McDonald's Corp (MCD) Management Presents at JPMorgan Gaming, Lodging, Restaurant & Leisure Forum Conference (Transcript)

Mar. 15, 2019 2:34 PM ETMcDonald's Corporation (MCD)1 Like
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McDonald's Corp (NYSE:MCD) JPMorgan Gaming, Lodging, Restaurant & Leisure Forum March 15, 2019 11:20 AM ET

Company Participants

Kevin Ozan - Corporate EVP & CFO

Conference Call Participants

John Ivankoe - JPMorgan Chase & Co.

John Ivankoe

Okay. Good morning, everyone. It's John Ivankoe with JP Morgan. Welcome back to the Friday morning session of JP Morgan's Management Access Forum in Las Vegas. I'm very happy to have McDonald's headline this morning with us. I think McDonald's Corporation certainly needs no introduction. And the company's successful CFO, Kevin Ozan, is joining us today, and we look forward to an event-filled, and hopefully, condensed conversation that covers a lot of different ground across the world.

Question-and-Answer Session

Q - John Ivankoe

So let me just jump right in, if I may. Firstly, in the U.S., there's obviously a lot of initiatives in 2018. The $1 $2 $3, fresh beef rollout, delivery, EOTF implementation, many initiatives you've put onto the franchise community. Any one in themselves in a normal year would have been a lot. Could we talk about in hindsight, in 2018, where you feel these initiatives were the most successful, what is needed for -- opportunity for improvement going forward? And which of those initiatives do you think have an opportunity to be more impactful in the future as time gives you the opportunity to optimize?

Kevin Ozan

Sure. First of all, thanks for having me here today. I appreciate it. Good morning to everybody. So 2018 was an interesting year for us in the U.S. As you just mentioned, John, it was a year of significant change, a lot of hard work in the U.S. and a lot of initiatives, substantially more than what I would call for us a normal year. So if you think about it, at the beginning of January, we introduced our new value platform, $1 $2 $3 menu. I'd say that worked pretty well during the year, but we're tweaking it for a couple reasons. One, we have gone away from mostly local value to having this national value platform and coming completely away from local value. And I think what we determined was we need the right balance. There are certain things that are better off being marketed on a local basis. Breakfast, for example, is more of a local marketing perspective, because if you think about what they eat for breakfast in the Northeast of the country versus the Southwest of the country, it's very different. Southeast is very different than a lot of the other areas. And so we've determined that certain areas of the day, like breakfast, need to have the value messaging happen locally. In addition, what you'll see with the value platform is, there will be more local autonomy on which products around the $1 $2 $3 menu because various cities have different cost structures, if you will. Again, certainly, New York City has a very different cost structure than Southeast of the U.S., let's say.

John Ivankoe

And by local, do you mean with the 50 current advertising co-ops or even more than that?

Kevin Ozan

So it will generally be -- it will be by co-op. And so each co-op has the ability -- the requirements for the $1 $2 $3 menu are everyone will have $1 any sized drink and $2 small cafe drink -- McCafé drink. The rest of it effectively is up to local co-ops to determine at a co-op level what other product. Now you have to have something at $1 $2 $3, but there will be different offerings depending on where you are throughout the country. So that you'll see change. Some have already changed. Some are in the midst of changing, but that's kind of going on right now. The next thing that happened in 2018 is we introduced fresh beef for our quarter-pound sandwiches. That certainly was successful. That will continue. No changes on that. But that was a big change for the system, just to put that in and go through all the training and operation efforts that needed to happen to get that in.

So that was an impact in 2018. Now we're just in what I'll call steady state related to that. The other -- one of the other things that happened in 2018 is we continued our rollout of Experience of the Future in the U.S. That was about 4,500 projects in the U.S. That's a ton of contractors, restaurant closings, reopening of restaurants, construction. Just the effort to do 4,500 projects in the year was a distraction for the company. It impacted our comp sales by about 0.5 point in 2018. That should begin to dissipate as we started lapping all that now in 2019. What I'd say related to Experience of the Future is now we're modernized. We have kind of our modernized contemporary look in nearly 80% of our restaurants in the U.S. So that's a big -- for us, that's a big thing because most of our international markets had already remodeled. The U.S. was behind on the remodeling efforts. Now with 80% of them remodeled, you have a much better chance of seeing a remodeled restaurant than one that hasn't been. At the same time, a little over 50% now have this Experience of the Future elements. So we'll continue that rollout in 2019, about 2,000 projects or so in 2019, but a much -- a lower pace of projects. But the projects will likely be some of the bigger projects because we did some of the restaurants that are already been remodeled and just needed the Experience of the Future elements, which are primarily technology, self-order kiosks, et cetera. A lot of those got done in 2018. 2019 will be a little bit higher proportion of the full remodels and Experience of the Future.

John Ivankoe

Let me ask you first. So what do you plan to achieve with the changes in the $1 $2 $3. It's average ticket? It's profitability? Was it -- I mean, obviously, we hear about the franchise committees, what have you. I mean, was it driven from them? I mean -- or does this collaboration still exist as it has before and maybe the press is…?

Kevin Ozan

You covered a lot there. Okay, so--

John Ivankoe

Well, it's kind of what do you expect to achieve with the $1 $2 $3 and what was it driven by?

Kevin Ozan

So the $1 $2 $3, what we did see is transactions that had an item with the $1 $2 $3 with it had a higher average check, which may go against what people might expect, but we actually saw a lot of folks ordering a meal and then using an item from the $1 $2 $3 as an add-on. So we did find the transactions that had any item from the $1 $2 $3 Dollar Menu were actually higher average checks than without a $1 $2 $3. So it did serve its purpose from an average check perspective. Where we -- where you'll see a little bit of change is on the deal side. So what you would have seen in December and January, we did 2 for $5 national deal. Those have generally worked out well, and it's generally with our core products. You see that it ends up lifting the core products, even if it's not part of the deal. So when you do 2 for $5 and have Big Mac, let's say, as part of the 2 for $5, we see Big Mac units sales going up even if someone buys a Big Mac not as part of that 2 for $5. So what you'll see in 2019 is the value -- the pure value menu side of the $1 $2 $3 will now be, I don't want to say split between local -- there's a national framework, but it will be executed at a local level. And then what you'll see pulsed in a few times a year will be national deals like a 2 for $5 or a 4 for $6 or something like that. I think what we did in 2018 was work out the right balance of local and national and the right balance of value and deals.

John Ivankoe

And in terms of what you expect to achieve, I mean, it's more traffic, it's more ticket, it's more profitability for the franchisee? What's the intention of the change?

Kevin Ozan

Yes. Yes on all of those. Generally, the 2 for $5 deals and the 4 for $6 deals will have a higher average check associated with it also. That's generally favorable to operator cash flow. So those types of deals work well. Clearly, our Velocity Growth strategy plan is built on growing guest count. So ultimately, all of this has to drive traffic in the long term. But some of these do drive average check in the near term that does help operator cash flow on a near-term basis. The only other thing I'd mentioned then, just thinking about the big initiatives, the other thing we did was we added several thousand restaurants that are on delivery now. So we now have about over 9,000 restaurants in the U.S. that are offering delivery. To me, 2017 and '18 was really about getting the restaurants on. What you'll see in 2019 is it's now about optimizing that. How do we increase awareness? Because the guest counts for delivery in the U.S. still are relatively low per day per restaurant, but the opportunity is enormous. And so really, the first couple years are about getting all the restaurants on, working through some of the technology of integrating with UberEATS. Now it's about, how do you optimize that business and grow awareness? Because once people are aware that we offer delivery through UberEATS, we see a high repeat order rate. We see high customer satisfaction. It's a higher average check associated with delivery, and it's generally at times that are complementary to the rest of our business. So more of the delivery business is skewed to the evening and night hours, which is when we've got some capacity in the restaurant. So it's a good complement to the drive-thru and in-store business.

John Ivankoe

And I'll follow up with that one. What does the word optimize mean in this case?

Kevin Ozan

Several things. So growing awareness would be the first thing. The biggest opportunity is, for us, to just grow awareness. So you will likely see some more advertising related to delivery just so that people become aware that we're offering McDonald's through delivery. The other things is there will be things like packaging. We're working on some packaging to make it more efficient to transport some of the products to make sure that they arrive hot and fresh, things like that.

John Ivankoe

You mentioned the fresh beef rollout was certainly successful. But one of the themes that happened in 2018 was slower drive-thru times. It would be easy to correlate it to, so could you elaborate on that? And then let's talk about what -- why slower drive-thru times happened and what can be done to change that.

Kevin Ozan

Yes, perfect. So our drive-thru service has actually slowed down a little bit over the last few years. So it wasn't just driven by fresh beef. But if you think about what we've done over the last several years: introduced All Day Breakfast, now put in fresh beef, put in some more premium products like the Signature Crafted sandwiches that take a little bit longer to make, and some of the complexity that we've added into the business has now created a little bit slower drive-thru times. So again, one of the things you'll see in 2019 is a big focus on what we call just running better restaurants, just running -- the basics of running good restaurants. And the plus that we have in 2019 again, comparing it to 2018, is we don't have all these huge efforts going on that we had in '18: the introduction of a new value platform, restructuring. We've restructured our whole field structure in 2018. So we went from 21 field offices to 10 field offices. We reduced our co-ops from 180-plus co-ops to 50-some-plus co-ops. All of that created just an enormous amount of change in the business. And while that was disruptive in 2018, to do all that and still have a 2.5 comp, we feel like it sets us up really well as we start and get into 2019. So we feel much better about the position we're in right now than when we began 2018. You will see a big focus on drive-thru service times, and that's -- there are several aspects of that. It's menu complexity. It's operational complexity. It's outdoor digital menu board you'll see in all the restaurants that make ordering for a customer easier. And it's trying to make sure that we're staffing our restaurants at the right level, which is one of the big challenges right now.

John Ivankoe

So let's talk about staffing, I mean, just broadly in the economy and then I want to talk about your traffic comps. Being late cycle within QSR, not only are hours oftentimes not what are optimal, but the people that are in the stores. The turnover gets higher the newer people that are -- people that don't necessarily have an intention of making a career working at McDonald's, like less so at the end of the cycle than at the beginning of the cycle. So talk about staffing and what that means regionally, locally, and how much you think staffing is a cause -- is in and of itself why '17 and '18, for example, did see these slower drive-thru times and what -- it cannot be reversed.

Kevin Ozan

I think -- it's part of the reason, I'd say. So definitely, we've seen a correlation between the restaurants that are, what we would call, fully staffed. We have guidelines that tell you how many people should be on shift based on volume, time of day, et cetera. And we can look at restaurants that kind of, what we call, staffed to guide, which means you're following the guidelines and putting that number of staff in the restaurant. We know that there's a direct correlation between the restaurants that are able to staff to guide and results: comp sales, sales results, et cetera. So the more that we can make sure that the restaurants are able to staff to guidelines, that helps sales for sure. The challenge right now, as all of you know, and it isn't just for us, obviously, is with record low unemployment, with increasing labor costs. Labor is probably our -- not probably, is our biggest challenge right now in the U.S. But not only in the U.S., that's around the world, because there's generally pretty similar demographics or dynamics around the world as far as availability of labor, increasing cost of labor. And our business is a little bit higher labor-intensive than some. And so what we've got to do is find efficiencies in the restaurant, that's in front of the restaurant and that's also in the kitchen behind the counter, of how we can be more efficient to reduce our reliability on so much labor. And that's some of the things we're working on right now.

John Ivankoe

So in terms of -- I mean, you described the labor market, which we know, record low unemployment, higher labor costs. And yet the same-store traffic in the U.S. was down 2.2%. Same-store traffic was not -- which, I guess, is also a traffic in this case. So what does that comp performance tell you about the secular outlook, if you will, of quick service? I mean, because cyclically, we should -- we, as an industry, should be doing better. And then I may have a follow-up on that traffic versus ticket.

Kevin Ozan

Yes. So again, I don't think anyone who follows IEO, the informal eating out industry -- certainly, traffic in just about every peer competitor -- same-store traffic, I think, was down in 2018. There were 1 or 2 that were able to grow it. But in general, the industry traffic was down. If you look over the last several years, people are not eating out as often as they were. There's a host of reasons for that: aging population, availability of delivery, more people working from home, a whole bunch of kind of societal changes that are driving less people to be eating out than they used to. That's why things like delivery are important because some of those folks aren't out and about as much as they used to be. So that's a dynamic that we've got to be able to adjust to. That's why delivery, I think, has exploded as quickly as it has recently. And it will continue to find -- I think the challenge will be to continue to find ways to provide the right experience, convenience and value to customers wherever they want to get their food.

John Ivankoe

Is there evidence that you've seen that delivery, whether it's third party or not, is actually affecting drive-thru traffic? I mean, drive-thru which -- it used to be the ultimate convenience. And now sitting on your couch and clicking the app might even be more convenient. It's not cheaper, for certainly. Food might not be delivered in the same optimal condition. But it's -- are you -- is your data now showing that? And how big of an issue do you think was it?

Kevin Ozan

Our data is still showing that, today, the delivery business is highly incremental. We generally talk at least 60% to 70% -- probably 70% plus incremental. The question is, ultimately, that will become harder to measure and less incremental. It's easier today because delivery is so new, but it's like credit card sales. At some point, you got to be in that game. It may cost a little bit more, but if you're not in there, you're losing a whole new group of customers. So delivery, I think, is going to continue to grow. There's enormous opportunity there. We see that business growing substantially over the next several years. I think it will be harder to measure the incrementality as we get further and further along. Today, it is highly incremental, which makes it profitable for both us and our operators. Now, it is a lower gross margin percentage sale because there's an extra cost of those sales commissioned to the third-party service provider. But as long as it's highly incremental, it's at least adding new dollars, both to us and our operators. And so that's why it's important right now. But it's going to start meshing where it's going to be more difficult to measure the incrementality, I think.

John Ivankoe

But let me ask about, again, what's in the news in the franchise community because it is interesting. A franchisee got the comp that they would normally want, which is one that was very driven by ticket. In 2018, your price/mix was up 4.7% and had a 2.2% decline in guest counts in the U.S. I mean, normally, franchisees would really be up in arms when traffic is positive and ticket is flat to negative because that's where they do make less money. So I guess, talk about, like, why the composition of that comp wasn't satisfying to the franchisee and if it's an appropriate venue to do this. McDonald's has been built on a very collaborative relationship, I mean, in a usually collaborative relationship between suppliers, franchisees and the corporation itself. I mean, like, what was the fracture, if you will, in 2018 that maybe made some of these private conversations public?

Kevin Ozan

Yes. So let me start with the first one, which was the kind of the components of the comp, if you will.

John Ivankoe

Yes. Like -- and why wasn't that a desired outcome for the franchisee?

Kevin Ozan

So historically, we had always said, you probably needed a 2% to 3% comp in what we would call normal inflationary environment to be able to stay flat or at least -- on margins and cash flow or maybe even grow a little bit. Labor costs have gone up substantially. So wage increases have outpaced kind of normal inflation, which causes that original algorithm not to work. We had a little bit of commodity inflation, but that was more normal, I'd say, during those times. Average check did go up. But when you're not growing guest counts, which we weren't -- and where we're losing guest counts is breakfast is one of the big areas. And so again, the shift there is to more local-focused breakfast products and value because breakfast is an area that's still a stronghold for us. It's about 25% of our sales, our most profitable daypart. So we need to make sure that we don't continue to lose guest counts at breakfast. But I think between breakfast and the fact that less people eating out, that original algorithm of, "If you get check, you should be able to grow cash flow," is more under stress these days. Let me go to your next point about kind of our relationship with the franchisees and how things have unfolded over the last, I'll say, 6 to 12 months even. Again, if I go back to 2018, a lot of change, a lot of disruption in the marketplace for us. We're asking the franchisees to put in fresh beef, to adopt a new value platform, to add restaurants on delivery and to invest their money in this Experience of the Future, at the same time that their cash flow has been going down for at least a year -- a couple years, really now.

John Ivankoe

If we put down into context, like down is x versus y...

Kevin Ozan

So it was down about $15,000 last year being 2018. It was about down similar amount in 2017. It's now at a level of about 360,000-or-so per restaurant, and the average operator owns about 6 to 7 restaurants. That's pre-debt cash flow. But that's down, I'll say, $30,000-ish over the last 2 years. And so none of us like to see our cash flow going down from 1 year to the next. So when you think about all of that, that happened in 2018, there was some angst in the operator community. Totally understandable. A lot of change, a lot of things happening. They're making investments and their cash flow is down. So as you mentioned, our history is a very collaborative relationship with our franchisees and our suppliers. That's one of the things that I think is the cornerstone of our business. Sometimes, things take a little longer to get done because of that, but we've always felt that, that's our competitive advantage, just our relationship with the franchisees.

So we had some good discussions. We are still in the midst of some discussions. You will have seen that we did tweak a few couple aspects of our original plan. We now gave a little bit more time to get these Experience of the Future projects done. So originally, we asked them to be done by 2019 effectively. We've now given them another year of similar partnering at 55% through 2020. And then for some people who will need a couple more years, they can do that in a lower partnering rate of us -- from us. What we are seeing is most of them will get it done by the end of 2020. They like getting a little bit more of our money. And so they'll get -- when they can, they'll get those done by 2020. We would expect we'd be substantially done by the end of 2020. There will still be some projects left over, but that was one -- kind of through dialogue, we got to a reasonable answer on that. The other big piece that we've been in dialogue, and I've talked about a couple times now, is the evolution of our value platform. So this idea that they -- the franchisees were strong believers that certain aspects of value need to be driven locally. And through our discussions, fair enough, I think they were right on that. And so we have moved some of that back to local. Like I said, breakfast will be local, and some of the flexibility on the $1 $2 $3 Dollar Menu will be local. Those were two of the largest concerns that the franchisees have had. And so I think we've adequately addressed those. We'll continue to address a couple other issues that we're in the midst of dialogue. But I do feel like we're in constructive dialogue with the franchisees now, which is more of the way we've always done business.

John Ivankoe

And I don't think the cost of EOTF was a surprise. So it wasn't the benefit that was -- maybe it was the disruption that was a surprise or maybe the realized benefit after the disruption, that was a surprise. So talk about what -- the reason that you did it and let's talk about whether that is being...

Kevin Ozan

I think -- yes, I don't think the benefit has been -- the cost to our -- the cost is a little bit higher than we thought because of things like the construction industry has experienced a little more inflation because of demand right now. So the costs are probably a little bit higher than we would have originally estimated. But I don't think in general that's the biggest issue. One of the issues is restaurants were going down for a little bit longer than we anticipated. So they were closing for a little bit longer period than we were used to. We have now tweaked that so they're not closed for as long a period. They now recover a little faster once they come up. Once they do, the benefit that we are seeing, which is, effectively -- we call it mid-single-digit sales lifts, so let's call it 4% to 6%-ish sales lifts, once you reopen and get to the right kind of into normal pace after that. That's similar benefits that we've seen in our international markets, who are further ahead and have done this already outside the U.S. So we're seeing the benefits that we expected, that we had talked to the franchisees about. It just -- for a little bit, it was taking a little longer to get there. I think we've tweaked some of our process now to be able to kind of address some of those issues.

John Ivankoe

And were there tipping points in various markets where -- and as you classically said it, when there is enough stores in a market that have been modernized, the entire market gets a lift. I mean, how...

Kevin Ozan

Here's the way I think about it. We generally think that once you get over 50% in a particular area, whether that's a co-op or a trade area, as a customer, you have more than half a chance of seeing a restaurant that now is modernized and has all the technology. The other thing I think it does a little bit is it highlights in a good way the other restaurants that need to be modernized and need to get up to speed. And so the hope is that, that kind of encourages or presents the business case for the other restaurants to be able to do that as quick as possible. And we've generally seen that around, where -- again, as a customer, you don't want to go to 1 restaurant and see one thing, go down the street a mile later and see a completely different experience.

John Ivankoe

Obviously, I mean, the evolution in McDonald's from what was -- your company is spending nearly $3 billion of CapEx -- $1 point million which I think was in 2012, to something materially less than that. There are numbers of $1.2 billion, $1.3 billion that were being talked about was -- your franchisees in the system were going to do major remodels of Experience of the Future firstly in the International Lead. In some cases, it was capital; in other cases, it was royalty relief. And then the U.S. there were going to come in to a steady-state level of CapEx around that $1.2 billion, $1.3 billion as franchisees are, I think, contractually responsible for typical remodels, like regular way business remodels to themselves. Like that's not a McDonald's Corporation contribution. So is that still the case? Or is there any type of change of, "Hey, you own the building, so therefore, you're responsible for more of the CapEx going forward." Has there been any change in that longer-term paradigm that we've become used to?

Kevin Ozan

Yes. So technically, legally, contractually, the franchisees are responsible for all of the reinvestment in the building. The reality is, as we have implemented, I'll call them, major programs, major initiatives like Experience of the Future, where it's a dramatic change and we want to get speed as much as anything else, we have generally partnered with our franchisees. And that's not necessarily just a U.S. phenomenon. That's pretty much around the world. We don't always partner in the same way, as you mentioned. Generally, it's to a rent reduction outside the U.S. for a 5- to 7-year period. In the U.S., it's generally contributing capital. So we did that with this Experience of the Future project. We've contributed about 55% to these, again, in order to help us stimulate and jump-start the program and get them done quickly. We believe that getting this done, from a competitive standpoint, helps us to have all of our estate modernized and all looking the same and potentially can get done quicker than some of our competitors may be able to get done. And so that's why we do that. It doesn't change the requirement going forward of franchisees being responsible for reinvestment, but we do think there's a benefit by us spending some of our substantial cash resources to doing -- to getting this done.

John Ivankoe

And the $1.2 billion to $1.3 billion, which is meant to be kind of fiscal '20 run rate, that's no longer the case because Experience of the Future has been stretched from '19 and all the way through 2022 in kind of, obviously, insignificantly smaller numbers. Is that still the thought -- and the inflation on adjusted, that would be the longer-term kind of steady-state use of CapEx?

Kevin Ozan

So capital for 2019 will be about $2.3 billion or so and probably similar for 2020, maybe a little bit less in 2020. 2021 and '22, as I said, we'll be substantially complete in the U.S. by the end of '20, so the reduction in '21 and '22 should be roughly $500 million or so from that number for '21 and '22. And then we'll have kind of all of this, I'll call it, intense reinvestment period done and should be able to get to more of a steady state. Now that steady state of, let's call it, $1.3 billion-ish, then is just what we would require for new restaurants around the world and kind of base reinvestment needs in our company-operated restaurants. What it doesn't account for is, at some point, is there another program or another big effort that would require more capital. So there's nothing like that in our plans right now. But that $1.2 billion to $1.3 billion is kind of steady state of new restaurants and company-operated reinvestment.

John Ivankoe

And we know there will be different opportunities in 2023 that we really can't necessarily cost base.

Kevin Ozan

I would guess we have.

John Ivankoe

So can we talk about the resegmenting of the business? I mean, you haven't yet reported the quarter on it. And the words don't slip off the tongue maybe as they kind of used to. Beyond just the nomenclature change, maybe what do you expect to accomplish out of that and how might this influence the way you run your business?

Kevin Ozan

So back when we started our turnaround back in 2015, one of the things we did was talk about the fact that we were going to refranchise a considerable number of restaurants. We came up with about 40,000-or-so restaurants that we were going to refranchise. And at that time, we resegmented it to International Lead segment, High Growth segment and Foundational segment. These are all outside the U.S. U.S. has and will be and its own segment. And the reason for that was because they were 3 distinctly different groups of countries. The High Growth segment are markets like China and Russia that have a lot of opportunity to grow new units. The International Lead segment was our 5 largest markets outside the U.S.: that's Australia, Canada, France, Germany and the U.K. And then Foundational Segments were the 100, yes, 100 foundational markets or the 100-plus markets remaining. We will start in first quarter this year reporting under 3 segments instead of four segments.

So U.S. will still be its own segment. Now we'll have two International segments: One is called International Operated Markets. It's about 15 to 17 markets, and it's all of our wholly owned markets outside the U.S. So it still has the 5 large markets outside the U.S.: Australia, Canada, France, Germany and U.K., but then it also has every other market where we run some company-operated restaurants potentially and some conventional-licensed markets. The other segment, which is, we call, IDL, or International Developmental Licensed Markets, is the 100-plus markets where we're in this developmental license model, which is where we don't spend any of our capital. They find the real estate. They invest in the real estate, find the sites, operate the restaurants, and we just collect the royalty. So we have kind of 2 -- we have 3 different business models: company-operated restaurants where we're operating the company -- the restaurants, getting profits obviously from those; conventional-licensed, where we find the location, we will own or lease the building and land and will lease those to the franchisees.

We'll collect rent and royalty from those franchisees. We make a profit on the rent and a profit on the royalty, obviously. And -- but we incur capital for the land and building on those; and then we've got that third model of developmental license, where they do all the investment on their side. We don't invest any of our capital, and we just collect the royalty. So now you've got the segments aligned with those 3 different business models. It allows -- and there's different ways of managing those markets, and so that's why we're now organized that way. That's how we'll manage it internally as well as reported externally.

John Ivankoe

I mean, looking at it from the outside, I mean, basically, it's a combination of ILM and High Growth in the one segment and -- so it's -- but...

Kevin Ozan

Yes, except China and Hong Kong now moved into the International DL, would be the one big change of that. So you're right, it's generally combining High Growth and ILM into one, but moving China and Hong Kong into the other.

John Ivankoe

And in terms of expected benefits and expected learnings, I mean -- and certainly, we understand, like, you did sort of like -- you're having certain business models there together. But what -- why are they together?

Kevin Ozan

So internally, what's happens is the best practice sharing, the meetings, the -- all the work that happens, happens within a segment. Those markets will get together fairly often and talk about challenges, best practices, et cetera. It allows us to share ideas faster. It allows us to make decisions quicker, related to those types of markets, and it allows us to move talent the right way around the system. So that's kind of the underlying business reason for doing that.

John Ivankoe

One thing. It's -- a few years ago, a target that you didn't quite get to was G&A, which I think is currently around a $2 billion spend globally. Can that money be spent better? Can we spend less? I mean, as part of this resegmenting, I mean, is it a matter of moving different pieces around that do allow you to get to the efficiency levels that were expected, I think, that you guys made just a few years ago?

Kevin Ozan

So the resegmentation or the adjustments in segments is not a G&A savings. It's not anything related to trying to get more G&A savings. It's a business management, how we'll manage the business internally and report externally. So it is not really a very light segment structure, just like we had. So there isn't much opportunity to really reduce G&A structure there. What you're talking about is we came out with an original target in 2015 of saving $500 million of G&A. Later in 2017, we talked about potentially -- well, we talked about adding $100 million to $200 million to that savings. We then stepped back from that $100 million, $200 million. We saved the $500 million -- or we're in the midst of saving the $500 million. This year, we'll save -- we will hit that. The $100 million and $200 million we came off of for one primary reason. And I'll -- we believed and I believed -- we were a little behind the technology infrastructure.

We needed to invest a decent amount in technology infrastructure to get the technology more up-to-date, both for consumers as well as our in-house technology. We thought that would be a little bit of a spike for a year or two and then would go back to what I'll call a normal run rate. The reality is, the technology spend is going to be at a high level for a while. I think technology, which used to be considered to support the business, is now to grow the business. And so we're going to incur costs related to technology, but we like that spend because that's spending on growing the business. So what we have done is we've shifted more than $500 million. We've saved more than $500 million and have reinvested those additional savings into technology. So there's less kind of maintenance to run the business G&A and more focused on growing the business.

John Ivankoe

Thank you very much.

Kevin Ozan

Thanks a lot for your time this morning.

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