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McDonald's (NYSE:MCD)
Q4 2017 Earnings Conference Call
Jan. 30, 2018 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to McDonald's January 30, 2018, 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. At that time, investors only may ask a question by pressing *1 on their touchtone phone.

I would now like to turn the conference over to Mr. Mike Flores, investor relations officer for McDonald's Corporation. Mr, Flores, you may begin.

Mike Flores -- Investor Relations Officer

Hello, everyone, and thank you for joining us. With me on the call today are our president and chief executive officer, Steve Easterbrook, and chief financial officer, Kevin Ozan. Today's conference call is being webcast live and recorded for replay by webcast. Now, before I turn it over to Steve, I want to remind everyone that the forward-looking statements in our earnings release and 8-K filing also apply to our comments today.

Both documents are available on investor.mcdonalds.com, as are any reconciliations of non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures. And now I'd like to turn it over to Steve.

Steve Easterbrook -- President and Chief Executive Officer

Thanks, Mike. Good morning, everyone. 2017 was a very strong year of performance for McDonald's. Our results demonstrate we successfully completed the transition from turnaround to growth.

Our momentum is broad-based across the McDonald's system, with strong leadership teams in place, a business that's fit for purpose, and growth platforms underpinning our strategy that resonates with customers and markets around the world. Our top priority in 2017 was serving more customers more often, and we did. We grew guest counts by 1.5% in the fourth quarter and 1.9% for the full year, with all business segments positive. This was our first full year of positive comparable guest count growth since 2012.

Comparable sales recorded grew 5.5%, marking our 10th consecutive quarter of growth. Full-year comparable sales increased by 0.3%, our best performance in six years. We made significant advancements with our franchising strategy in 2017, culminating with our largest developmental licensee transaction, China, and we reached our target of refranchising 4,000 restaurants a year ahead of schedule. Customers tell us that we are now simply enhancing their McDonald's experience by being more attentive to their needs and serving hotter and fresher food.

Overall customer satisfaction survey scores continued to improve in 2017, with most markets achieving gains across multiple elements of brand perception, particularly friendly service and taste and quality of food. As a result, six of our top eight markets grew market share, with the U.K., Canada, and Japan leading the way. We are pleased with our progress but certainly not satisfied. There is more potential in the marketplace and in our plan, and we are leveraging our considerable size and scale to unlock it.

We are sharper and more focused in the way we organize, think, and act, and we are confident in our ability to execute with excellence to drive sustainable, long-term growth. Kevin will walk you through more details about our financial performance in the fourth quarter and the full year.

Kevin Ozan -- Chief Financial Officer

Thanks, Steve. By all measures, our strong performance in 2017 shows that we have momentum, enabling us to drive our business, innovate, and invest in our growth so we can compete effectively in today's global marketplace. Our comp sales performance is a significant achievement in a soft global IEO market and on top of strong prior-year results. Comp sales and guest counts were positive across all of our operating segments, with overall results driven by strong performances in the U.S., the U.K., Japan, Canada, and China.

U.S. comp sales increased 4.5% for the quarter compared with the rest of the QSR sandwich competitor set, which was relatively flat. Comp sales for the international lead segment rose 6%, with positive results throughout the segment. High-growth comp sales increased 4%, led by China's strong performance along with positive results across the segment's European markets, partly offset by some near-term challenges in South Korea.

In foundational markets, comps were up 8%. In addition to Japan's strong performance, comps were positive in each of the segment's geographic regions. I also want to mention that starting with fourth-quarter 2017, comparable sales in our foundational segment and on a consolidated basis have been adjusted to exclude the impact of Venezuela due to its hyper-inflationary status and the significant impact it had on the fourth quarter. We recasted comp sales for the first three quarters of 2017 to exclude Venezuela and reflected those in the earnings release to provide comparable amounts.

As we move into 2018, we will continue to direct our efforts and resources toward driving the convenience and menu innovation that will help maintain this top-line momentum. On a reported basis, earnings per share for the quarter declined 40%, to $0.87. These results include a one-time net tax cost of approximately $700 million for the impact of U.S. tax reform.

The $700 million net costs consist of $1.2 billion of costs for the deemed repatriation of our undistributed foreign earnings, partially offset by a benefit of $500 million for the revaluation of our deferred-tax assets and liabilities to the lower U.S. tax rates. Excluding the impact of tax reform, diluted earnings per share increased 19%, to $1.71, reflecting strong comp sales, G&A savings, a reversal of a tax valuation allowance in Japan, and a 27% tax rate. This tax rate was lower than expected because of tax law changes in some countries outside the U.S. in the fourth quarter. We ended 2017 with franchised restaurants representing 92% of our total restaurant base, up from 81% three years ago. As a result, franchise margins now comprise more than 80% of our total restaurant margin dollars. For the fourth quarter, franchise margin dollars increased across all segments, reflecting sales-driven performance and the shift to a more heavily franchised system.

The franchise margin percent in the U.S. remained flat due to higher depreciation costs related to our roll-out of Experience of the Future. Our company-operated restaurant base now consists of a little over 3,000 locations spread across the U.S., international lead, and high-growth segments. The U.S. and international lead markets account for about 75% of the company-operated margin dollars. For fourth quarter, consolidated company-operated margins improved 40 basis points, primarily due to our refranchising efforts. Company-operated margins in the U.S. declined 150 basis points due to higher labor costs, which reflected both wage pressures and our continued investments in deployment of our key initiatives, along with higher commodity costs.

Commodity costs in the U.S. for the fourth quarter were up a little over 1.5% versus last year, while our full-year U.S. grocery basket increased 60 basis points. In terms of menu pricing, our fourth quarter pricing was up 3% year over year, which was above food-away-from-home inflation of 2.5%.

The menu price increases we took in the fourth quarter were part of a broader strategic pricing reset of the menu board, ahead of the launch of our $1, $2, $3 menu in early January. By the end of the first quarter this year, we expect our pricing to be back below food-away-from-home inflation. For the international lead markets, commodity costs were up about 3% for the fourth quarter and 2% for the year, with menu prices up about 2% year over year. G&A for the year was down 7% in constant currencies, in line with the guidance we provided at the start of the year.

I'll put these savings into perspective relative to our G&A savings target in a few minutes when I review our updated outlook for 2018. Finally, other operating income increased nearly $60 million for the quarter, primarily due to the one-time reversal of the valuation allowance in Japan that I mentioned earlier.

Steve Easterbrook -- President and Chief Executive Officer

Thanks, Kevin. As our results demonstrate, McDonald's is much more agile and able to move at the pace needed to address the needs of today's customers. With the introduction of our Velocity Growth Plan last March, we aligned and mobilized the McDonald's system. We began acting on it straight away, and by the end of the year, we made substantial progress in the eyes of our customers.

We are serving more customers as we retain those most loyal to our brand, regain visits from those who have been coming less often, and convert our casual to committed customers. We've grown sales across the full breadth of our menu with great-tasting value offerings, delicious core selections, such as our Big Mac, and exciting premium sandwiches with a wide range of flavor profiles. With relevant menu choices for our most price-sensitive customers, we have strengthened consumer perceptions of McDonald's as a place to find a tasty and affordable meal. Across the system, our markets have increased the range and appeal of our food and meal bundles offered every day at compelling price points.

Petit Plaisir in France offers premium quality at a very affordable portion size. The Saver Menu in the U.K. and Value Picks in Canada provide a range of affordable food for snacking and add-ons. In the U.S., McPick 2 for $5 combined with $1 any size fountain beverages provides customers the opportunity to bundle and share, which drove incremental visits and average check in the quarter.

Programs like McPick 2 for $5 and Germany's Taste of McDonald's, featuring rotating core selections for EUR 1.99, not only appeal to the price-conscious consumer and drive incremental traffic, they reintroduce customers to the great-tasting quality of the food at a core of our menu. Across the McDonald's system, we've increased support and excitement via iconic food customers identify with our brands: the Egg McMuffin, the Quarter Pounder with Cheese, Chicken McNuggets, french fries, and, of course, our world-famous Big Mac, which is celebrating its 50th anniversary this year. We have reaffirmed that customers still crave this food and the core of our menu still drives growth. Maintaining greater strength in our core menu platform has allowed us to venture further into exciting and compelling new offerings, such as All Day Breakfast, which is satisfying customers and driving growth for McDonald's in the U.S., Australia, and Canada.

We also recently launched Buttermilk Crispy Tenders in the U.S., which contributed in a meaningful way to our sales performance for the quarter. Markets that have already modernized their restaurants now have the capacity and credibility to offer more premium beef and chicken sandwiches, such the Signature Collection in the U.K. and Seriously Chicken in Canada, which are driving brand perception scores higher and profitable top-line growth. To make it even easier for our customers to access our great-tasting food, we're providing them with greater flexibility and choice in how they order, pay, and are served their food.

In 2017, we went from piloting delivery with UberEATS in 200 restaurants in Miami, Tampa, and Orlando to offering our customers the convenience of great McDonald's food delivered from 7,000 more restaurants in 21 different countries around the world. With our markets in Asia and the Middle East, where we've offered delivery for many years, we are now delivering meals from over 10,000 restaurants, more than one-quarter of the system's restaurants. Delivery orders tend to surpass average check size by 1.5 to 2 times, and with high customer satisfaction, we are seeing solid repeat business from those who try it. During the fourth quarter, delivery gained traction and emerged as a meaningful contributor to our comparable sales in several of our largest markets.

In many of our markets, we've scaled the Experience of the Future platform, providing our customers a more seamless, personalized, and enjoyable experience, with additional menu boards, self-order kiosks, greater hospitality, and a modernized look. They're telling us they like the new McDonald's better. They're awarding us with more frequent visits and they're spending more on average when they do. We have deployed Experience of the Future, or EOTF, in about one-third of the restaurants in the McDonald's system, including nearly 3,000 restaurants in the U.S.

Customers increasingly expect to engage with brands via apps on their mobile phones. And in the U.S. alone, we now have over 20 million registered users of the McDonald's mobile app. We are well-positioned to capitalize on that user base, ending 2017 with 20,000 restaurants around the world offering mobile order and pay.

I'm proud of our team's work. We achieved that milestone from a standing start in just over 10 months. While still very early with customer usage, we're encouraged by digital orders as we're seeing higher average check size and greater customer satisfaction among customers. In particular, many customers are appreciating the added convenience of curbside pickup.

Now as we're starting 2018, our focus is on executing our Velocity Growth Plan. We will continue to provide customers an improved experience and greater choice in how they order, pay, and are served their food. We have opportunities in 2018 to raise consumer awareness of the enhanced convenience available with delivery and mobile order and pay. In the coming months, we'll initiate marketing campaigns that encourage more customers to enjoy these expanded options to engage with McDonald's.

And as we do, we're optimistic this will contribute to the momentum of our business. With nearly 37,000 restaurants in 120 countries, McDonald's has a distinct scale advantage and significant potential. Over the course of 2017, Kevin and I visited markets throughout the United States and around the world. We could see firsthand how our local chains are leveraging the benefits of being part of the larger McDonald's system and delivering on that in ways that matter most to the customers and their communities.

The contemporary decor and well-trained crew members we saw in markets such as the U.K., Canada, and Poland demonstrate how successful we've been in enhancing the overall customer experience in our modernized restaurants. When customers have a better experience, perceptions of our brand improve, sales increase, and guest counts grow. In Italy, we saw the results of our strong focus on operational excellence. Customers appreciate the quick, friendly service and great-tasting food they receive, which has dramatically changed the trajectory of our business in that market.

With this accelerated growth, Italy enjoyed its best year of sales since 2006. France has been a system leader in the development and evolution of self-order kiosks as a customer convenience and solution for bottlenecks during high-volume periods. During our visit last fall, we saw how our French team has led in hospitality and table service across the market to further elevate the customer experience and open up capacity. Service innovations like these, on top of their menu and value platforms, have helped the market achieve an all-time high in market share.

Restaurant employees in São Paulo and Buenos Aires demonstrate an outstanding commitment to hospitality. While visiting with them last fall, I experienced firsthand the passion and energy of our crew and managers as they embraced cultura de serviço. Their innovative program creating a new service-focused culture is making a real, meaningful difference for customers. The confidence we have in the business continues to grow and I can say that our franchisees share our optimism.

Buoyed by this confidence and the benefit that the franchisees and the company will receive as a result of U.S. tax reform, we are further accelerating our investment in Experience of the Future in the U.S. We will bring EOTF to nearly 4,000 additional U.S. restaurants in 2018, resulting in about half of our U.S. restaurants being completed by the end of this year. This is no small feat. While our franchisees are confident about our plan for the future, they also acknowledge this is a major undertaking that will require significant investment of time, focus, and leadership to execute well. And clearly, it will require a significant financial investment, too.

Between the company and our franchisees, over the next two years, we will invest approximately $6 billion to transform the U.S. business. The impact will extend beyond the new equipment and decor we're bringing to the restaurants. This is an investment in our local communities, as the benefit of these projects will extend to construction crews and suppliers.

We also will continue demonstrating our commitment to our people as we look at enhancing the training and development opportunities now offered through our Archway to Opportunity program. We're doing all of this in partnership with our owner/operators with confidence and a firm commitment that the payout will be a better, stronger McDonald's delivering a vastly improved customer experience and sustained profitable growth. Now Kevin will share additional details about our outlook for 2018.

Kevin Ozan -- Chief Financial Officer

With the progress we made in 2017, our business is strong heading into 2018. Over the last few quarters, I've been messaging that our 2018 results will be choppy due to the refranchising of several markets in 2017 and the $100 million of depreciation benefit in China and Hong Kong in 2017 associated with the refranchising of those markets. Looking forward, we expect 2018 results to be even a little more choppy, with U.S. tax reform and a new revenue recognition accounting standard that went into effect January 1 this year.

On revenue recognition, while the new accounting standard will have no impact on our cash flows, the change will affect the way we recognize revenue for initial franchise fees that we received for new restaurant openings and new franchise terms. Previously, we recognized initial franchise fees when we received them, upon opening a new restaurant or granting a new franchise term. Beginning in 2018, we'll recognize that income over the life of the franchise term. For this year, we expect this change to have a negative impact of about $50 million on our consolidated franchise revenues and franchise margins.

I talked about the impact of U.S. tax reform on our 2017 results, and I'll spend a couple of minutes walking through how we expect this will impact the business going forward. All of this is based on available information and our current estimates, which we know could change as further clarification is provided and our analyses are finalized. From an earnings standpoint, we expect our effective tax rate for 2018 to be 25% to 27%, down from our historical range of 31% to 33%.

Our global blended rate will be higher than the new U.S. rate due to taxes that we pay outside of the U.S., which currently average close to 30%. From a cash flow standpoint, we expect an incremental benefit of $400 million to $500 million annually prior to any reinvestment. A few points to put this into perspective.

First, we historically have not had a large amount of cash held overseas, so the new law will not result in us suddenly bringing back a lot of cash. Second, this incremental cash flow represents less than 10% of our historical annual operating cash flow of roughly $6 billion. Finally, we have not been capital-constrained in the past, so we expect our capital allocation priorities to remain consistent with what they have been: first, to reinvest in existing restaurants and invest in opportunities to grow the business; second, to pay dividends; and third, to repurchase our stock. Having said that, we now expect to return about $24 billion to shareholders for the three-year period ending 2019, which is at the high end of our previously stated target.

From a business operations standpoint, we expect our U.S. franchisees in general to also benefit from tax reform. Given the ongoing strength of our franchisee's existing cash flow, this benefit should enhance their ability to invest in and execute on the Velocity Growth Plan. Next, I want to take a moment to review the progress we've made on our financial targets around refranchising and G&A.

During 2017, we completed transactions in the Nordics, Taiwan, China, and Hong Kong, which enabled us to reach our target to refranchise 4,000 restaurants. We begin 2018 ready to operate under the streamlined and more heavily franchised business model that we set out to create under our turnaround plan. While we do expect to continue to refranchise some of our company-owned restaurants in our major markets, like the U.S. and international lead markets, we anticipate the gains on sales of restaurants in 2018 will be down roughly $30 million to $40 million from 2017 as our refranchising activity begins to slow down.

Regarding G&A, we developed the target savings of $500 million from our base of $2.6 billion at the beginning of 2015. Through 2017, we've realized about $300 million of net savings. In order to achieve those net savings, we saved significantly more than $300 million on a gross basis related to maintenance spending and then reinvested some of those savings primarily in technology and digital. So at the same time we've saved cost overall, we've also shifted more of our remaining spend from maintenance spending to investing in activities that drive growth.

For 2018, we expect G&A to decline about 1% in constant currencies. This reflects savings from our refranchising transactions and a reset of our incentive compensation, offset by one-time costs associated with our biannual worldwide operator convention, the final year of our Olympic sponsorship, and our upcoming headquarters office move, as well as continued spending in technology. We expect to fully realize our targeted $500 million of net savings in 2019. As we become more efficient with the G&A required to run the business, we will continue to invest in activities that we believe can accelerate growth.

At the same time, we will continue to exercise strong financial discipline in the use of our valuable resources. Moving on to capital. We expect to end 2017 with capital expenditures of nearly $1.9 billion. This was slightly higher than we anticipated at the beginning of the year because of currency-exchange rates and because we were able to complete more EOTF projects in the U.S. than planned, ending the year with 3,000 EOTF restaurants, as Steve mentioned. In 2018, we expect to spend about $2.4 billion of capital. Approximately $1.5 billion or two-thirds of our capital will be dedicated to our U.S. business, primarily focused on further acceleration of Experience of the Future.

Of the remaining capital budget, about half is earmarked for new restaurant openings and half is allocated to reinvestment as we continue to expand Experience of the Future in markets outside the U.S. Our capital will contribute about 250 new-store openings while capital from developmental licensees and affiliates will contribute to another 750 openings, for a total of 1,000 planned new restaurants. Finally, for 2018, we anticipate some currency tailwind, primarily in the first half of the year. At current exchange rates, we expect a positive impact of $0.07 to $0.09 in the first quarter and $0.23 to $0.25 for the full year.

As you know, over the last month, exchange rates have fluctuated more significantly than we've typically seen and we don't know what will happen in the rest of the year. So please take this as directional guidance only. We've made significant progress in our business. The path that we're on with the Velocity Growth Plan, along with the investments we're making in our future, position the company for sustainable, long-term growth.

We remain confident in our ability to achieve our long-term financial targets beginning in 2019. And now I'll turn it back to Steve.

Steve Easterbrook -- President and Chief Executive Officer

As you can see, our business is growing. It is fundamentally sound and we are confident about our future. We have returned the business to growth and have achieved momentum with comparable sales. 2017 was our best performance in six years.

Customers are rewarding us with more visits because the actions we are taking to serve them great-tasting meals, offer friendly hospitality, and provide more choice in how they order, pay, and are served their food. The three-legged stool of the McDonald's system is continuing to make bold and aggressive investments in our most promising growth platforms, a strong signal of the confidence we have in our future. We're also looking forward to 2018 because of the many opportunities it will bring for building brand excitement with our customers and our people. This spring, we will gather in our worldwide convention in Orlando with nearly 14,000 owner/operators, suppliers, and employees in the McDonald's system.

This will be a tremendous opportunity to building our enthusiasm as we celebrate our progress and then rally together to pursue our even greater ambitions in the years ahead. As I mentioned, this is the 50th anniversary of the Big Mac, a one-of-a-kind sandwich invented by Jim Delligatti, one of our earliest McDonald's franchisees. We have exciting plans to celebrate with many fans, who remain so passionate all these years later about this iconic burger. Our flagship Chicago restaurant is receiving a dramatic makeover, and it will offer greater convenience and hospitality to our customers when it reopens later this year.

Our modern design will blend our latest technology and decor inside with green space, planters with outdoor seating, and a park for the community to enjoy. And I can't wait to take another big step in advancing the evolution of our culture when we open our new headquarters in Chicago's West Loop. Moving into the heart of such a dynamic city will put us closer to our customers and energize the McDonald's team. We are becoming a better McDonald's.

And as we do, it's driving better results. Whilst pleased with the progress we made in 2017, we have far greater ambitions. We have the right organization and the right plan. The platforms we put in place are delivering growth today.

We're confident they will serve as a springboard accelerating our future success. So thanks, everyone. And now we'll turn it over to Mike to lead the Q&A.

Questions and Answers:

Mike Flores -- Investor Relations Officer

Thanks, Steve. I will now open up the call for analyst and investor questions. Please press *1 if you have a question and then # if you want to remove yourself from the queue. To give as many people as possible the opportunity to ask questions, please limit yourself to one question and we'll come back to you with follow-up questions as time may allow.

Now the first question is from David Palmer with RBC. David?

David Palmer -- RBC Capital Markets -- Analyst

Thanks, good morning. This is regarding the U.S. It wasn't that long ago that surveys that we've done or seen elsewhere had McDonald's U.S. toward the bottom of the pack in the peer set in things like quality and even toward the middle of the pack in things like value and convenience, where you think McDonald's should obviously be winning.

Those surveys are probably pretty stale now. You're probably seeing some improvements. But perhaps, lead us to where you have made the most progress. And then, maybe it makes sense to tie into a market like Canada, where you're further along with reimaging and other initiatives, how you think the brand perception can improve from here.

Thanks.

Steve Easterbrook -- President and Chief Executive Officer

Yes, thanks, David. No, you're absolutely right. I mean, clearly, we say at a market-by-market that we're very close to all the consumer research and feedback we can get. And I mean, very simply, I guess, you could categorize it into brand perceptions but also operational metrics as well, and the two kind of go hand in hand.

What we've seen around the world and what we're beginning to see in the U.S. is, when you look at a brand like McDonald's, effectively everything that you do communicates. So the look and feel of the restaurants, the quality and engaging element of our marketing programs, the friendliness of our people and their enthusiasm. Technology innovation starts to talk about you being a business for the future as well.

So what we're beginning to see is, as we continue the broad-based investment both in our people, in our restaurants, in the menu improvements, such as through the poultry supply chain with the antibiotics, whether it's for the clean-label McNuggets and so on, all of these things communicate a business that's on the move and a business that's heading the direction that our customers want us to. So we're certainly encouraged. We are seeing some improvement in operational metrics in terms of friendliness, speed of service, in terms of the customers' perceptions. And then, you look at the broader brand metrics like it's a brand for -- this is a company for a customer like me, for example.

So broader brand metrics. And we're beginning to see that lift. In the markets that are more advanced, and you can look in -- [Inaudible] our more developed markets, markets like Canada, as you mentioned, U.K., Australia. But we also see it into a number of our high-growth markets, where we really have modernized the estate and really repurposed the whole employment proposition, countries like the Netherlands and Poland or Spain and Italy.

We begin to see, as each part of progress we make, it just lifts all brand perceptions. And also, just the taste and quality of the food perceptions go up if you are able to satisfy customers with modern environments. So we're encouraged. It's early days.

We finished the year in the U.S. with around 3,000 of our restaurants really representing the look and feel that we are proud of going forward. And with the further acceleration that we've announced today for 2018, we're going to have probably just north of half of our estate to converted into really a great expression of the forward-looking brand of McDonald's by the end of 2018. So we're encouraged but a lot of work to do.

Mike Flores -- Investor Relations Officer

Our next question is from Brian Bittner with Oppenheimer.

Brian Bittner -- Oppenheimer -- Analyst

Hey, thanks, guys. Can you just give us any insights into any sales benefits, if any, that you're seeing so far from your national value platform? Whether you're seeing a change in the industry gap or just incrementality in your business would be helpful. And could you also, second to that, help us understand if this platform has changed the sales mix from value in any meaningful way in your sales pie versus recent history?

Steve Easterbrook -- President and Chief Executive Officer

Yes, Brian, I mean, it's really too early for us to give any meaningful feedback on the Dollar Menu $1, $2, $3. There's only been 20-plus days that's been in the marketplace. And when you introduce a platform that's strong, and it's being built upon for the medium and long term, it's going to take three to six months for it to fully embed in the minds of consumers. That said, in terms of the gap, we're beginning to see it in the marketplace broadly.

We ended the year in a competitively strong position. We announced in the U.S. a sales number of 4.5%. I think the overall competitive set was pretty much flat.

I think it was plus 0.2%. So we have noticed that over the four quarters of the year, the gap has steadily increased. Now I'm not giving that as any directional, future direction, but it was very encouraging for us that the more holistic the plans that we execute across the market, we are making a dent in the competition, which clearly gives us further encouragement. On a weekly basis, I think we outperformed the peer group in 48 out of the 52 weeks across 2017.

So again, really consistent, strong competitive performance from our team here in the U.S. We feel good about the Dollar Menu $1, $2, $3. I mean, just as an overall guide, we are not seeing a significant or material shift in product mix. We're still seeing average check growth across the overall business.

So we feel that it's settling in, bedding in well. We brought in some of the elements which were successful for us in 2017, such as the $1 any size fountain drinks, which we know is very, very powerful and very strong. And we really augment it with some breakfast products and both across beef and chicken menu as well, including then also the $3 Happy Meal. So we're off to a good start.

It's very early days to comment on anything meaningful for it, but it's certainly encouraging enough.

Mike Flores -- Investor Relations Officer

Next question is from Andrew Charles of Cowen.

Andrew Charles -- Cowen and Company -- Analyst

Great, thanks. Kevin, can you speak to the long-term CAPEX targets you laid out at the Analyst Day back in March? And how should we expect you to bridge from $2.4 billion in CAPEX in 2018 to $1.2 billion ultimately? And just kind of frame it in reference just to your original expectations for about $1.7 billion per year through 2020. And just one clarification as well. You talked about investing tax savings into Experience of the Future.

I just want to clarify, are you investing greater than a 55% stake that you originally did in 2017 into the modernized restaurants in 2018?

Kevin Ozan -- Chief Financial Officer

OK, Andrew. I'll try and hit all of them. If I forget something, you'll remind me. But let me start with the capital.

So you're right. When we talked about it at Investor Day back on March 1, we expected that it would take several years to complete the Experience of the Future roll-out in the U.S. We've now taken the opportunity with the momentum we have and with the operators on board to effectively just pull that forward some. So what you'll see is a total capital envelope of around $2.4 billion in 2018.

You should expect a relatively similar amount in 2019. My guess is there will be a little leftover in 2020. I hesitate to say it will be completely done in '19, but it should be significantly completed by the end of 2019. And then, probably beginning in 2021 would be the ongoing normal run rate, which right now, absent anything new that we know about, would be in that $1.2 billion to $1.3 billion range.

So that's how I think the kind of the evolution of the capital. It isn't spending more than we originally anticipated. It's just moving forward the spend so that we're able to complete these EOTF projects quicker. Same with that investment, as you referred to, our 55% hasn't changed.

It's just accelerating the timing of some of those projects. But our contribution rate, the partnering program we have is consistent with what we've talked about. So that hasn't changed. Again, it's just a time aspect of being able to get the projects done quicker than we originally anticipated.

Steve Easterbrook -- President and Chief Executive Officer

Yes, just to add to that, and Kevin is absolutely right. I just want to put into context the significance of the acceleration that we are describing here. We exit 2017 with around 3,000 restaurants fully converted. We started the year with around 700.

So 2017, therefore, we completed around 2,300 projects. So this is the best part of doubling that rate. And again, just to put it into context, we have something similar to do in the U.K., France, and Germany all together in one year. I mean, this is a massive undertaking, a massive signal of confidence from our owner/operators and ourselves.

But the other piece, the other devil is always in the detail, and our aim isn't just to get 4,000 done. It's to get 4,000 done very, very well because each owner/operator is committing their money into this and every customer would like to see the kind of gold-standard execution. So for us, this is a really significant undertaking. It demonstrates our confidence in the future of the business and the confidence that we have for an infrastructure investment such as this as a result of a tax reform, I think is worth pointing out.

Mike Flores -- Investor Relations Officer

Next question is from Sara Senatore with Bernstein.

Sara Senatore -- Bernstein -- Analyst

Great. Thank you. I have one question and then a follow-up if I could. The first is actually considering such a strong year, I was surprised to hear Steve say that you think you can accelerate the momentum next year.

So I guess, I'm just trying to figure out what that means. Is that sort of talking about brand perception or could you actually see traffic and comps accelerate? And so just trying to understand maybe quantitatively what that commentary means. And then, the second question I had was sort of broader and it was a follow-up on the value discussion. I think some of your smaller competitors have tried to be aggressive on value and have seen kind of a worst-case scenario where they maybe get better traffic, but there's pressure on check and profit dollars.

Could you maybe talk a little bit about how your marketing messaging allows you to drive value traffic but still see higher check averages? Is this just your volume of marketing? Is it the nature of the messaging? Just trying to understand how you're able to do this distinct from what some of your other competitors are seeing?

Steve Easterbrook -- President and Chief Executive Officer

Yes, thanks, Sara. I'll have a stab at both of those and Kevin can join me on things I miss. Yes, I mean, we don't want to get into any habit of sort of forward-projecting, if you like. But as we enter this year, we're constantly reviewing our plan, areas of strength, areas of opportunity.

The plan is delivering and through 2017 delivers. We exceeded what we expected out of our plan in 2017. So that gives us encouragement that we have a number of facets of our business that are working, whether it's the core nuts-and-bolts focus in the markets on the day-to-day operations, friendly service, hot, fresh food, staffing our restaurants fully, the real basics of a customer experience, but all the way through to the additional accelerators and the other platforms of growth, whether it's through delivery, the emergence of some of our digital and technology and the growth opportunity that has and what we continue to see out of Experience of the Future. So you heard me talk probably a number of times around how we try to layer these platforms of growth upon each other.

They don't all outperform. But if there's anything that's underperforming, we go back and take a look and review and look to enhance and [Inaudible] to outperform our expectations. And as we enter the year, we feel confident that the plans we've built and the progress we have in place are going to continue to deliver strong growth. As we continue to invest, you're absolutely right, the brand perceptions will undoubtedly improve if we continue to execute to the standard that we set ourselves.

So once we have about one-third of our global estate now fully modernized in the truest sense of that, as we continue that pace, we know that the brand perceptions improve in restaurants that are much more modernized. So that we find -- we're confident that the key metrics, both the, if you like, the lagging indicators and the leading indicators, both the financial metrics as well as the brand metrics will continue to improve. With regards to value, it is, it's a market-share fight. We don't see really any significant broader market growth this year.

We're certainly not planning on that. So therefore, we know we're in a market-share fight and value is where it really does get the street fighting really hits. What we feel good about on the marketing side here, particularly if I talk to the U.S., there's two things. One, we have great quality and great value items in the $1, $2, $3.

If you look at that lineup, these are iconic products that customers are familiar with, are confident with, and really, I think, exude much of the values and the things around what we stand for as a business and also as we develop our menu. So as well as offering great value, we think it reinforces the quality perceptions and taste perceptions that we're looking to move. In terms of just the muscle we have, I mean, one of the changes that the operators in the company signed up to last year was we were going to divert more money from the local agencies, the local costs, international into the national marketing part. And that is, a) more efficient in spend; and secondly, gives us much more universal clout.

So I think that makes us somewhat incomparable -- really gives us a differentiating muscle as opposed to any of our competitors. So I think the quality of the lineup and the financial muscle we have through our national marketing program in general, we think we're going to remain very competitive on the value end.

Mike Flores -- Investor Relations Officer

Next question is from Chris O'Cull with Stifel.

Chris O'Cull -- Stifel -- Analyst

Thanks, guys. It looks like the average U.S. company-operated store experience has declined year over year in the margin profit dollars. I'm curious if franchisees experienced similar performance.

And given the level of promotional activity and labor pressure, what comp you really need in the U.S. to increase that margin dollar profit?

Kevin Ozan -- Chief Financial Officer

Yes, Chris, it's a fair comment because, historically, we had always said kind of in a normal inflationary environment that a 2% to 3% comp would maintain margins. I think clearly, today, the 2% to 3% isn't enough, mainly because of labor pressures. For us, it's both on the cost side as well as we're investing in labor to make sure that we deploy all these initiatives in the right way. On the operators' side, they certainly would have the wage pressures.

Having said all that, their cash flow is still doing pretty well right now. So they're -- in the U.S, they're near all-time high cash flow, so they're able to still invest in the business and move forward with all these EOTF projects that we need them to do. So while there is additional pressure because of labor, the fact that we're growing guest counts and growing comp sales is affording the operators with the cash flow that they need to be able to appropriately invest in the business.

Steve Easterbrook -- President and Chief Executive Officer

And just actually to hook on to the previous point as well, from Sara's question. If I was to continue the comment on our marketing shift to national from local, because of the efficiency and effectiveness we can gain, we've been able to slightly reduce the marketing contribution that goes through the P&Ls of both our operators and our company stores. So, again, this is using our size and scale, not just an advantage to get us share of voice and drive the effectiveness of our programs. But actually, we can do so more cost-effectively in part on that benefit through the P&L.

So it turns out to be a win-win for all of us.

Kevin Ozan -- Chief Financial Officer

The only other thing I'd reiterate is, we had talked about our conscious effort to invest in some of this labor in the near term. So some of that investment in our labor as far as to make sure we deploy all these initiatives is a near-term phenomenon that we would expect for another couple of quarters but shouldn't be ongoing then forever, if you will.

Mike Flores -- Investor Relations Officer

The next question is from David Tarantino with Baird.

David Tarantino -- Baird -- Analyst

My question is on delivery in the U.S. Steve, I think you mentioned that that is becoming a more meaningful contributor to comp. So I was wondering if you would be willing to share some metrics around that, what type of sales lift are you seeing overall and comment on what you've seen in the markets that have been offering delivery for the longest period of time. And then, lastly, if you could also talk about what the franchisees are seeing from a margin perspective on those delivery transactions.

Steve Easterbrook -- President and Chief Executive Officer

Yes, David. Yes, I'll speak a little more on delivery. I'm not going to give any precise commercial information. I think that wouldn't be sensible.

But as I talked about our platforms of growth, yes, we believe we have five, six, seven platforms of growth all working at the same time. Delivery is one of those. So it's now featuring as a meaningful contributor to the overall sales build we have in the market. We did a really good job at rapidly rolling out delivery across, well, globally, but also across the U.S.

And we ended with around 5,000 restaurants with UberEATS here in the U.S. So we've got a two-pronged approach to 2018. One is to continue to expand that. It won't be in the same rates because we're looking at major cities in urban areas, and we've hit a good number of those early.

And clearly, we can only expand at the rate of the UberEATS coverage will offer as well. But I mean, also, we have a great opportunity to actually just raise the awareness and the usage from a customer perspective. The U.S. is a little behind in terms of guest counts per day than a number of other established markets.

So again, what we're doing is kind of the stuff that you'd expect us to. Some great, best-practice sharing. What it is that's driving such high takeup in markets like the U.K., Australia, increasingly so Canada. We're getting some great results also out of the Netherlands, out of our growing businesses in Spain and Italy as well.

So we believe we can get the adoption and frequency to increase in the restaurants that are already offering delivery, and we will just generally expand that number across the U.S. as the UberEats coverage expands. In terms of the franchisee, I mean, clearly it's a different margin dynamic because there's a fee element to a -- that we pay to the provider through UberEATS, which it compensates to the fact that we don't have to hire drivers, run cars, have all the insurance costs, all the complexity and the complication of that. So that's kind of a, clearly, the consideration balance we have to make.

But the reality is this is -- we're seeing the vast proportion of this as incremental business. And as long as that business stays incremental, then we're getting an incremental dollar profit as well. It will be a lower margin percent, but it's incremental dollars, which is ultimately what we're aiming to do. And frankly, we believe we've had a bit of a jump on the market here as well with us -- by leveraging the size and scale.

We will find ourselves very high up. If you had to go on to UberEATS in many of the markets now, we'll be one of the early recommended restaurants just because of the operation that we run now we can actually get from order to delivery in under 30 minutes pretty much everywhere we are, which puts us right at the head of the pack in terms of the convenience that we offer customers.

Mike Flores -- Investor Relations Officer

Next question is from Jeff Bernstein with Barclays.

Jeff Bernstein -- Barclays -- Analyst

It's a question on, I guess, more broadly on franchisee sentiments. I mean, you talked about a massive signal of confidence from the franchisees. Obviously, they're pleased with the sales momentum. I'm just wondering if you could talk a bit about if there's any pushback we often hear about the overload from some of the initiatives going on simultaneously, Steve.

As you mentioned, you've got five, six, seven platforms going. So just wondering, whether from an ops or a cost standpoint, you're getting any focused pushback. And one of those initiatives, I'm assuming it's fresh beef, which you didn't give much color to today. I was just wondering whether as an aside, you can offer an incremental in terms of feedback from tests or the timing and pace of the roll-out of that you're expecting, which I believe was in the middle of '18.

Steve Easterbrook -- President and Chief Executive Officer

Yes, sure, Jeff. So franchisee sentiment, clearly, it's something we work so closely hand-in-hand with the owner/operators. And I mean, our owner/operators knew as our leadership team in the U.S., that they were building a very aggressive and confident plan, and they call it in the U.S. the bigger, bolder Vision 2020.

So they collectively built this plan knowing that there was a lot tied up into it. As we enter to 2018, I mean, there's a totally expected combination of excitement and confidence and also just the anxiety that comes with the workload and the commitments that have to be made. So I wouldn't say so much as pushback but just the reality is now hitting home. We've got a lot of work to do both at a local level and the restaurants with the owner/operators and also at a national level to execute some of these priorities.

But there is nothing that our teams don't talk about. And really, we're looking to alleviate the anxiety just with some great execution. If we can execute great Dollar Menu $1, $2, $3 from the start of the year, we've got a couple of other promotional campaigns coming up soon that we believe will be exciting and drive the business. And then, if we can get the -- continue to build on the reliability through the technology, whether it's through the mobile app our customers have and also improve on the user experience, for example, on the self-order kiosks, there's loads of areas we're looking to continue to improve, and as we do so, our collective confidence grows.

But I wouldn't say the sentiment is any different from any normal human reaction to when you enter a year and you've got to work really hard and also write some big checks. It always makes you think twice, and I understand that. And yes, we're very empathetic to that. With regard to fresh beef, yes, I haven't spoken so much about it because we're in roll-out stage, and we're converting a lot of our facilities around the country in order to be able to meet the demand when we go to national launch, which should be around May, June time.

So we already completed the first full wave. We probably have now 2,000 to 3,000 restaurants, which now have the fresh beef for our Quarter Pounders and our signature range. And clearly, we have a phased roll-out across the next two to three months. The feedback we're getting is, clearly, you need diligence in the operational trading in order to get our grill teams familiar with the new procedures.

But once they're embedded, the crew members are very adaptable and learn very quickly. I mean, the other, which is the most encouraging feedback we're getting, is from customers who just love the taste of the fresh beef and the Quarter Pounder. So yes, we're getting unsolicited feedback from customers on a noticeable improvement. So, again, that just gives us further encouragement as we roll this out in the next two or three months.

Mike Flores -- Investor Relations Officer

Our next question is from Brett Levy with Deutsche Bank.

Brett Levy -- Deutsche Bank -- Analyst

Good morning. Thank you. If I may, two questions. One is a clarification.

On G&A, did you intentionally or was it accidentally that you removed the 5% to 10% additional savings beyond '19? And then just as a follow-up to some of the questions on franchise profitability. How were they thinking, based on your conversations, how were they thinking about their spread between not just the investments in EOTF and value, but also what they're seeing on a labor front as companies like Starbucks and Walmart have once again taken it upon themselves to pass along savings and raise wages? Any color you could provide on that would be helpful.

Kevin Ozan -- Chief Financial Officer

I'll start with the G&A. So, yes, it was conscious that we took out the 5% to 10%. I guess, just to reiterate some of the things I said, we've been focused on both saving G&A and shifting some of our spend from maintenance to kind of areas that grow the business. The way I -- our overall philosophy is to achieve savings as far away as possible from the areas of the business that directly impact our customers.

So that's where we've been focused. We've realized that we're going to need to continue to invest in technology and digital in order to keep up with where the world is going and our customers' expectations. So we're going to commit to the $500 million but not commit anything past that. We do look at a variety of G&A measures, both internally and externally, to compare with our peers.

So we look at G&A as a percent of sales. We look at G&A as a percent of operating income because effectively, the G&A is incurred to grow sales and operating income. And I'm not 100% sure that everyone in the industry classifies all the costs exactly the same way. So to me, the ultimate measure is looking at operating margin, kind of how efficient are you at bringing revenues down to the bottom line? So we look at all those measures to ensure that we're spending our costs efficiently.

We're going to continue our financial discipline. I think over the long term, we would expect that our G&A would be at or below 2% of sale. But for now, we're going to commit to the 500 and just keep reevaluating and keep our discipline. Related to the labor cost --

Steve Easterbrook -- President and Chief Executive Officer

Yes, I mean, it's very early days since each of us are working on our programs that we're building for the benefit of our people. So it's no immediate impact that we can see. But overall, I would say that the fight for talent continues. It's going to get increasingly challenging to attract the talent you want into your business.

And then you're going to work really hard for your training and development to retain them. So at a local level, I know our owner/operators on our company restaurants clearly want to stay competitive on pay, but we also want to differentiate ourselves through our programs such as Archways of Opportunity, which we're looking to significantly enhance the benefits to our employees from that and also broaden the accessibility beyond the U.S. into a global program as well. Because we want to make sure that all of our people around the world stand to benefit.

So we remain very close to it. And that's actually one of the advantages of our franchising organization such as ours is that we've got our owner/operators close to the market as they are, there are very swift to adapt to the changing marketplace.

Mike Flores -- Investor Relations Officer

So we've reached the hour, but we will take one more question, and that will be from John Glass with Morgan Stanley.

John Glass -- Morgan Stanley -- Analyst

Thanks very much. This question is around return of capital goals. First of all, just the lower tax rate. Does that necessarily imply higher dividend even if you keep your payout ratio the same? Or do you attempt to sort of smooth that over time? Same thing with leverage ratios.

Does the tax reform sort of change the way you think about leverage? And then, finally, you think about sort of overall return of capital goals. I know you're still within that 2019 goal. But is it, given you've got line of sight in CAPEX spending in like a couple of years, when is the appropriate time to talk about new goals for return of capital for investors to think about under this new all-franchise business model?

Kevin Ozan -- Chief Financial Officer

OK. So let's -- let me talk about, I guess, the various pieces of return to capital that you mentioned since you hit them all. Given that's a board decision, we'll review with them kind of ongoing. We haven't had -- we didn't have a new discussion right now related to changing dividend kind of as a quick reaction to tax reform, but we certainly will have those discussions as the year progresses in our normal course.

I don't know that a tax reform in and of itself changes dramatically the way we think overall about dividends. We've been committed to dividends for over 40 years. We're still committed strongly to dividends. We do look at things like payout ratio.

And so we'll continue to look at just as a guide. We don't have a set target, but we'll continue to look at payout ratio to help inform that decision. We did, as you indicated, even with our acceleration of CAPEX for 2018 and 2019, we're still comfortable in indicating that we'll return about $24 billion to shareholders through 2019, which was at the top end of our range. Leverage ratios, I think the rating agencies are still working through some of how to look at tax reform and how to think about their model.

For us right now, we continue to believe that we're at the appropriate credit ratings, so we don't have a plan to change our credit rating. That gives us a little bit of room, plus or minus, in any given year. And so as we think about returning, it does imply potentially a little bit flexibility at adding some debt. And as I indicated, our priorities still are the same.

The first priority is clearly to invest in the business for growth, and then we'll consider dividends and share buyback.

Mike Flores -- Investor Relations Officer

Well, thank you. And now I'll turn it back over to Steve.

Steve Easterbrook -- President and Chief Executive Officer

Yes, just before I close, just to add to Kevin's last comment. Just not to lose sight of the fact that our operating business is still a massive generator of cash. And there's no doubt tax reform provides an encouraging help both for our owner/operators and ourselves. But growing a business is going to be the primary source of cash growth going forward, and that's where we remain focused.

So just to close up, I just want to reiterate our Velocity strategy is working, and we really do have high expectations for McDonald's in 2018. We've got a strong leadership team and a great commitment and [Inaudible] over the franchisees, supply partners, and employees, who make up the three-legged stool of the McDonald's system. So we've got great confidence about where we're going to take our business this year and look forward to sharing that with you as we progress. Thanks very much.

Operator

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

Duration: 65 minutes

Call Participants:

Mike Flores -- Investor Relations Officer

Steve Easterbrook -- President and Chief Executive Officer

Kevin Ozan -- Chief Financial Officer

David Palmer -- RBC Capital Markets-- Analyst

Brian Bittner -- Oppenheimer -- Analyst

Andrew Charles -- Cowen and Company -- Analyst

Sara Senatore -- Bernstein -- Analyst

Chris O'Cull -- Stifel -- Analyst

David Tarantino -- Baird -- Analyst

Jeff Bernstein -- Barclays -- Analyst

Brett Levy -- Deutsche Bank -- Analyst

John Glass -- Morgan Stanley -- Analyst

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