated McCafe beverage cells that will allow us to better drive growth against our MCDs. We'll share more details on our plans related to the Fourth D development in December at our investor update. McDonald's reliability, value, and feel-good experiences continue to play a key role in connecting to our customers, not just in Australia, but across all our markets, offering delicious food at an affordable price and at the convenience our customers have come to expect. It's promising that our markets continue to grow share despite the pressure of living costs. As we had expected early in the year and have talked about on prior earnings calls, it's clear that consumers continue to be more discriminating about what and where they spend. Between inflation remaining high, the elevated cost of fuel, interest rates, housing affordability pressures, and more, consumers all over the world are having to pay more and more for everyday goods and services, proving time and time again in difficult economic times, the McDonald's brand and our positioning on value is an opportunity for us. Take Germany, for example. The team has delivered remarkable results with the launch of the McSmart menu earlier this year, offering smaller, more affordable meals. It's an incredible example of remaining agile and listening to our customers. Our German team heard from customers that they were creating these options, and McSmart made our menu more accessible to them, contributing to outperformance and value perceptions when compared to the rest of the industry. And it was an important driver of delivering Germany's 10th quarter of double-digit sales growth. We're always pushing ourselves to stay one step ahead of the customer as we have throughout our history by innovating and reinventing ourselves even as we're operating from a position of strength. McDonald's is one of those consumer brands that has the permission and power to be part of people's everyday lives. And one of the great things about McDonald's is that we don't rest on our laurels. We continue to find new ways to earn customer visits, and we believe the actions we've taken over the last several years have laid the foundation for our continued success. This starts with strong local leadership and franchisee alignment. When we combine that with a fully modernized estate, a globally recognized brand, delicious food on our core menu, and a high level of execution across our 4 Ds, our competitive strength is on full display. And while the macro environment will remain uncertain, we believe our brand and our business are well positioned to win. This powerful combination of brand, physical advantages, and digital penetration has positioned us as an industry leader. And as we continue to keep a constant pulse on what's top of mind for our customers, we believe that we'll maintain our leadership position and continue to connect our brand to consumers in a way that drives growth and momentum for the business. I remain confident in our Accelerating the Arches strategy and the enduring strength of the McDonald's brand.

Ian Borden, CFO

Thanks, Chris, and good morning. Our third quarter results yet again demonstrate strong restaurant-level execution across our Accelerating the Arches growth pillars with significant increases in customer satisfaction across most of our major markets. Our restaurants are offering customers an affordable destination every day for delicious food and great service, driving nearly 9% global comp sales for the quarter. Thanks to the tireless efforts of our entire McDonald's system, the McDonald's brand remains stronger than ever. The resilience of our business is rooted in our ability to adapt to any environment. As expected, challenging macro dynamics continued this quarter and consumer spending remains pressured. And while top line growth has continued to moderate in line with our expectations, we're outperforming the industry, and we remain the leader in value and affordability perception across most of our largest markets. Providing affordable options for our customers has always been core to McDonald's success, and continuing to evolve these options as customer needs change remains critical. As Chris mentioned a few minutes ago, it's clear that our customers continue to seek reasonably priced meals as rising costs persist and our markets around the world continue to respond. Germany delivered its highest-ever monthly sales performance by focusing on the evolving needs of our customers amid increasing macro pressures. The market launched a Your Remix, Your Deal promotion exclusively in the app, allowing customers to build their own small bundles. Beyond affordability, this promotion offered the personalization our customers are looking for and significantly increased customer engagement, which was evident in an additional 1 million 90-day active loyalty members in the third quarter. This approach of smaller, more affordable bundles featuring our core menu favorites was first highlighted earlier this year in Germany and the U.K. with the launch of new permanent value offerings and has since been adapted locally in other markets. In Canada, a highly competitive breakfast market, the team offered customers a more affordable option with the McMuffin and hot coffee pairing. By simply featuring our core products at a compelling price point during a critical daypart, we drove market share gains in both breakfast and coffee, demonstrating how providing customers what they want at great value always resonates. The D123 Everyday Value Menu in the U.S. takes a similar approach to affordable bundles with nationally promoted products at locally relevant price points. The platform features products such as the McDouble or four-piece McNuggets. With a bundle offered at each daypart, customers can visit McDonald's for an affordable meal no matter the time of day. And while prices have evolved over time, the featured products have remained the same, providing customers with their familiar favorites from our core menu. This consistency in our value offerings means customers know exactly what to expect every time they visit us, driving our strong position as the affordability leader in the market. And in China, with slowing macroeconomic conditions and historically low consumer sentiment, the market relaunched a campaign with small price-pointed bundles featuring our hot delicious burgers. Designed to engage our Gen Z consumers, this promotion drove meaningful customer demand and increased beef share in the market. Beyond the price of our food, we're continuing to provide customers with new experiences, further elevating their value perceptions. Many markets are using our digital app to drive engagement and increase loyalty participation with our fans through exclusive activations. This was on display through recent MONOPOLY campaigns in several markets. Starting with Australia where MONOPOLY contributed to record digital sales in the market for the quarter, fueled by higher app registrations and increased game piece redemptions. And in the UK, MONOPOLY returned for the 17th consecutive year, featuring a double-peel option encouraging customers to scan their game pieces into the app. MONOPOLY once again ignited our fans' love of the brand and delivered higher levels of app engagement than ever before. Spain had similar success with their MONOPOLY promotion over the summer. Now leveraging the same app features as the U.K., the promotion delivered significant increases in both app downloads and registrations. This is another great example of sharing best bets across our system to fuel our digital growth ambitions. In fact, in our top six markets, digital sales represented more than 40% of system-wide sales, or nearly $9 billion for the third quarter. We now have over 57 million 90-day active members across these top markets, and our relationship with them continues to grow. We're learning when they visit, how they visit, and what they buy, with more and more of our sales coming through identified channels than ever before. By continuing to elevate the McDonald's digital experience, our customers feel more connected to the brand, driving those incremental visits that we believe would otherwise go uncaptured. And it gives us more ways to reunite with customers who haven't visited us in a while. Beyond MONOPOLY, the brand was at the center of our marketing yet again this quarter, as we leveraged a One McDonald's Way approach to celebrating the FIFA Women's World Cup in July. With record-breaking viewership and fan engagement, our brand was part of a cultural moment, and we continued to elevate our creative excellence through a scalable, culturally relevant campaign. This came to life through global activations across 28 markets, tapping into local fan excitement, and was supported by a fully integrated social, digital streaming and content strategy. Even more exciting, we celebrated our restaurant teams by sending crew members who go above and beyond to attend the live matches. Across the As Featured In campaign, MONOPOLY activation, and the FIFA Women's World Cup, I can't think of another time when we better utilized our scale to leverage great marketing ideas across our system, which is a tangible demonstration of our accelerating the organization principles in practice. Our food is at the heart of our customer's relationship with the brand. This is why we're also taking a One McDonald's Way approach to our menu, further fueling our chicken ambition by scaling core chicken equities. Our McCrispy Chicken Sandwich continues to be an important driver of chicken share growth, having first launched in 2022 and now a $1 billion brand across multiple markets. McCrispy was most recently launched in Australia this quarter, where early results indicate a lift to chicken category sales while bringing a renewed focus to our chicken portfolio. The U.K. continued to drive excitement in chicken by creating fresh takes on our new global favorites. This past quarter, the market featured a new line extension, McCrispy Deluxe, offered alongside the McCrispy and the McSpicy in the market. By combining strong execution of our core menu offerings with new flavor news and limited additional complexity, we continue to strengthen our chicken credibility with customers and maintain our market share leadership in the chicken category. Across each of our Accelerating the Arches growth pillars, it is clear that our playbook is working. Thanks to the resilience of our system and the strong execution across the M, Cs, and Ds, we're staying relevant to our customers as their needs continue to change. Turning to the P&L, our strong top line performance drove adjusted earnings per share of $3.19 for the quarter. This is an increase over the prior year of 16% in constant currencies, excluding current year charges primarily related to accelerating the organization restructuring costs. Our company-operated margin performance remains pressured by continued cost inflation, in line with our expectations. We expect these macro headwinds will continue in the fourth quarter. Strong franchise sales performance continues to be partially 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 on our full-year results. Total restaurant margin dollars grew by about $335 million in constant currencies or about 10% for the quarter. G&A for the quarter increased 1% in constant currency, and our adjusted effective tax rate for the quarter was nearly 21%. Adjusted year-to-date operating margin is 47.5%, driven by our strong top line growth. For the full year, we now expect adjusted operating margin to be about 47%, including an expected property gain in other operating income in the fourth quarter, and G&A of about 2.2% of system-wide sales. Foreign currency translation positively impacted third quarter results by about $0.08 per share with a slight tailwind expected for the full year. As I wrap up, I want to touch on the recent dividend increase approved by our Board of Directors in early October. This marks our second consecutive annual increase of 10%, and we're extremely proud of our track record of delivering meaningful cash returns to shareholders, marked by our 47th consecutive dividend increase. This demonstrates our confidence in the Accelerating the Arches strategy and our commitment to a long-term growth for the system and our shareholders. I look forward to sharing more with you at our investor update in December. And with that, I'm going to turn it back over to Chris.

Chris Kempczinski, CEO

Thanks, Ian. As we continue to operate in a challenging macro environment, what remains unwavering is our commitment to creating an environment where the entire McDonald's system thrives together. Through our Accelerating the Arches strategy, we've acquired an industry-leading digital loyalty base that complements our restaurant footprint. We're retaining top talent who are passionate about the McDonald's brand. Our restaurant teams are executing at a high level, customer satisfaction is increasing, and we continue to attract the best franchisees in the world as a franchisor of choice. Despite ongoing legislative and regulatory headwinds, we are committed to mobilizing our system to protect franchisee decision-making at a local level and on building a long-term presence in civic spaces to advocate for policies that benefit local restaurant owners and the communities they serve. We're also fulfilling our purpose of feeding and fostering community. In September, we hosted our second global volunteer month where over 6,400 volunteers across 12 markets spent an estimated 26,000 hours giving back to local communities. And at the beginning of October, McDonald's was named to Fast Company's list of brands that matter for a company whose work is moving the needle on critical issues and that display the highest level of commitment to their purpose and values. While our strategy is working, our customers continue to expect even more of us, and we're prepared to meet that challenge. What Ray Kroc said in 1967 still stands true today. We are living in a rapidly changing world, so McDonald's will change with it. Change is our only constant. As was the case for those who came before us who built McDonald's into the global leader it is today, we will earn our success, and together as a system, we will lay the foundation for our future. And on Wednesday, December 6, I hope you'll join us to hear more at our investor update as we look to the growth potential that lies ahead and share our plans for the future. It makes me excited to think about what the next 5 to 10 years will bring for McDonald's. We believe that because we're operating from a position of strength with a strategy that continues to deliver, we now have the opportunity, the ability, and the obligation to reimagine our brand for the future. I look forward to seeing you in Chicago this December, and now I'll hand it over to Mike for Q&A.

Operator, Operator

Our first question is from John Ivankoe with JPMorgan.

John Ivankoe, Analyst

Hi. Thank you very much. Obviously, value is a big focus on this call. And I wanted to ask, I guess, the focus on value in the context of recent average ticket increases for you and really across the sector, much of which is driven by premiumization, customization, larger sizes, and so on. In other words, pricing increases in average ticket beyond just that of price. So as we talk about value, what does that mean for future price increases? And is there an intention to value a particular bundled value to where the average ticket can be protected? Or would you sacrifice some average ticket in order to get future market share gains and presumably transaction gains? Thank you.

Chris Kempczinski, CEO

Yes. Thanks, John. On value, I think it's always a focus at McDonald's. We're a business built on value and convenience with great-tasting food. So we're always keen to focus on value. I think certainly, given the inflation that the market has experienced, that we've experienced over the last year, really more than the year, we've tried to be very careful and disciplined on how we have executed those price increases. The good news is we continue to lead on affordability. We continue to lead on value for money. We've seen no deterioration in our advantages there. We are holding those up. How we do it varies by market. I wouldn't give you a generalized statement about how we approach value. It's up to each individual market to think about how they continue to deliver great value to customers. But I can tell you, in every major market that we look at, the teams are doing a great job on value. They're delivering against it. We're seeing really no change at all in terms of customer acceptance pass-through on pricing, which to me is also an indication that the teams are striking the right balance.

Mike Cieplak, Investor Relations Officer

Next question is from David Palmer with Evercore.

David Palmer, Analyst

Thanks. And thanks for the color on the marketing initiatives in the IOM countries. It does sound like there's a bit more focus on value, but I'd love to hear how trends might be settling out in these big IOM countries, the big five, so to speak, in the post-COVID mobility recovery world. In other words, maybe back-to-school might be a good way to look at that. As you get past the tourism boost of the summer, maybe you're getting a sense of what type of comps we should be expecting for these IOM markets. So any color about the type of consumer environment you're seeing in these markets, and how same-store sales trends really exited the quarter would be very helpful.

Chris Kempczinski, CEO

Yes. Thanks, David. I'll start at a high level and then hand it over to Ian to give you any more detail on that. At a high level, we continue to be very pleased with how our IOM business is performing. We're seeing, whether you look on the quarter, the year, or a four-year stack, this business is continuing to perform very well overall. We're also seeing that there's great execution. We're seeing customer satisfaction scores increasing in almost all of our major IOM markets. So overall, we feel good. In Europe and, in particular, we've certainly seen more inflation in Europe. The team there has had to be even more focused on making sure that we deliver great value. But the business overall is not seeing any big change quarter-to-quarter in terms of how it's performing, but I'll give it over to Ian to give you some more detail.

Ian Borden, CFO

David, yes, just maybe a couple of additions to what Chris mentioned. If you look at the comps for the quarter across IOM at 8.3%, that's a pretty strong indication of the consistency and fundamental underlying momentum that we've got in the segment. We had positive traffic growth in the segment, which I think is an indication of how that momentum is performing from a sales and traffic perspective. We're continuing to grow market share across the majority of those large markets, which tells us that despite some of the different macro or consumer environments in those markets, which are varied, we are continuing to do well versus the competition. I mean I think we've spoken, and you heard it in our opening remarks, that we expect to continue to see moderation in that top line as inflation levels continue to come down and pricing comes down in line with that. But I think we're in a really good spot, and we believe that just speaks to how our strategic plan around Accelerating the Arches continues to resonate with consumers consistently across the business.

Mike Cieplak, Investor Relations Officer

Our next question is from David Tarantino with Baird.

David Tarantino, Analyst

Hi. Good morning. My question is on the cost side. I think you lowered your SG&A outlook, at least as a percentage of system sales versus what you had given us last time. I just wondered what changed in that outlook? Is it a matter of some of the savings and accelerating the organizations coming through, or delays in investment spending? Any context you could give us on that front would be helpful. Thank you.

Ian Borden, CFO

Good morning, David. Ian, obviously. So let me try and give you some context there. As we said in our guidance at the beginning of the year, we expected G&A as a percentage of sales to be in the range of 2.2 to 2.3. We've now updated that to about 2.2. So it's come down marginally. I think obviously, we've had some really strong top-line results this year. So that's a partial element of the benefits. The other part is just timing of spend. We are kind of a back half weighted spend cycle within the business. The fourth quarter will be more pronounced from a quarterly standpoint. We do expect a higher level of spending as we get into the fourth quarter. But there's a timing element of how the investments that we're making. I talked about two areas on our last quarterly call where we continue to invest: one is behind technology and digital, which we believe are strong opportunities for growth, and we're going to continue to invest when we have those opportunities. We have a strong track record in how those investments are delivering for the business. The other area is around our global business service organization, which we stood up earlier this year as part of Accelerating the Organization. We've spent a lot of time over the last six months looking at what we believe the opportunities are for the business there. We've got good line of sight into some things that can drive sustainable efficiencies from an operational perspective as we go forward. We're certainly investing now behind some of those areas of opportunity. What I would call it is more of the timing of spend around those initiatives and a focus in the first half of the year on bringing our organizational changes to life.

Mike Cieplak, Investor Relations Officer

Our next question is from Jeff Bernstein with Barclays.

Jeffrey Bernstein, Analyst

Great. Thank you very much. Just focused on the U.S. consumer, I'm just wondering if you can talk about any changes in behavior, whether there was a change in trend through the quarter or more recently into the fourth quarter. I was wondering if there's pressure in some areas, maybe benefits from trade down in others. Otherwise, you mentioned in the release that the U.S. comp was driven by strategic menu pricing, with no mention of traffic. I'm just wondering if you can give a breakdown of that U.S. comp components, whether the lack of traffic growth is a concern looking at '24. How you think about those components within that U.S. comp? Thank you.

Chris Kempczinski, CEO

Yes. Thanks for the question, Jeff, and I'll answer, and then if Ian has anything else he wants to add. Specific to the U.S., we've been talking about how the consumer is more discriminating because of all the price pressures they are facing, as well as interest rates, and things like that. What you end up seeing is that the pressure is felt more on the lower-income consumer. One of the things that we saw industry-wide is that this low-income consumer, which we would say is $45,000 and under, was negative from an industry standpoint. If you zoom out and think about our performance relative to that, we continue to have, on a full-year basis, traffic growth. Although we did see a slight dip in traffic, we went slightly negative in Q3. We expected that because of what we were lapping. But if you look at us on a two-year stack in the quarter, our traffic is up strongly. We need to continue to keep a close eye on that $45,000 and under consumer because of the pressure they are feeling there and ensure that we're offering value. Hopefully, the industry stays disciplined as well on pricing.

Ian Borden, CFO

Maybe just to add a bit to Chris' commentary, while it's important to highlight the headlines, overall, we maintained our QSR traffic market share in the quarter. We continue to see strong share gains in both beef and chicken, which are the key elements of the category. We continue to gain share with both middle- and higher-income consumers, which hints at some of your trade-down comments. We held share with the lower-income consumer in a competitive marketplace. However, our comparable traffic was marginally down due to longer-term trends, which have been negative for the industry. Our comparable traffic being down in the quarter reflects that. The headline is that our comparable sales remain strong, which continues to showcase the strategic strength that we've been working on over the last couple of years.

Mike Cieplak, Investor Relations Officer

Our next question is from Eric Gonzalez with KeyBanc.

Eric Gonzalez, Analyst

Hi. Thanks for the comment on traffic. I'm wondering if you could expand on the pricing discussion. I think last quarter, you said you expected pricing to be in double digits for the year. Could you comment on what that might imply for the fourth quarter? And can you give us an early look at what we should expect for 2024, whether you expect price to be a little more normalized than what we've seen in the last few years? Thanks.

Ian Borden, CFO

Good morning, Eric, it's Ian. Let me talk a little about pricing. Obviously, this is specific to the U.S., as pricing varies across markets depending on the context in the individual marketplace. I think as I mentioned last quarter, we continue to believe that our average pricing level in the U.S. business for the full year will be just over 10%. In quarter three, for the first time in several quarters, our average pricing level has started to come down in terms of the rate of increase. This speaks to the fact that inflation is starting to come down as well. We expect pricing to come down in line with how inflation is trending. As we've discussed, our U.S. business has been disciplined in how they have continued taking pricing. We have put a lot of effort into the data and analytical capability from our third-party advisers, who make pricing recommendations to our business. I think the fact that we continue to maintain our leadership position in both value for money and affordability is remarkable considering the elevated pricing levels driven by elevated costs and inflationary pressures. We've executed that in a way to minimize customer resistance while maximizing the flow-through from those price increases. Our flow-through continues to be in line with historical norms. I think we've talked about moderation, and that part of it will be pricing as inflation continues to come down as we look ahead.

Mike Cieplak, Investor Relations Officer

Our next question is from Dennis Geiger with UBS.

Dennis Geiger, Analyst

Great. Thank you. I wanted to just ask a bit more about maintaining that underlying momentum and share gains in the U.S. As you think about some of the key drivers across the 3 Ds—operational execution, value, Ready on Arrival, Best Burger, etc.—Chris, can you share your latest thoughts on some of the most impactful traffic and sales opportunities into next year and beyond? Thank you.

Chris Kempczinski, CEO

Thanks for the question. I look forward to seeing you on December 6, when we discuss more about how we see the outlook for next year and specifics planned to continue driving the business. My view is that our Accelerating the Arches strategy still has plenty of runway. Each of the growth pillars—marketing, core menu, and 4Ds—still has much to be done underneath each item. Again, we will be more specific about it on December 6. Moreover, on the digital side, the business is starting to amass significant scale, and this scale opens up many opportunities that we think will be difficult for our competitors to match. When you combine our physical presence with more restaurants in the U.S. than anyone else, our digital presence, which is larger than anybody else in the U.S., and great execution reflected in strong consumer satisfaction scores, we're in a strong position to continue our growth.

Ian Borden, CFO

Just a small addition, I wouldn’t underestimate some of those things we’ve accomplished over the last couple of years, such as the fully modernized estate. Some of our competitors might struggle to do that now in an environment of pressured cash flows and higher interest rates. We have a fully modernized estate and a digital platform at scale that continues to grow. I believe these investments are critically important as we navigate this macro volatility.

Chris Kempczinski, CEO

Additionally, we need our franchisees to be in a strong position. In the U.S., franchisee cash flow is up this year and up in the quarter. This flow-through gives us confidence that we can continue to drive the business despite inflation pressures on food, paper, and labor. This positive turnover and improved staffing result in lower training costs and improved execution.

Mike Cieplak, Investor Relations Officer

Our next question is from Lauren Silberman with Deutsche Bank.

Lauren Silberman, Analyst

Thank you. I appreciate it. I want to follow up on the competitive environment. Can you discuss what you're seeing in the promotional environment? Any uptick in discounting across the industry? And how might your approach to value change if the consumer becomes weaker? Additionally, any color on same-store sales across different dayparts or competitive activity in any specific dayparts? Thank you.

Chris Kempczinski, CEO

I'll take the overall competitive landscape, and Ian can speak to dayparts. Overall, it is what you'd expect in a competitive landscape; everyone is focused on making sure they are competitive from a value standpoint, particularly with the lower-income consumer. We're seeing some promotional activity step up from competitors, but nothing alarming or beyond prudent. We're focused on maintaining our value leadership, going beyond just price to deliver a better customer experience through faster service times, improved hospitality, and a modernized estate. All these factors affect value perception, which is why our value perception holds up despite these pressures. I don't foresee any big changes there. For specific dayparts, let Ian address that more.

Ian Borden, CFO

Good morning, Lauren. On the U.S. side, we've had strong and consistent performance across all dayparts. I wouldn’t highlight one daypart where we aren't seeing solid performance. However, there’s a bit more pressure in the breakfast daypart, particularly as competitors who lag in recovery come back to life in that category. We continue to see solid performance. In Canada, for instance, we adjusted our value approach with a morning offer of McMuffin and coffee pairing in that critical daypart. Our markets are focused on listening to consumers and ensuring we're meeting their expectations.

Mike Cieplak, Investor Relations Officer

Our next question is from Brian Bittner with Oppenheimer.

Brian Bittner, Analyst

Thanks. Good morning. As it pertains to the U.S. company-owned restaurant margins, they expanded this quarter for the first time in two years, albeit modestly. What was the biggest driver of this? Was it simply easing food cost inflation against still strong pricing? Or was there anything else to point to? And could this be a potential turning point for restaurant margin stabilization or even expansion moving forward?

Ian Borden, CFO

Good morning, Brian. Thanks for the question. On company-operated restaurant margins, we’ve been consistent in our expectations that company-operated margin percent in the U.S. will be in line with where we landed in quarter 4, 2022. Our strong sales performance this year is contributing, but the only way to sustainably work through periods of higher inflation is to continually grow the top line and deliver solid performance. This is our focus. We are confident that we can see improved restaurant margin performance because of that sales growth. Our margins on dollar growth are also increasing.

Chris Kempczinski, CEO

Furthermore, we’re seeing positive trends with franchisees too, with turnover down and roster sizes up. This means improved execution and less training. Even though franchisee roster sizes are growing, we’re seeing improved flow-through despite inflation pressures.

Mike Cieplak, Investor Relations Officer

Our next question is from Brian Harbour with Morgan Stanley.

Brian Harbour, Analyst

Yes. Thank you. Good morning. You commented on the U.S. side, but within IOM and IDL same-store sales, I'm wondering if you have comments on the check versus traffic component. Also, I'd be curious about the estimates for California franchisees regarding wage increases and how much pricing might be needed to offset that?

Chris Kempczinski, CEO

Yes. I’ll answer the California question, and then Ian can cover the rest. As you mentioned, with the recent legislation in California regarding wages, there will be a wage impact for our franchisees. We cannot specify the exact amount that will affect pricing at this point, but it will have some effect. However, in the longer term, this is an opportunity to gain share as this impact will affect all of our competitors. We believe we’re better positioned to weather this than they are. Let's use this as an opportunity to accelerate our growth in California alongside some mitigation efforts. With that, let me have Ian cover the rest.

Ian Borden, CFO

Good morning, Brian. On the IOM and IDL side, the headline is that the comp numbers are strong and consistent. We’re pleased with the consistency of momentum across the business, despite challenges in specific markets. In IOM, France continues to face challenges. We’ve been taking market share, but consumer sentiment in France has been affected by inflation and unrest, which has dampened demand. The key takeaway is that we are performing well overall and continuing to adapt to shifting conditions.

Mike Cieplak, Investor Relations Officer

Our next question is from Jon Tower with Citi.

Jon Tower, Analyst

Thanks for taking my question. First clarification and then a question. Ian, could you provide a potential range for the size of the property gain in the fourth quarter? Second, could you share your thoughts on the recent NLRB ruling that is set for implementation in December? How might that influence your business or the industry in the years ahead?

Ian Borden, CFO

Jon, it's Ian. Regarding the property gain, we expect it to be around $60 million in IOM. These gains stem from high-value properties where their highest and best use differs from what we're currently using them for. While we don't anticipate these instances occurring often, this decision was simply good business strategy for us this quarter.

Chris Kempczinski, CEO

On the NLRB ruling, we strongly object to last week's ruling, as we believe it will undermine small business ownership in the U.S. The franchise business model is a critical American innovation that has created wealth for many, especially underrepresented minorities and women. This needs support, not opposition. We view this as agency overreach and expect it to be contested both in the courts and Congress. We oppose it and will align with others in doing so. Regardless of how the ruling plays out, it's likely to impact the entire industry, but we feel well-positioned to withstand it.

Mike Cieplak, Investor Relations Officer

Our next question is from Andy Barish with Jefferies.

Andrew Barish, Analyst

Good morning. Can you provide a rough idea of how much of the $100 million to $150 million in subsidies has been spent so far? Regarding your IOM margins, there are thoughts of returning to the mid-20% range like before. What are your views on achieving that long term?

Ian Borden, CFO

Good morning, Andy, it's Ian. On the subsidies, we expect to be inline with our previous guidance of $100 million to $150 million for the year, and that’s where we are tracking at this point in time. As for margin expectations, throughout our 60-year history, we have dealt with periods of higher inflation and have always found a way back. I don't see any reason this time will be different. If we remain disciplined in pricing and leverage our strategic advantages, we can expect margins to improve as we progress.

Mike Cieplak, Investor Relations Officer

We have time for one more question, Brian Mullan with Piper Sandler.

Brian Mullan, Analyst

Thank you. Question on U.S. development. Can you discuss the takeaway-only location in Texas? What early lessons have you gleaned? And do you expect new formats to have a more meaningful role in U.S. unit growth in the future?

Chris Kempczinski, CEO

You're right; we'll discuss this at length during our December 6 meeting. We're closely monitoring the test in Texas. While there will be opportunities for smaller, footprint restaurants without dining rooms, we primarily see development opportunities for our traditional restaurants. We believe there’s still considerable potential for traditional formats. Smaller formats may emerge, but the bulk will remain traditional restaurants, which we’ll elaborate on in December.

Mike Cieplak, Investor Relations Officer

Okay. Thank you, Chris. Thank you, Ian. That completes our call today. Thanks, everyone, for joining.

Operator, Operator

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