McDonald's (MCD) Presents at Bank of America Merrill Lynch Consumer & Retail Tech Broker Conference (Transcript)

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McDonald’s Corporation (NYSE:MCD) Bank of America Merrill Lynch Consumer & Retail Tech Broker Conference Call March 16, 2016 8:00 AM ET

Executives

Kevin Ozan - Chief Financial Officer

Analysts

Greg Francfort - Bank of America Merrill Lynch

Greg Francfort

Good morning, everyone. My name is Greg Francfort. I am on the restaurant team here at Bank of America. I will be moderating the restaurant sessions of the panel. Joe Buckley is out this week for personal reasons and sends his regrets that he is not here. Joe will be in the office next week and available for calls or meetings. So, we are excited to kick off the second day with Kevin Ozan from McDonald’s. Kevin, thank you for being here and taking some time. So, how we are going to do this is I am going to ask you few questions, but please don’t hesitate to jump in, raise your hand and we’ll go from there.

Question-and-Answer Session

Q - Greg Francfort

So, Kevin, I think the most frequent question we are getting from investors is about the sustainability of the positive comps in U.S. and we have several questions, but first probably how are you thinking about U.S. sales and what must be done to sustain that positive trend?

Kevin Ozan

Sure. If you think about last year 2015 for us, we recorded positive comparable sales in the third quarter prior to launch of All Day Breakfast. So, we think about our momentum as really beginning before All Day Breakfast and then certainly getting accelerated by the introduction of All Day Breakfast. If you go back to earlier in 2015, a couple of things occurred. We focused on simplification, which for us is a broad area that includes menu simplification, operational simplification, replacement of drive-through menu boards, things to make it easier for our customers to order and get their food. Then there was a significant focus on food quality. We had a couple announcements related to things like progressing towards cage-free eggs, progressing towards antibiotic-free chicken and introduced artisan grilled chicken sandwich and then new Buttermilk Crispy Chicken and then launched All Day Breakfast at the beginning of October that again certainly accelerated the momentum and has opportunities going forward to extend it further. And then we launched digital, our global mobile app in the fourth quarter and again right now it just has offers. So, there is certainly a lot of runway on that. And now we are focused on working with our franchisees to develop a national value platform that will help have an everyday predictable value platform going forward. Those are the key drivers of our sales that should continue to help us grow sales in the near-term.

Greg Francfort

And then I guess you guys have done this, the pushing to All Day Breakfast, can you talk about what your overall experience has been in terms of has it been a driver of attachment or maybe people coming in more frequently incremental visits and then do you view that launch as having significant legs or maybe more of a catalyst in the short-term? How does McDonald’s view that?

Kevin Ozan

Right. All Day Breakfast certainly was a catalyst I would say and I will call it an accelerator of momentum. It’s certainly been well received by customers. It was the number one customer request that we have gotten over the last several years. So, it really was a focus on meeting customer needs. And as we launched it, we saw right now we saw several people come in who hadn’t been at McDonald’s a while that are retrying McDonald’s. So some I will call lapsed users that have come back to McDonald’s, some people who have been McDonald’s loyalists that are now using it as an add-on for some meals. So, believe it or not, you may find some people ordering a lunch entrée and ordering an Egg McMuffin sandwich as an add-on. And then we have some people that are trading up actually. What breakfast did for us is it filled a mid-tier price tier that we had a little gap in. If you think about our menu over the last couple of years we had, had things at $1 or close to $1 in our core and premium products and a little bit of a gap in between and All Day Breakfast helped fill that price tier a little bit. So, we have seen about in launch period, we saw about 15% of our food order was outside of the breakfast day part included in All Day Breakfast item during our launch period. That percentage has come down a little bit since then, but still maintaining at a reasonably high percentage and we think All Day Breakfast still has a lot of runway.

Greg Francfort

I have added breakfast items as an add-on, so…

Kevin Ozan

And so have I.

Greg Francfort

Yes. And then one of the other I guess key initiatives right now is the value platform and you have tested I guess in January was the 2 for $2 and then more recently we have seen 2 for $5. Can you talk about how you think about value if that’s sort of if you are testing anything else right now and how you approach that going forward?

Kevin Ozan

Sure. Last October, as we worked with our franchisees and thinking about moving towards a new national value platform, we talked about a few different alternatives and we agreed on in January for about a 5-week period to run this 2 for $2 nationally. So, we did that during the month of January and we also agreed back in October to run in March this 2 for $5, which gives you a choice of 4 or 5 sandwiches, picking 2 of them for $5. February was what we call a local window or regional, where the individual regions around the U.S. could choose to either stay on the 2 for $2 if they wanted or could alter it a little bit to meet what made sense for the region. So, you may have seen some regions, put some products on a 2 for $3 or a 2 for $4 depending on where they are in the country and what products they wanted to push. So, those are both giving us some good information related to what customers respond to. We believe that it’s important for customers. They like choice and flexibility. And so what the 2 for $2 and 2 for $5 do is give you a few different choices and items to choose for the same price point and we will use those learnings as we are now developing kind of the national value platform to go forward.

Greg Francfort

So, if you I guess come in and out with national price points, how do you avoid confusing the guest around when there is the price point in place and when there is not the price point in place?

Kevin Ozan

Yes. So, you may see – as we are working on developing a national platform, you may see certain price points nationally few times a year, could be three or four times a year potentially, where we do national promotions, national pricing with the same menu items around the nation. And in between those, the regions again will do local things that may be altering those a little bit as far as different products for different price points. Consumers are used to that, because right now we have a mix of national and regional promotions and items. There are certain things that we sell in certain regions of the country, things like lobster roll in Boston does really well, but probably isn’t going to do great in the south. We have McRib in certain parts of the country that – where it does well, but don’t necessarily sell it everywhere. So, I think our customers are used to having certain national value platforms and then having individual items that complement that throughout the year.

Greg Francfort

Then I guess, outside of the value platform or that specific value platform you are developing, how does the rest of the product pipeline look for 2016? Do you think product news flow will be a big driver? And then I guess tying into that somewhat is there has been some news reports about the, I guess, an expanded test of the All Day Breakfast in some markets. I guess could you talk a little bit about what is happening there?

Kevin Ozan

Yes. So, we are in a couple markets in the south testing kind of a full morning, if you will, all day. So as you know, right now, the co-ops selected either muffins or biscuits from an operational complexity standpoint. Each of them are serving one or the other all day past breakfast time. We are testing right now in a couple of markets whether to have the full breakfast menu all day. Now, what goes along with that is reducing complexity then in other areas, because we can’t just add that complexity or the additional items all day. And so as part of that, we are looking at what needs to come off the menu in order to be able to do that from an operational complexity standpoint. From a food pipeline standpoint, we will continue to have a mix of national and local limited time offers, promotions, etcetera, but you will also see a continuation of focusing on the core, our core menu items, improving the quality of those core menu items. I mentioned artisan grilled chicken and Buttermilk Crispy Chicken. You might expect to see a continuation further in the core menu of improvement in the quality of some of those items.

Greg Francfort

Is part of that with commodities coming down, there is an opportunity to upgrade some of the products, is that part of what’s creating that opportunity?

Kevin Ozan

There is, but I don’t know that behind the strategy is current commodity prices, I think it’s a longer term strategy of knowing that our core menu items are significant part of the menu, and customers have higher expectations these days related to quality and ingredients in those food items and so we are focused on that for the long-term versus just taking advantage of a short-term commodity swing, if you will.

Greg Francfort

And then going back your comments on menu simplification, how are you viewing that, is it a one on, one off sort of approach, is it net simplification or keeping the same, where do you stand?

Kevin Ozan

Right. When we talk about simplification, we talk about it in terms of net simplification, meaning net number of items needs to be the same or lower. Generally, it will be lower. It was in 2015 as we put in All Day Breakfast in the markets, we took off seven to ten items generally around the country depending on where you are. We didn’t mandate which items for each market come off the menu. That’s more determined at a co-op level or potentially even a restaurant level based on what sells in that market. But we also look at simplification as a broader perspective, meaning that we have a discipline now looking at a grid or matrix almost that looks at operational complexity, looks at the impact to customers and looks at company profitability. Looking at those three factors helps us determine which items should stay on and which should come off.

Greg Francfort

That makes sense. In the general landscape for restaurants, there seems to be a high level of discounting, where do you think we stand versus historical levels like the burger wars and can you discuss what you are hearing from franchisees because obviously, you guys don’t dictate pricing, but what you are hearing from franchisees on their plans to take pricing this year, are they looking to offset wages, are they looking to maybe play more in the discounting side, just what you are hearing?

Kevin Ozan

I think it’s safe to say it’s a competitive marketplace right now. The positive is that if I think back to the fourth quarter of 2015 that we grew obviously our sales. Our sales were pretty strong in the fourth quarter, but the QSR market also grew. And so that’s a positive. It isn’t like it’s a zero-sum game that people are just trading off customers, but the market is still growing. There is an opportunity for companies to grow. So I don’t feel like the discounting has gotten to an unhealthy level, let’s say where you are just swapping customers now. It’s certainly helping that the market is growing. As far as pricing, to your point we don’t dictate the franchisee pricing. But from – they use generally similar metrics and tools that the company does. And we look at a few different things. We look at food away from home inflation, which certainly is impacted by commodity prices. Commodity prices are fairly benign this year. We expect about 1% to 2% decline in commodity prices in the U.S. in 2016, but the franchisees rightly so are concerned about labor wages, healthcare cost increases and so that impacts also. And we took about 2% pricing in 2015, expect that it will probably be relatively similar in 2016. But we will keep a close eye on that because as commodity prices are relatively low and inflation is relatively low, there is some risk about getting all that pricing power, I will say this year. And so the franchisees and us both watch those pretty closely, because we want to make sure we are still growing guest counts and so you have got to balance taking pricing with growing guest counts.

Greg Francfort

Is the wage inflation issue, is it more of a structural issue, you think or is it a shorter term challenge that the franchisees are facing?

Kevin Ozan

I don’t know that’s a shorter-term challenge because my guess is they are not going – different than commodity prices. Commodity prices will go up and down throughout different years. I haven’t seen where wage prices go down. So generally, they go up and may plateau for a little while, but they won’t come down. And so it’s a little bit different pressure that everyone feels versus commodity costs, which you hope is a temporary thing if they are up a lot 1 year.

Greg Francfort

Got it. And then going back your comments on the QSR category expanding, who do you think loses, is it casual dining, is it at home, I guess who – what segments is QSR taking share from?

Kevin Ozan

There is a meaningful percentage of QSR customers that I will say demand and want value. And so value is really important to a lot of the QSR consumers. And they will look at that compared to the grocery store, compared to other casual dining restaurants. And there is a few different types of customers. There are some value seekers that look for kind of an entry-level price point value and want to make sure they are getting a deal at that point, and there are others what we will call deal seekers that kind of go around and look for the best deal around. And so we have got to be able to attract both of those customers in order to grow.

Greg Francfort

And then I think this is the first time in as far back as I can think, but maybe forever, that the U.S. restaurant count for McDonald’s will decline, can you talk about what you think or where we stand on a level of capacity in the QSR category especially as we think there is a lot of concepts out there who are looking to grow and McDonald’s is sort of reversing course may be and shutting down the growth?

Kevin Ozan

Yes. So in 2015, we closed about 200 restaurants. We took an opportunity to do a strategic review of our restaurants in the U.S. and around the world and made a decision to close a few underperforming restaurants, but we also have some closures every year due to like lease expirations, etcetera. So net-net, we went down about 100 restaurants in the U.S. in 2015, that’s less than 1% of our total restaurants. 2016, maybe something similar as far as net decline, if you will, but it isn’t because of an overcapacity issue. It’s more at least for McDonald’s, it’s certainly our focus on growing comp – comparable sales at existing restaurants and not focusing as much on building a lot of new units in the U.S. There isn’t an overcapacity issue at McDonald’s restaurants. I am not sure I have seen that a lot in the whole industry. So I don’t think there is a big overcapacity concern.

Greg Francfort

Yes. I will check with the audience. If anyone has any questions, please don’t hesitate to raise your hands. Maybe in the back there?

Unidentified Analyst

I am curious as to how the commodity deflation you think is affecting the promotional cadence within your industry.

Kevin Ozan

It’s interest – so beef cost is the main reason obviously that the commodity costs are lower a little bit in 2016 than 2015. I can tell you from the McDonald’s standpoint, we generally are voting in promotions relatively in advance of that and so we haven’t changed most of our cadence, I will say based on short-term commodity changes. It isn’t dramatic enough that you have seen a major change, I will say in anything we are offering or promoting or anything like that. So it’s a benefit certainly to our franchisees and to the company from a cost perspective, but hasn’t caused any change in strategy as far as what we’re promoting or what we are offering.

Greg Francfort

Over there.

Unidentified Analyst

You said that your capacity – your store count is call it of course flat or down just a little bit 2015 to 2016, what about the rest of the industry, what are competitors doing in store openings?

Kevin Ozan

Some competitors are opening restaurants certainly. If you talk to some of the other folks, I guess, you would see that some of them are continuing to build new units. We certainly have seen some competitors continue to build units and some competitors have talked about entering new markets or starting up in new places even though that hasn’t occurred yet. So we have heard some of the companies talk about expanding in certain areas, but it hasn’t changed our strategy as far as opening new units. We look at our demographics as far as where we have restaurants located, where the population is and we are relatively comfortable with where we are located from a capacity standpoint. You may see – you may continue to see competitors continue to build in certain areas where maybe where they are not, some competitors are strong in one part of the country and aren’t – don’t have a lot of presence in another area of that country. So you may see some of them expand in other areas of the country.

Unidentified Analyst

I mean it’s easier to add comp if the industry is not adding a lot of capacity. Do you know that we are seeing 1% or 2% growth in capacity?

Kevin Ozan

The growth in the industry, the overall industry is a couple percent that we have seen for the next few years and so we feel pretty good from an overall growth forecast if you will of the entire industry over the next few years.

Unidentified Analyst

Thank you.

Greg Francfort

Any other questions from the audience? So, maybe I will dig into a couple other topics here. Technology seems to be a growing area of focus for the restaurant industry, including areas like mobile or kiosk ordering. I guess how meaningful are these opportunities and how meaningful maybe are they specifically for quick service given the drive-through mix? And can you talk about where you stand and where you are going on those?

Kevin Ozan

Sure. Technology is going to continue to be important and I think over time is going to even become more important. So, you certainly can’t put your head in the sand. We have been a little late to the game on digital mobile apps. We launched in the U.S. in the fourth quarter and focused at the beginning on offers. And so it has the capability to do order pay, loyalty, all the other things you want a digital app to do, but we started with offers primarily because again if you think about our customers, they value, value and they value offers. And so that seemed to be the right thing for us to start with. It gets people used to using an app with McDonald’s. It gets people used to getting offers from it. There is opportunity going forward than to add both ordering as well as a loyalty program. And so you may see us testing or piloting an expanded loyalty program by the end of the year that allows you to do more one-on-one marketing with consumers. So right now, we have to do mass marketing to consumers through various means. What mobile app allows you to do is talk to customers and interact with customers one-on-one whether that’s through offers, through loyalty, etcetera. So, there is huge opportunity in the technology space. We think about the digital technology space as two components. There is what I will call experience, which is really ordering and paying. It’s kind of the basic functionality that ultimately you want people to be able to do. And then you have got this engagement side, which is engaging with customers through offers and through loyalty. We are going to have to play in both of these spaces to be successful. We have got to figure out some of the operational complexities on some of the order and pay side since about two-thirds of our traffic goes through the drive-through in the U.S. So, you have got to figure out if someone orders on their mobile app how do they pick it up, because they are not going to want to get into the same line in drive-through that everyone else is in. So, we have got to figure out from an operational standpoint how can we best deliver that order than to someone who has ordered on their mobile app.

Greg Francfort

Do you need to be on a common POS to execute some of those things or I don’t know, are you today?

Kevin Ozan

We are on generally a relatively common POS. There is some hardware that needs to be changed out in some of our restaurants, some of our franchisees’ restaurants in order to be completely on a common platform. And so that’s one of the things, the basics we need to get done before we kind of rollout broadly the app with nationally pay and order.

Greg Francfort

And then I guess hitting on the drive-through and sort of the efforts that you are working and how that interplays with the drive-through, Experience of the Future is a program that you are focused or there is some focus on in the U.S. I guess, in terms of create your taste can that work through the drive-through? And then what are you testing maybe besides that, that could work through the drive-through?

Kevin Ozan

So Experience of the Future is really about helping customers order what they want and how they want. And so there are several components to that. It’s about service, it’s about menu customization and it’s about digital ultimately. And so we are testing various combination of elements I would say around the country, including some that have menu customization, some have create your taste as you mentioned, but some have other forms of menu customization. We think some form of menu customization is going to probably need to be a part of this. In what form? I don’t know until we go through some testing. And the other pieces that I think will be important we are testing things like self-order kiosks. Again, it gives people a choice of how they want to order, whether that’s through their mobile app or through a self-order kiosk or at the front counter. And then in some of the restaurants, we are also testing table service. Again, you can order at the self-order kiosk and sit down and the order maybe brought to you. So, there is various combination of elements that we are looking at for this Experience of the Future. Some of these or several of these we have put in various places in other parts of the world. So, Australia has a chunk of these ideas and we have seen what’s worked well there. UK has some components and then we will see what the right mix is here in the U.S.

Greg Francfort

Then I think this is the first you are going back to the digital side, I think this is the first year where you are building in some component of a digital, I guess, tailwind into your sales. Is it that immediate that 2016 could start to see a benefit from some of these programs that you are working on?

Kevin Ozan

Yes. I mean, it’s pretty slight. 2016 certainly has opportunity to grow, but what we are seeing is people who order or people, who use offers from the digital app, it’s about a significant average check increase for people who come and order using the offers that one of the offers that they have gotten on the digital app. So, we know that, that’s building average check and also some frequency and so that’s why we have built in a little bit into our sales build, if you will, in 2016, but there is certainly more opportunity as we build out more in the digital app.

Greg Francfort

Sure. Again, if anyone in the audience has a question, please don’t hesitate to raise your hand, so...

Kevin Ozan

At the back.

Unidentified Analyst

Can you hear me?

Kevin Ozan

Yes.

Unidentified Analyst

Can you maybe give us some early indication of the penetration for mobile ordering? I know it was very soon.

Kevin Ozan

So, we launched in the fourth quarter, so I only have fourth quarter data right now. There is about 7 million – little over 7 million, almost 7.5 million downloads of the digital app that occurred in the fourth quarter, about 6.5 million redemptions from that and about 5.5 million registered users, where we verified e-mail addresses. So, we have the start of a good database of consumers just in the first quarter actually and again obviously, that would continue to grow, but that’s where the real benefit is. So, we have now got over 5 million e-mails and active registrants that we can communicate one-on-one with and again that will continue to grow.

Unidentified Analyst

And maybe digging into that, on the loyalty side, I guess, McDonald’s it seems like a lot of the not QSR, but some of the limited service competitors have been focused in on loyalties for a little while here. I guess, how are you approaching it going forward? Is it you guys, is there any immediacy or do you want to roll it out very quickly, I guess how are you approaching that rollout?

Kevin Ozan

Yes. Loyalty is going to be an important part of the strategy going forward. And I think as we have talked about it, we want to make sure we get that program right the first time. So, we will test and pilot something by the end of the year. It maybe based on frequency of visits that you earn points and the more visits you have, the more points you earn that you can redeem and they expire or something along those lines. So, we don’t have the formal program set yet, but we will begin testing and piloting by the end of this year with the idea to hopefully rollout something more broadly next year.

Unidentified Analyst

Did you say that two-thirds of your revenues come from the drive-up?

Kevin Ozan

Two-thirds – in the U.S., two-thirds of our guest counts go through the drive-through, about 65% of the sales go through that.

Unidentified Analyst

How do you overcome the problem of the digital order being picked up rapidly by the consumer, will you add a window?

Kevin Ozan

Well, so that’s what I am saying. We have got to figure out before we turn on the order piece. We have to figure out the operational side of it. It could be something like you have a couple of parking stalls and the people that order in advance go and park in that stall and someone brings out the order, because that way you can bypass the line. So, we have got to figure out that operational complexity, but that is the challenge right now.

Unidentified Analyst

Put them on roller skates?

Kevin Ozan

That’s a possibility I guess, but what we have done in a couple of countries outside the U.S. something like I just talked about where you have some dedicated parking stalls, people go into those parking stalls and someone just comes out and brings you the bag with the order. Sure.

Unidentified Analyst

Could you talk a little bit about the potential for deflation for food at home and the impact that might have in your business?

Kevin Ozan

Yes. So I mentioned that we look at food away from home inflation. I should also mention the other thing we certainly keep an eye on is food-at-home inflation, because if food-at-home inflation gets to be too low or deflation, the grocery store becomes our competitor just as much as any other restaurant, if you will. So, we keep an eye on both of those as we think about and look at pricing power. We will keep an eye on both food away from home inflation and food-at-home inflation to make sure that we don’t get too much out of line with that.

Unidentified Analyst

[Question Inaudible]

Kevin Ozan

It’s relatively benign just like all the other food. It’s relatively low, I guess, inflation and so that’s why I say there is a risk of us having the pricing power that we are hoping to have, because both food away from home inflation and food-at-home inflation isn’t very high these days.

Greg Francfort

In the front here.

Unidentified Analyst

Two questions for you. First, would just love your overall thoughts on the financial health of the U.S. consumer kind of how your consumer is feeling right now? And then secondly just maybe turning to China for a minute, maybe just talk about recent trends that you have seen in that business maybe from Q4 and your outlook for growth in China?

Kevin Ozan

Sure. Let me start with the consumer and if I forget the second, you will remind me that it’s China. I think the consumers right now I think are feeling okay, obviously with gas prices down, consumers I think generally are feeling alright. Having said that, we don’t always see a direct correlation between gas prices and our business, so I know some people think that there is a big correlation as gas prices come down, the QSR industry and McDonald’s specifically will see an impact in sales. We haven’t seen a direct correlation with that other than on specific highway stores, I will say, where you see people traveling more by car. But I think in general, what we are seeing consumers are spending a little bit and feeling okay, I think right now, they are certainly a little cautious with – unemployment isn’t too bad right now. The economy I think in general is doing fairly well. People aren’t sure what to make of the political landscape and I won’t even try and enter that arena, but I think in general, consumers are feeling okay. And I think that, that’s contributing to our business certainly. The weather also being positive over the last 6 months around the country probably has helped consumer psyche and our business also.

As far as China, we are bullish on long-term prospects in China. So, we are going to continue to grow in China. We will open about 250 restaurants in 2016. We have a little over 2,000 there right now. Third and fourth quarter for us was kind of a recovery or kind of after recovery period in China. We had been lapping a supplier incident we had in 2014, lapped that in mid-2015 and had strong comps there in the third quarter, a little bit lower, but still positive in the fourth quarter. It’s a competitive environment in China. It’s very competitive there, more so from local Chinese QSRs even than globally branded QSRs. So, it’s very competitive and we are not the lowest cost provider in China. It’s a little bit different environment than here in the U.S. We are a little bit higher priced compared to some of those Chinese QSRs. And so it’s a little bit more difficult competitively there, but we are extremely bullish on long-term growth aspects. We will open, like I said, about 250 restaurants this year and we will continue franchising significantly in China. There is still an opportunity for us to franchise a lot of our restaurants in China. So, you will continue to see a lot of activity in China.

Greg Francfort

Following up on that, has it gotten more competitive? One of your largest competitors over there has talked about the level of competition increasing over the last few years. Have you seen that and what you think is driving it? Is it availability of capital or some other reason?

Kevin Ozan

Yes, it has gotten more competitive. And again, I think a lot of it is the local Chinese QSRs. You have a lot of street vendors there that are competitors. There is a lot of choices there and a lot of low cost food choices that make competition there difficult and competitive. And it has gotten more competitive over the last couple years I think is fair to say.

Greg Francfort

All those things seem to be things that have existed there a long time. Is there something that might be new that’s driving that?

Kevin Ozan

I don’t know if local competitors felt threatened by more global consumer, global competitors or what caused it, but the Chinese consumers I think like choice and like value. Value is important to Chinese consumers. So cost matters there. Value is a big proposition. Our breakfast business does pretty well in China and so it is a competitive environment, I wouldn’t see that ending in the near-term.

Greg Francfort

Maybe I’ll just hit on the – sorry.

Unidentified Analyst

Good morning.

Kevin Ozan

Good morning.

Unidentified Analyst

If we look across the QSR or even the fast casual landscape, over the last 5 years to 10 years, there has been a secular shift to more franchising as far as the business model. It seems like that has the potential to shift the drivers of the business models for the respective companies, where I am going with that is potentially does that mean that ability is going to be a little bit lower for the industry as a whole as a result of greater efforts to be driving growth among the franchisors and does this pave the way for discounting to be a more permanent part of the strategy in that pursuit?

Kevin Ozan

Yes, it’s a good question. I will speak for McDonald’s versus the entire industry, but I don’t think the franchising in and of itself changes the unit economics, if you will or lowers what comes out of a restaurant. For us in general, the franchisees probably run a little bit better restaurants than we do in reality. And so by us franchising, what the franchising does is gives us that predictable revenue stream. It doesn’t give us as a company subject to big variability in costs in one year versus another. And the franchisees still want restaurants. They are doing well, earning cash flow. And I think there is going to be enough profitability in the restaurants that the franchisees will continue to do well, but the company will also then have this predictable revenue stream. So I wouldn’t see that that in and of itself promotes further discounting or any kind of change in overall economics just from the franchising side. Of course, I could be wrong.

Greg Francfort

Just a follow-up on that, do you think are lower interest rates playing a role in terms of your thinking around the franchise mix or maybe the industry shift towards more franchising, I guess what’s – it seems to be a phenomenon that’s been, I guess a lot of the large chains have stepped up the re-franchising the last couple of years, what do you think is the biggest driver of that?

Kevin Ozan

Yes. I wouldn’t put lower interest rates in the main mix of why we are doing that, I will say. It’s about allocation of resources, meaning if I have got capital to spend, how am I going to get best spend it. And by franchising obviously over the long-term, I should be able to reduce my capital spend as well as my G&A spend. And like I said, the franchisees generally will run good restaurants, we will get a predictable, reliable revenue stream and we will have an efficient resource allocation both in terms of capital and G&A by doing that. And so I don’t think the lower interest rates is driving that because there is always a demand by franchisees from restaurants – for restaurants. They earn in the U.S. The average restaurant in the U.S. is earning over $300,000 of cash flow and so there is always a demand to get more restaurants. And if they need to take on some debt to do that, they are definitely willing to do that.

Greg Francfort

Okay. I think we are out of time. So thank you very much for your time and thank you all for being here.

Kevin Ozan

Thanks for your time. Thank you.

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