Source: Seeking Alpha
McDonald’s Corporation (NYSE:MCD)
Q2 2014 Results Earnings Conference Call
July 22, 2014, 11:00 AM ET
Kathy Martin – VP of Investor Relations
Don Thompson – President and CEO
Peter J. Bensen – SEVP and CFO
Brian Bittner – Oppenheimer & Co.
Matt DiFrisco – Buckingham Research
Joe Buckley – Bank of America Merrill Lynch
David Tarantino – Robert W. Baird & Co.
David Palmer – RBC
Jeffery Bernstein – Barclays
Jeff Farmer – Wells Fargo
John Glass – Morgan Stanley
Jason West – Deutsche Bank
Sara Senatore – Sanford Bernstein
Bryan Elliott – Raymond James
John Ivankoe – JPMorgan
Keith Siegner – UBS
Paul Westra – Stifel Nicolaus & Co.
Hello and welcome to McDonald’s July 22, 2014 Investor Conference Call. At the request of McDonald’s Corporation this conference is being recorded. Following today’s presentation there will be a question-and-answer session for investors. (Operator Instructions).
I would now like to turn the call over to Ms. Kathy Martin, Vice President of Investor Relations for McDonald’s Corporation. Ms. Martin, you may begin.
Kathy Martin – VP of Investor Relations
Thank you. Good morning everyone and thanks for joining us. With me on the call are our President and Chief Executive Officer, Don Thompson and our CFO, Pete Bensen. Today’s conference call is being webcast live and recorded for replay by phone, webcast, and podcast.
And before I turn it over to Don I want to remind everyone that the forward-looking statements in our earnings release and 8-K filing also apply to our comments. And both documents are both available at www.investor.mcdonalds.com, as are reconciliations of any non-GAAP financial measures mentioned on today’s call with their corresponding GAAP measures.
Now I’d like to turn it over to Don.
Don Thompson – President and CEO
Thank you, Kathy and good morning everyone. Before I discuss our second quarter results I wanted to provide a brief perspective on our performance relative to our expectations. I also want to share with you how our strategies have evolved, to guide our actions going forward. As we shared with you at our Investor meeting last November and in the last couple of quarterly calls we entered 2014 well aware of the challenges we face for comparable sales and margins amid ongoing broad based challenges and cost pressures throughout our P&L. And we don’t expect any material changes to this operating environment in the second half of the year.
Our financial model is built on growing comparable sales, which in turn drive profitability. So when comparable sales are relatively flat as in second quarter our ability to grow income is significantly impacted. We’ve often said that there is no one silver bullet or single solution for driving sustained growth. In fact the key to our success over time has been that we’ve executed multiple initiatives simultaneously. Enduring success requires an ever stronger foundation. So we’re pushing forward on a multiple fronts as we focus on those areas within our control to enhance our relevance and appeal to consumers.
Earlier this year we evolved our Plan to Win Framework, refocusing our planning and actions on what matters most to our customers; relevant food choices, easier engagement with our brand through digital and greater transparency into the quality of our food and what we stand for as a brand. Serving good food through good people and being a good neighbor in the communities in which we operate is what McDonald’s stands for.
In April we shared our updated global Plan to Win framework with the more than 15,000 franchises, suppliers and company employees at our Biannual Worldwide Convention. Our decentralized system is now moving forward as we run with more than 35,000 restaurants in 119 countries aligned around an evolved global Plan to Win framework and executing in a way that takes into account local consumer needs and local business environments.
As we work to regain business momentum we are pursuing two parallel paths. First, we are strengthening key foundational elements of our business to deliver our better overall customer experience today. And second, we are making progress on comprehensive strategies in pursuit of the sizeable growth opportunities that lie before us. These activities are interrelated and together they position us to drive profitable growth over the long turn.
Let me talk first about the work currently underway for foundational elements of our business today. These include value first. We are evaluating the relationship between pricing and quality perception across our menu board and that’s because value is one of our grand pillars. So we must continue to fortify our position within this key consumer attribute.
Second, operations and service; around the world we are enhancing our operations and service platforms to improve the customer experience and ultimately increase visits. This includes the service reset in the United States and servicing kitchen enhancements in Europe.
Third, marketing. We are taking actions to reestablish our marketing leadership position globally. In some markets, this means adding fresh perspectives by bringing in new leadership or agency partners. In others it means heightening our awareness of how customers use McDonald’s and creating stronger messages to reinforce our place in customers’ lives. And around the world we are also strengthening our creative messages by placing greater emphasis on the quality of our food and again reestablishing the emotional connection that our customers associate with the McDonald’s experience.
The fourth area is simplification. We are streamlining our merchandizing menu board and product offerings and in addition to making it easier for customer to order their favorite products, this will reduce complexity in our restaurants which in turn should enhance accuracy and speed of service.
Getting these foundational element right is critical to maximizing the impact of the additional growth initiatives that we are actively pursuing within the strategic priorities of the Plan to Win framework. Specifically these growth initiatives include menu customization and personalization, digital engagement and brand trust. In the area of menu customization and personalization our initial efforts focus on delivering the best burger experience to our customers. I’ll talk more later about our learning lab we recently established in the United States to help us better understand what matters most to customers in this arena today?
We are also accelerating our digital leverage as we talked about before, leveraging learning from markets like France and Australia we’re now executing some elements of our e-commerce digital strategies. We are also testing various additional elements of our strategy in other markets like the U.S, Sweden and the UK as we refine and execute our global digital vision. And we are taking meaningful action to become even a more respected brand including our work with the World Wildlife Fund and the Alliance for Healthier Generation which was found by the American Heart Association and the Clinton Foundation. These represent just the subset of our broader sustainability efforts.
We are pursuing these initiatives holistically and building on investments we already made to deliver an unparalleled experience to our customers and consumers in general. It’s these combined efforts that give me confidence in the future and our ability to drive enduring profitable growth for our system and our shareholders over the long turn.
Let’s now turn to performance for the quarter. Global comparable sales were relatively flat for the second quarter and comparable guest counts were negative. Operating income was down 1% in constant currencies and earnings per share was $1.40, a 1% increase in constant currencies. Several markets delivered solid results, stronger operating income performance in China, the UK and France was offset by weaker performance in markets including Germany, Japan, the U.S. and Australia. These four markets remain priority areas of focus for us and I’ll talk more later about the actions we’re taking in these markets to reignite momentum.
We’re moving with a sense of urgency but recognize that it will take time to see the results of our actions. Our franchise business model is a clear advantage for us but it also requires alignment around our plans and actions and this takes time. Once allied it takes time to enact changes in the restaurant and time for customers to notice the changes we’ve made and reward us with more visits. Therefore we expect continued volatility across markets for the second half of the year and expect full year 2014 global comparable sales to be relatively similar to year-to-date June performance with July global comparable sales excepted to be negative.
Let’s talk more specifically about performance and the actions we are talking by geography starting with the U.S. In the United States comparable sales for the quarter were down 1.5% and operating income increased 1%. While comparable sales were disappointing the U.S. is making progress in three critical areas, improving service through the operations reset, focusing on menu and strengthening our marketing position. The service reset was designed to place greater emphasis on the critical role of proper staffing, scheduling and positioning in our restaurants across all the day parts.
Over the last six months our operation support staff are making [inaudible] with all franchise and company owned restaurants to recalibrate around service and customer experience standards. Restaurants across the U.S. are now executing as planned and we are beginning to see a reduction in order accuracy complaints.
From a menu standpoint, we are placing greater emphasis on the balance between our core classics and the number of new products that are being introduced into the marketplace and this is to ensure that they can be delivered at the speed and convenience that customers expect from McDonald’s.