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McDonald's Corp (MCD) Q3 2018 Earnings Conference Call Transcript

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MCD earnings call for the period ending September 30, 2018.

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McDonald's Corp  (MCD -0.89%)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Hello and welcome to the McDonald's Third Quarter 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.

(Operator Instructions) 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 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'm going to remind everyone that the forward-looking statements in our earnings release and 8-K filing also apply to our comments. Both documents are available on, as are reconciliations of any 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?

Steve Easterbrook -- President and Chief Executive Officer

Thanks, Mike. Good morning. With another solid performance in the third quarter, we remain confident in our business as we continue to execute an aggressive and holistic growth strategy. We are making substantial progress in modernizing restaurants around the world, enhancing hospitality and elevating the experience for the more than 60 million customers we serve every day.

As a result, we've achieved our 13th consecutive quarter global comparable sales growth and we're increasing top line traffic share and guest counts in most of our top markets. During the third quarter, most of our largest international markets continue to drive momentum in our business. Canada has been on a 10-year run of success. In August, I was in Vancouver to meet with the local leadership team and we visited the first McDonald's restaurants opened in Canada.

It was recently modernized and we could see the digital menu boards, the refreshed decor, McCafe Bakery displays and other improvements making such a noticeable change in McDonald's customers. Like many of our top performing markets, Canada is excelling at the fundamentals of running great restaurants. The crew members continues to set some of the highest standards of hospitality in the McDonald's system. Customers appreciate the commitment crew members in Canada have took personalized service that makes each visit enjoyable as demonstrated by continued year-over-year increases in customer satisfaction scores.

Earlier this month, I was in China. We marked a full year since the successful transaction that created the largest McDonald's developmental licensee, a partnership operating and managing McDonald's businesses in Mainland China and Hong Kong offers exceptional business expertise and deep understanding of the local market. And moving rapidly with ambitious expansion program to over at least 2000 new restaurants over five years. Now open about 375 new restaurants in 2018, over 400 in 2019 and expect that they will ramp up a pace even more aggressively over the next few years. I was also impressed to see how well the team in China is operating in a highly competitive environment that make steady gains with our brand image among consumers in China's largest cities as they've modernized nearly 75% of the existing restaurants in the market.

China also is a leader in the McDonald's system with share of our top growth initiatives, Digital and Delivery. The market has driven exceptional growth of delivery and is gaining strong adoption for its digital platform. Many of our top international markets are well positioned due to our sustained growth for our business.

We have exceptional management teams and aligned franchisees working together to execute ambitious integrated plans. We're confident that we will continue to achieve sustained momentum as our restaurants serve delicious food, offer warm hospitality and advanced strategic platforms enabling us to satisfy rising customer expectations.

The US continues to move forward with the most significant transformation ever undertaken in the largest market in the McDonald's system. As we have discussed before, the US team and our franchisees are taking on a lot all at ones.

US is maintaining an aggressive pace of modernizing restaurants, completing around 1000 projects during the quarter. At our current pace, by the end of 2019, we expect to complete over 12000 restaurants with our Experience of The Future initiative making this as the largest construction project in our history.

We still have hard work ahead, but we are seeing an encouraging response from customers in restaurants where many of these improvements are already completed. This is in line with our experience in other McDonald's markets such as Canada, the UK and Italy executed programs several years ago that was similar to the one that US is undertaking now.

This continues to strengthen our confidence that Chris Kempczinski, our US President, -- and our franchisees are on the right track as we introduce these enhancements to a growing number of restaurants.

As we've evolved to more heavily franchised business model, we are making sure our operating structure continues to adapt. We have a growing number of developmental licensees either business partners are intensely focused on growth and innovation and operating in some of our most complex markets.

Starting in January, we'll make changes to the operating structure of our business. Joe Erlinger, who now is President of High Growth Markets, will lead our International Operated Markets. Ian Borden, who now leads our Foundational Markets, will be President of International Developmental License Markets. This structure will ensure we provide the right level of support that contribute to the success of our development licensees and other franchisees.

It would also continue to enable us to share and scale our best solutions across our international markets. I also want to take a moment to acknowledge Doug Goare, President of our International Lead Markets and Chief Restaurant Officer. Last month, we announced his upcoming retirement. Doug has made many valuable contributions to McDonald's over his 40-year career. We'd appreciated his leadership and his counsel and thank him for all that he has done for our brand and our organization.

Now Kevin will discuss some of the financial performance highlights from the quarter.

Kevin Ozan -- Chief Financial Officer

Thanks Steve. We're pleased with our strong sales performance for the quarter. Global comp sales increased 4.2% reflecting positive results across all of our business segments. Comp guest counts grew in most of our top international markets. While in the US, guest counts declined during the quarter. As Steve mentioned, our top international markets are consistently leading and driving in the performance of our system. In addition to Canada's success, here are just a few other highlights from around the world to illustrate this momentum.

Australia has delivered 18 consecutive quarters of comp sales growth. France is enjoying 8 consecutive quarters of guest count growth. And Netherlands just experienced their 14th consecutive quarter of positive comp sales and momentum continued in Japan, as they now have 12 consecutive quarters of comp sales growth.

Comp sales in the international lead markets remained strong, up 5.4% for the quarter. The UK delivered their highest monthly sales in guest count volumes in their 44-year history, resulting in 50 quarters of consecutive comp sales growth. In addition, every market within the segment contributed to the growth.

As markets across the ILM segment reached critical math on Experience of the Future or EOTF, they continue to see higher contributions from multiple platforms including value, delivery and digital. In addition to Australia's launch of a holiday breakfast in 2016, they recently introduced an holiday favorites platform. Customers can now enjoy a limited menu of their favorite burgers, chicken and fries available any time of day. The sustained positive results of the well-established markets in this segment are a demonstration of the size and scale potential of the McDonald's brand.

Turning to the US. Comp sales increased 2.4% for the quarter. A higher average check drove sales due to favorable product mix shifts and menu pricing for US (ph). The product mix shifts were a result of menu news (ph) including Glazed Buttermilk Crispy Tenders or 100% Fresh-Beef Quarter Pounders and new choices afforded to customers through our value offerings. Initiatives deployed across the US from delivery to self-order kiosks, also contributed to the higher check.

The US plan is grounded in the importance of delivery, a mix of higher average check and comparable guest count growth. As guest counts remain a challenge, we're focused on increasing customer visits. The environment in the US remains very competitive, especially around value and deal offerings. Considering this, we're pleased with our comp sales GAAP for the quarter of positive 70 basis points versus our QSR sandwich competitors.

On our last earnings call, I've talked about the need to further appeal to our deal customer segment. We've recently wrapped up a successful 2 for $5 Mix & Match deal offer. And we'll soon launch a new classic meal deal option, featuring some of our iconic core menu items where our customers looking for a satisfying meal at an affordable price.

Breakfast remains an opportunity and in September we expanded our $1, $2, $3 menu offerings by introducing Dollar Any Size coffee as well as adapting two customer favorite breakfast sandwiches at the $1 price point.

Soon we'll introduce new breakfast menu items inspired by our customers. A combination of national value, a return to local breakfast deals in new food offerings, the vision is up to win back customers at breakfast. In the high growth segment, comp sales grew 4.6% with positive results across substantially all markets.

Italy, the Netherlands and Poland all delivered double-digit comp sales increases for the quarter.

Italy continues to gain sales and guest count momentum across all day parts and each of our Velocity Growth Plan accelerators are contributing meaningfully to results. And across the foundational markets, comp sales were up 6%. Each geographic region contributed positively to results with Japan continuing to lead the segment. Now I'll turn it back to Steve.

Steve Easterbrook -- President and Chief Executive Officer

Thanks Kevin. The key elements of the Velocity Growth Plan are working. We have powerful growth drivers at the heart of our strategy. The taste of our delicious food is the top reason customers choose McDonald's. The iconic sandwiches are the core of our menu continue to have strong appeal and we are always driving to make our food even better.

France, for example, where we continue to increase market share, shows a solid (ph) success with a 50th anniversary Big Mac campaign. Market also achieved a double digit increase in premium burger sales from the same quarter a year ago. With a lineup featuring proven successful favorites such as the 280 and the Big Tasty. Many consumers also are more focused on the quality of ingredients in their food.

And during the quarter, we announced a significant step forward we've made in the US. Our seven classic burgers in the US now have no artificial preservatives, no added colors from artificial sources and still no artificial flavors. This was in addition to the switch we made earlier this year to a 100% fresh meat in the Quarter Pounder burgers, cooked right when you order. Previously, we also removed artificial preservatives in our Chicken McNuggets.

Now lets turn to accelerators. Delivery, digital and Experience of The Future are proven to be catalysts for sustained growth. As we contain to maximize the impact of these accelerators, we're expanding choices, enhancing convenience and elevating the overall experience from McDonald's customers.

We continue to move aggressively in developing the delivery opportunities. With over 37,000 restaurants, we have a massive global footprint, which provides a distinct advantage by placing us closer to more customers than any of our competitors. We are focused on expanding coverage, growing demand and innovating to increase efficiency and provide better service to our customers.

We now offer delivery from over 15000 restaurants representing substantial growth from the end of 2016. With the benefit of our global partnership with Uber Eats, we're continuing this expansion. We expect to reach thousands more of our restaurants by the end of the year including a total of 9000 in the US. Delivery is becoming an increasingly meaningful contributor to comp sales and in several top markets such as the UK, Australia and France, delivery now represent as much as 10% of sales at restaurants offering delivery.

We're working to encourage existing delivery customers to order more regularly as we also strive to raise awareness that McDonald's offers this convenient option. Customer satisfaction with McDelivery remains high. Once they experience the convenience, many of them become our most loyal customers frequently reordering the delivery. The delivery market is evolving rapidly and we are committed to innovating, so we remain competitive. We are seeing improved speed and accuracy after completing an initiative earlier this year to integrate delivery orders into a point of sale systems in many of our restaurants.

We are exploring additional innovation opportunities ranging from integrating delivery ordering from mobile app to new packaging that will protect the quality of our food, two new approaches that improve efficiency at our restaurants with the highest delivery volumes. Underpinning everything we do with this growth accelerator is our commitment to make delivery easy and convenient for our customers which will help us maximize the competitive advantage for our business.

We have also introduced means (ph) of technologies to our customers that are now since are engaged on their terms. Self-order kiosks which are already in over 15,000 of our restaurants worldwide, provide customers an opportunity to spend more time browsing the menu and personalizing their orders. So fortify (ph) our guest experience later (ph) and with the option of table service, popularity and utilization of self-order kiosks continue to grow over time with a higher average ticket.

In France, Italy and Spain went over half of all international visits are transacted through the kiosk. We continue to engage customers through our global mobile app. Many of our markets have used special deal offers to drive incremental traffic and encourage increased utilization of the app. During the quarter, the US doubled the pace of downloads and registered users driving more transactions through the app. At this pace of active users growth, the rate of mobile order and pay option increases, we are providing our guest greater convenience on their terms, while gaining deep insights on their purchasing behavior. All of this is helping us create a foundational base of information of whom which we will build programs to deepen our customer relationships.

Through EOTF, we're in elevating convenience, hospitality and personalization for McDonald's customers. The improvements include crew members who serve in the front of our restaurants as guest experience leaders, kiosk ordering, table service, digital menu boards and our global mobile app. It's clear (ph) that customer notice and appreciate the changes we are making. But all of these elements are in place at a restaurant, we are seeing improvements in sales and guest counts.

We've seen steady improvements in overall customer satisfaction and in particular in the US restaurants, which are put in place all of the growth strategy initiatives. These restaurants were achieving significant growth in both new customers and frequency of visits by existing customers. And these customers are getting as much satisfaction ratings especially for those that dine in.

We're encouraged by the opportunity for our business as we continue to roll-out EOTF to more restaurants around the world, maximize the customer and business impacts and to find ways to further elevate the customer experience in the future. We are making significant progress in deploying EOTF across the McDonald's system over the past year.

By the end of the year, we expect to have converted over 15,000 restaurants across the global system, including half of old restaurants in the US.

Kevin Ozan -- Chief Financial Officer

As Steve mentioned, the US is modernizing at an unprecedented pace. Transforming over 3,000 restaurants to date into 2018 alone and expecting to surpass our original target of about 4,000 projects this year. As we move at a quick in pace, we continue to learn throughout this process and adapt our approach in order to maximize the benefits to the business.

Overall, restaurants have experienced a little longer downtime than we expected. So we're focused on limiting that in order to minimize the impact on sales and guest counts. The downtime in our restaurants ranges from partial, for example, when the drive through remains open, but the lobby is closed for remodel, to full when a restaurant has a large scale project and the restaurant completely closes for a short period of time. The sales and guest counts recovery period after we complete a project have also been a little inconsistent. So we've put processes in place to execute strong grand reopening plans after construction that involve our local communities.

Overall, we are seeing the sales list we expected. So our efforts are focused on achieving those results as quickly as possible. Our refranchising strategy have been a key part of transforming McDonald's into a more purposeful, stable and efficient organization focused on delivering long term growth. We're now more than a year out from our significant refranchising efforts, including the China-Hong Kong transaction last year. And I'm pleased with our results in global financial performance. Earnings per share for the quarter was $2.10, a 22% increase in constant currencies after excluding prior year special items.

Year-to-date, our operating margin improved to 43%. Nearly 85% of our total restaurant margin dollars for the quarter came from our franchise business. And the growth in franchise margin dollars more than offset the decrease in company-owned restaurant margin dollars. Franchise margins for the quarter benefited from refranchising, as well as positive comp sales growth, partially offset by higher depreciation related to our EOTF partnering contributions in the US. Consolidated company operated margins declined 70 basis points to 18.4% for the quarter.

ILM company operated margins grew 60 basis points, driven by positive comp sales partially offset by commodities and continuing labor pressures. US company operated margins were challenged due to EOTF, labor costs and commodity pressures. Our company-owned restaurants in the US are modernizing at an accelerated pace. In addition to the anticipated depreciation pressure on margins, our restaurants converting to EOTF are experiencing a temporary decline in labor productivity, due to a combination of lower guest counts and continuing to pay crew during construction downtime. We expect this pressure to dissipate in mid 2019.

Moving on to menu pricing and commodities. In the US, third quarter pricing year-over-year was up about 2%, while commodity cost for the quarter increased nearly 3%. We expect commodity pressures to ease somewhat in Q4 and anticipate our US grocery basket will be up about 2% for the full year. For the international lead markets, menu price is average to about 1.5% higher year-over-year. Commodity costs were also up about 1.5% for the quarter and we still expect commodity to be up about 2% for the full year.

Continuing on to G&A. At the beginning of the year, we indicated that we expected our G&A for the year to be down about 1% in constant currencies with fluctuations between quarters due to the timing of spending. For the third quarter, in constant currencies our G&A was down 8%, which resulted in costs being down 3% through the first nine months of the year. We now expect G&A cost to be down about 1% to 2% percent for the full year. Our effective tax rate was 24% for the quarter. We now expect our full year tax rate to be in the range of 24% to 26%, down from 25% to 27%. Although we may have additional favorable adjustments in Q4, as we've finalized the amounts recorded at the end of last year related to US tax reform.

Turning to foreign currencies. For the quarter, foreign currency translation hurt our results by $0.05 per share. At current exchange rates, we expect the impact of foreign currency to be a similar headwind in the fourth quarter, which would result in a full year benefit of $0.03 to $0.05. As usual, this is directional guidance only because rates will change as we move through the remainder of the year.

Before, I turn it back to Steve, I want to touch on our capital allocation. Our first priority remains investing in the business to drive future growth through initiatives such as EOTF. Our current expectation is that we'll spend about $2.5 billion in capital this year. As we communicated last month, we increased our quarterly dividend by 15% to $1.16 per share, the equivalent of $4.64 annually. The dividend meaningfully contributes to our cash return target, which we increase to about $25 billion for the 3-year period ending 2019. It reinforces our confidence in our long term strategy.

Steve Easterbrook -- President and Chief Executive Officer

Thanks Kevin. We provided an overview of the progress we're making and perspectives about what we remain still encouraged by Velocity strategy and the future of our business. Most of our largest international markets continue to drive momentum. US is growing sales and we makes investments that will enhance the experience of customers we serve. We're encouraged by the success of restaurants that already proved the growth initiatives in place. We'll continue to fine tune our tactics, but we are confident that our strategy is clearly guarding our business in the right direction. McDonald's system is focused on execution and committed to unlocking even greater potential.

Questions and Answers:

Mike Flores -- Investor Relations Officer

Thanks Steve. We're now going to open the call for analysts and investor questions. (Operator Instructions). Now our first question is from David Palmer with RBC. David?

David Palmer -- RBC -- Analyst

Thanks. Good morning. Question, I think for Steve on the US, there's been a lot of change obviously in 2018 and I think people are trying to figure out which parts of this are temporary friction that you'll evolve out of into 2019 and beyond? And then maybe where you have learned something, you're going to make adjustments, you know it's just, I guess to summarize you've had that shift in marketing dollars out of regional to national value, have the Experience of The Future. And then of course people are hearing about these headlines about franchisees that are adjusting to a new structure of communication and decision making, and I think people want to understand what adjustments you might have to make for that too? Thank you.

Steve Easterbrook -- President and Chief Executive Officer

Yes, David, thanks. Well, as we've said all along already throughout this year and it will continue through '19. We are taking -- I really appreciate plan in the US and we're at that kind of growing to out stage at the moment where we're putting significant investments into the restaurant and deducting the changes in that.

I think it's naturally that's just hard work. So -- and then the good news is that we've always had a very proactive positive relationship with our Owner/Operators as much as we have with our supply, we go to the three legged stool. So you know any conversations which are constructive and helpful into how we can better execute a plan which hope will open soon.

So having referred to one of two things, we're looking at with regards to EOTF, for example on how, how we minimize the impact of the downtime so we can come out stronger. So whether it's the initiatives that we are learning to get along with regards to the most effective way of investing the national marketing spend versus the local for the co-ops and yes, we continue to learn as we go along there and breakfast is a good example where we feel there's more regionalization to breakfast and therefore we're going to swing a little bit more of our emphasis on the marketing side to the local co-ops to take ownership of that and we can invest in more national platform in a sense.

So I think this is evolving with what is really encouraging for us. And I just keep reminding ourselves why we are doing, what we're doing is not only to the international business provide a helpful kind of signpost to what the opportunities are, but actually even here in the US now, if we did look at the analysis between the performance of restaurants which haven't yet adopted any of the EOTF and major initiatives all the way to those restaurants that have adopted multiple of the initiatives within that bigger bolder vision plan. There is actually an absolute crystal clear correlation at most sales and guest count level and customer satisfaction level, but literally as you step up the initiatives whether it's going to be EOTF or those table service or those delivery with its outdoor menu boards for example. As you step up the number of initiatives, the restaurants adopt, sales set up nicely with as do guest counts and customer satisfaction.

So you can expect just as we always do to work with the operators and any constructive ideas will actually wide open, so we just -- our success is inextricably linked. And actually we say our franchisee relationships has been something we should something of a competitive advantage for us that has been over time and we see it continuing that way.

So then -- I think fundamentally the key elements that we have built into the bigger bolder vision plan which is already pulled together between our own leadership and the operator leadership through the course of 2017. We are still confident in other side international business provides a good signpost for that.

Mike Flores -- Investor Relations Officer

Next question is from Andrew Charles of Cowen.

Andrew M. Charles -- Cowen & Company -- Analyst

Great thanks. I wanted to dig into the gap to domestic quick service peers that narrowed in 3Q. You guys are always introducing impactful initiatives to grow mix through fresh beef and the new chicken tenders flavors will make competitive on value through enhancements to the $1, $2, $3 Menu as well as a new 2 for $5 Dollar promotion. Has the offset to your efforts that are more broad slowdown in service times across the US system or is this been confined to the disruption of traffic from remodel construction and if it is the latter, can you help quantify with the impact has been to 3Q comps?

Kevin Ozan -- Chief Financial Officer

I can start and then Steve can chime in. Let me talk briefly about the comp gap that you started talking about on the 70 basis points for this quarter. I guess, we certainly look at all of the above current year comps, two and three years back just to look at kind of trends in our business. I think we feel pretty good about the fact that we've had seven consecutive quarters, 11 out of the last 12 of positive comp sales gap versus those two with our sandwich competitors. I wouldn't say that the service times still are an opportunity and I'll get and let Steve talk a little bit about that. But it is fair to say that service times remain an opportunity and so that is one of the big opportunities that I think we still have to continue closing or kind of accelerating that gap.

EOTF drag, I guess real quickly, we won't quantify every quarter what the EOTF drag is, but just to give a perspective, roughly, if I look at year-to-date comps in the US, roughly it's probably around 0.5 point impact negative certainly on our US comp and there are several components of that as you know. One would be the downtime we're experiencing and so we're focused on reducing that downtime. One would be the recovery time and how long it takes for us to get back to kind of volumes that we were at plus less than we expect and then net of that is obviously the sales lists we're getting.

As time goes on, obviously, our expectation is that the negative drag will start dissipating as we complete projects while we will obviously be left with the sales increases and sales lists. So again, that's what we've seen in our international markets. I just say, it is a little bit longer downtime, a little bit longer recovery period, but we are hope seeing similar overall trends in the US than we have seen internationally.

Steve Easterbrook -- President and Chief Executive Officer

I'll just add to what Kevin was saying there, interestingly enough for us, as Kevin said, our service times have slowed down, but interestingly, customer satisfaction has improved. So now we don't just want to rely on that, but it's interesting that as we have enhanced the broader experience that we do see customer satisfaction that was improved, but we also know that speed is a fundamental part of our DNA.

So when you look back over the last two to three years, with the introduction of initiatives such as all-day breakfast, we should help drive the top line, but have added a level of complexity into the restaurants, introduction of fresh beef, which is really enhanced the taste and the quality of the Quarter Pounder in the signature ranges, but has been an operational challenge to absorb.

And even if you look at such an initiative such as GMA offer redemptions and just the speed with which I'll try to change deal (ph) offers and still keep the car camp moving through. I think that we've got ourselves at a challenge into 2019 that I know the team have focused obviously which is around, have we get back to the concept of next simplification. I mean, we're always going to want to introduce initiatives that are attractive to customers, but shall reflecting where customers want us to go in the changing taste, but at the same time, how come we maintain that discipline of making sure we take as much out as we've put into the restaurants.

So I know in particular with the drive through that is a focus between our leadership and operator leadership and the team has been established to make a meaningful headway into that, is slightly less of an issue for us in the store obviously, because customers are now self-selecting how they order, many are choosing to go to self order kiosks, because they can get longer dwell time and they don't feel so hurried, if you are slightly more in that kind of grab-and-go mode of so, a busy lunchtime, weekday lunchtime and you're going to the front counter as you typically have. So you will see greater focus on the drive through and we do have an ambition to bring the service times back down.

Mike Flores -- Investor Relations Officer

Our next question is from Eric Gonzalez with KeyBanc.

Eric Gonzalez -- KeyBanc -- Analyst

Hey, thanks for the question. Can you comment on the performance of breakfast in the US during the quarter? Are you still losing share in the morning day part and maybe if the loss has accelerated in the quarter, how much was breakfast hurt by the messaging and the advertising shift?

Steve Easterbrook -- President and Chief Executive Officer

Well, I'd just say, we've made some tweaks through the year actually breakfast both in terms of regional spends -- shifting some of the spends to regional. We're still losing a little share. It's very competitive out there at breakfast. We did make some changes in September such as having Dollar Any Size Coffee, Dollar Sausage Biscuit, Dollar Sausage Muffin, again, the local co-ops choosing, which of those items are best suited for their customer base.

So that shift was really largely through September, so it's a little early to tell as to whether that's going to be sufficient. But we're also, you know, we haven't had much new food news at breakfast for a little while and you'll see some new food news in the fourth quarter this year which another team excited about, so am I. So it continues to be a battleground, I mean just go back to the Andrew's previous question and this one Eric. Is -- that the reality is -- it's a market share -- on traffic there's really no tailwinds from traffic. Any expansion or any additions that anyone from our odd days (ph) saying it's really through new units addition. So, on a like-for-like basis, where as we can get sales grow and I don't see many people out there in the sector who are actually growing traffic until, so say you really -- it's a scrap and it's a market share buy and our teams are responding. So we want to do better at breakfast, because initiatives in place which we're going see out through the next few months and also some new food news which we think a lot reenergize the day part.

Mike Flores -- Investor Relations Officer

And our next question is from Brian Bittner with Oppenheimer.

Brian Bittner -- Oppenheimer -- Analyst

Thank you. A question regarding the US and just a store level margins there. Can you tell us what the decline was year-over-year in the margins there when you strip out the EOTF downtime pressures meaning what was just the decline in margins from the kind of real pressures we're seeing and to follow up on that how are these margin issues that you're seeing framing the current conversations that you're having with franchisees related to the overall strategy, whether that be menu strategy or EOTF strategy and what not? Thank you.

Kevin Ozan -- Chief Financial Officer

I will talk about, the kind of the financial piece of the US market and let Steve talk about the owner operators related to that. A couple of things hit -- there were a few pressures on margins this quarter. One was, I'll say overall labor pressures and that has two main components to it. One of them is kind of increase in wages and labor costs and second is productivity, which would be the downtime in a lot of guest counts related to EOTF.

And say about roughly half of the labor impact was due to each of those. So roughly half with on productivity, roughly half on wages. The other piece of hitting margins is the depreciation related to our investments. So as you know we're certainly -- if I think about the company operated stores. Obviously we're incurring capital to remodel those stores and the depreciation related to that is also hitting margins. This quarter, we also had some commodity pressure, a little bit more than we had the previous two quarters and a little bit more than we expect to have next quarter.

So the combination of the labor costs, productivity, depreciation and commodities, all hit company operating margins and put pressure on in this quarter. The only thing, I guess I'd remind everyone of is -- topical margin dollars these days represent less than 10% percent of our total margin dollars in the US because of the refranchising that we've done and the fact that we're now at 95% franchised. But, obviously it does impact restaurant level profitability and certain of those costs, certainly have an impact on operators also.

Steve Easterbrook -- President and Chief Executive Officer

Yes, and just to take up the overall greater sense and I mean clearly stating the obvious -- operators want to grow cash flow and we want overall franchise to grow cash flow. Our plan was build, designed to do exactly that. Clearly they are saying many of them are saying input cost pressures that's -- company owned restaurants -- and when you got into major lines, food and labor, both with inflation are increases that puts pressure on the bottom line.

So I mean really this comes down too if they have growth story. We're having strong average check growth as you would have recognized and partly that's -- strategic investments we're making. I mean we're seeing higher average checks for the self order kiosks because they can dwell longer. We're seeing clearly higher average check on our delivery orders that can be somewhere between 1.5 to 2 times than normal average check. And then some of the other menu initiatives such as the great chicken tenders for example and help boost average check.

So it's not an average check story, this is about getting the guest count moving and if we can get both of those alongside each other. That won't give us the top line growth that we're looking for and I think that we're in back in the day used to be sort of a 2% to 3% comp would have helped just flatter the margin percentage level. We need stronger growth on that. So that's the mindset with which we build our plans. All of our markets in a developed world are facing similar cost pressures. So that's why such the strength of the international growth is so positive, because it does translate into cash flow growth as well as top line growth. But that's what we're going to say. So of single-minded, but certainly focused on getting the guest compliment of back into the US business where we can maintain, if we can generate that and maintain the average check growth, then that's with a lot more profitable for and raw prices, which is why we came to city.

Mike Flores -- Investor Relations Officer

And the next question is from Matt DiFrisco with Guggenheim.

Matthew J. DiFrisco -- Guggenheim Securities -- Analyst

Thank you. My question is with respect to the G&A savings and the improved guidance there. How sustainable are those lower rates of savings than what you had originally targeted for?

Kevin Ozan -- Chief Financial Officer

So again, at the beginning of the year we felt that we'd be down and we expect to be down about 1%, but now saying 1% and 2%. So in our mind, it's not dramatically different this year than what we expected. We will have a little bit more decline next year as certainly we won't have cost-related things to our operator convention that we have every other year. We won't have cost-related to Olympics and then we've taken some actions this year where we will get a full year of savings next year, such as the US reorganization. So I think we're well set up to achieve our G&A savings that we expected next year and this year is coming in a little bit, maybe more than we expected, but relatively in line.

Mike Flores -- Investor Relations Officer

And our next question is from John Ivankoe with JP Morgan.

John Ivankoe -- JP Morgan -- Analyst

Hi, thank you. Two, I think basically follow ups. First, it did surprise me a little bit that the net EOTF impact in the US was 50 basis points year-to-date '18. So as hoping to pour some thoughts in terms of what you thought that impact would be as we got into the fourth quarter of '18 and first half of '19 is the first clarification? And then secondly, half of the US system will be on EOTF by the end of '18. One couldn't interpret that '19 CapEX would be even higher than '18 CapEx -- revised '18 CapEx, but I did want to make sure whether that was true or maybe some of the increase that we saw in this '18 CapEx is in fact paying for it for some of the projects that you'll be doing in '19, thus allowing your previous CapEx guidance for '19 to remain unchanged?

Kevin Ozan -- Chief Financial Officer

Thanks, John. I'll take both of those. Regarding the net EOTF drag if you will, it's done on a year-to-date basis, it's roughly 0.5 point. It is fair to say that the impact in Q2 and Q3 were more than Q1. So I guess, I'll say it's safe to assume that it may have been a little more than 0.5 point this quarter, but on a year -- we want to look at this on a longer term basis, because to us this is the long-term initiative for the long-term sustainability of our US business.

So I don't want to get into having to talk about a specific impact every quarter, which is why we've talked about it on a year-to-date. But it is fair to assume that it was a little bit heavier impact on the individual quarter comp sales.

Regarding capital, so we said that our capital this year, we expect around $2.5 billion. If we look at -- a couple of things I guess to note regarding this year's EOTF projects. One, a little bit heavier skew to McCafe, a company-operated stores. So we've completed about 60% of the projects, the company operated restaurants. So a little bit more skew to company-operated restaurants.

The other thing that I would say is, while downtime is a little bit heavier and recovery period is a little bit longer, construction costs are probably a little bit higher than we originally anticipated to, partly because, we're going at a quick into pace and so we're not going to achieve some of the efficiencies that we may have thought that we were going to, not dramatically different. So what that means for capital in 2019 is, our CapEx should be relatively similar, maybe a little bit higher in 2019 than 2018. We will likely do a relatively similar number of projects, potentially a little bit less, but there are some of the higher cost projects.

So if you think about what we've got accomplished in 2018, we got -- we will get more than our 4,000 projects done, but they -- some of them are a little bit skewed to the lower cost, I would say easier projects to get done. In 2019, it will be some on the higher cost more intense projects if you will. So our overall capital should be relatively somewhere to the 2.5 again maybe a little bit higher than 2.5, but not substantially higher. And then again, we have seen some inflation out there in the construction costs that has been impacted some of the costs. We do expect this overall impact of EOTF to start flipping positive as we progress through 2019 probably in the back half of 2019 is when you should expect to see the net impact of EOTF being net positive.

Mike Flores -- Investor Relations Officer

Next question is from David Tarantino with Baird.

David E. Tarantino -- Robert W. Baird -- Analyst

Hi, good morning Steve. I want to come back to your discussion on throughput for the US business. Seems like a big opportunity we've been talking about now for multiple years and I know you've thrown a lot at the system in the past year or so in terms of complexity and new operating approaches. So I'm just wondering, I guess, if you can elaborate a little bit more on what you think the opportunity is and what type of -- in terms of drive through speed in terms of time? Do you think you can shave off of that and what it might mean for the sales going forward and how quickly you think you can start turning the dial on that whether it's a 2019 or even longer term impact? Thanks.

Steve Easterbrook -- President and Chief Executive Officer

Yes, sure David. I think the greatest opportunity as we look all around the world and the US is no different, is continuing to maintain our kind of system standards of the day-to-day operations, you'll hear me talk a lot about running better restaurants and that's not loose rental rate. That's an underlying principle by which we're all embracing and at the same time consumers get increasingly demanding and therefore that they expect different forms of service, they expect great interaction with technology and expect more venue innovation et cetera.

So it is always a delicate balance to get the operational foundation right, was also crazy enough energy and attraction in our business to win customers or often in a flat market frankly. So now we have put a quantification on the improvement of drive through, but what we can do, we have done and you may remember it from when we actually launched the last implant back in March of last year. We are able to model really what we believe the call throughput would be, as you can positively impact service time.

So whether it's from caller that may be turning away at the end of the lot because they could see the line and that will just turn them off and carry on going all the way through to just listening through and tick in the peak hours obviously the lunchtime hours and early evening hours. But its a fundamental truth that the quicker we're able to get service, the more calls we can serve and it could be all begin to create the demand we just need to just kind of meet that now as well.

So you'll -- we'll have more to say around it, but the other probably seven or eight sub teams within the US working at number of different areas around complexity because menu is one of them, getting reliable technology, working on a more consistent basis would be another on how we can ease the merchandising. We clearly have a broad menu, but how much of that do you merchandise to tend to focus more on your highest selling items for example, how we can also improve the training and improve retention of our crew in the restaurants would be another one, while other elements of the building and equipment could we continue to invest in which would actually make it just easier for a managing crew to run great restaurants.

So then just getting back into the disciplines of day-to-day operations making sure that as we release new initiatives, the restaurant we find fantastic training initiatives for our teams and make sure we don't now allowed them. So there's kind of a multi-pronged approach, we will continue to be introducing things to our restaurants. I guess what our customers expect, but I do think we need to do collectively, we need a better job and I need the better job, but that's ensuring that there's a corresponding reduction in just work flow from management and crew -- that working hard out there and it's not easy and we're committed to making a difference.

Mike Flores -- Investor Relations Officer

Next up is Jeff Bernstein with Barclays.

Jeffrey Bernstein -- Barclays Capital, Inc -- Analyst

Great, thank you very much. Perhaps looking outside the US for a moment. You know, Steve you mentioned China and what sounded like encouraging commentary all around in terms of new leaders and their initiatives and they're pretty keen to accelerate growth and what would be your largest market outside of the US? I'm just wondering if you can provide any more color around that in terms of performance, maybe the comps this quarter or just broader sentiment because whether it can comps or consumer behavior or the headlines we hear about is caution and I would have thought we might have heard more of a tempering tail around the China growth story. So maybe you can provide any insight into -- your hearing what the qualitative and quantitative that might indicate that?

Steve Easterbrook -- President and Chief Executive Officer

Yes, absolutely it was as I mentioned in my comments, I was out on the road, it's month actually manage to spend sort of three days in Beijing with our partners with our management teams out there actually getting into a restaurant. So to give you a sense on the quarter sales were marginally up in China for quarter 3, guest counts were up stronger than that. So they had a number of initiatives to drive customers into the restaurants and that gives a marginal positive sales comp. I felt really good about the fundamentals of the market. I mean in there with 3,000 each restaurants now, 75% of those are being remodeled to the full EOTF standard. They are system leading for us in terms of delivery both the combination of the McDonald's deliveries shows and DSS we call it which was the original system we adopted there.

And then the use of a number of third party operators. Now it is a dramatic to experience, so then in July, I was in one restaurant in Beijing where they created a more dedicated delivery area, in the front of the restaurant where they were able to just take the -- that the riders and the drivers would come in and we could just service them independently so it didn't distract from the in-store dining experience for our customers. I mean they continue the remarkable journey on the digital platform for example, so and we've seen -- about 60 million app downloads for example -- and therefore building some rich database of customer behaviors and on the same approaches pattern. But also encouraging just the interaction with our partners like a good long term perspective.

They have already previously announced the ramp up in new restaurant openings from -- through 75 this year with just over 419 and it would surprise me to see that kind of rates of acceleration continues. As you look into the out years, under the new ownership and our management team have settled into a good constructive working relationship and so I think overall we feel really strong, we we're in a very strong position in Tier 1 cities in the most of other cities. It's a bit topper in the lower tier cities and again we're going keep working on the best positioning for us at the investment level in the restaurant. Menu prices and pressure on sales expectations as we open more restaurants in lower tier cities. So we're still work more to learn there, but we've got the right partners in place, we've got a deep understanding of the Chinese consumers, Chinese marketplace.

So overall, I let China fielding really encouraged that again 50 months into the new ownership structure that we've made a great decision and also I am going to say the, what was also encouraging is that we're not really seeing any meaningful anti-American sentiment given some of the geopolitical issues that clearly exist between the countries. So I think increasingly we're being seem to be a local business of -- locally on business of a global brand and that's also encouraging as well.

Mike Flores -- Investor Relations Officer

So we have time for one final question and that will be Andy Barish with Jefferies.

Andy Barish -- Jefferies -- Analyst

I was just wondering, as you go through your kind of operating plan and look out toward '19, you know you're confident in reaching kind of your normalized targets that you've outlined before any puts and takes that we should be aware of it at this stage after what was termed kind of a choppy 2018?

Kevin Ozan -- Chief Financial Officer

Yes, I can talk about the financial targets obviously. I think we've talked about that we are progressing on operating margins. I felt very good about our sales target, our operating margin, our ROIC target and our EPS target as well as achieving our G&A target that we've set. So as I think about all the things that we've set out there going into 2019, we feel pretty good about all of those. Obviously the US continues to be a very competitive market, but as we look overall, I feel real good about all of those and I feel certainly good about achieving our cash return to shareholders target by the end of 2019. So I think, we entered 2019 with pretty good confidence in the business knowing that as Steve said, we still got a big street fight to continue in the US just for us to continue getting all of our projects done while at the same time trying to achieve comp sale increases and turn around guest count growth there.

Steve Easterbrook -- President and Chief Executive Officer

Just to add to that I mean momentum is a very important psychological health guide behaviors of our teams, and I think as we -- as winning is contagious for market to market and I think with our new simplified structure previously and then the way we're going to adopt into the new year, they'll just need visibility of what's working from market to market is only getting better and the speed with which we are lifting, localizing and then launching these initiatives has never been greater.

We've been through clearly we are going through all new pending processes and as we exits or look to exit 2018, I think 16 of our top 18 markets are in positive sales comp territory, some of them are quite incredibly strong sales momentum as well. So as we go through the early look-up plans for next year, I would say our managing director in the markets are coped in that momentum continuing clearly we're planning to grow in each and every market around the world.

So I think the next year, sorry, the next four to six weeks, we shape up the detail of that 2019 plan that there was a mood of optimism among the managing directors and our field leaders, and I share that, but I will see none of this is taken for granted, there is not a single market out there whether it's easy growth that just simply is not, even the -- typically being the hyperinflationary countries where you have a lovely tailwind the likes of a China or Russia, historically. These are now much more mature markets, much more competitive and yes, we've to shop and our game in those markets as well. But we'll be confident in the direction we're heading and excited about what's to come.

Mike Flores -- Investor Relations Officer

Thank you Steve and Kevin and thank you everyone for participating. That will end our call.


This concludes the McDonald's Corporation investor call. Thank you for your participation and you may now disconnect.

Duration: 61 minutes

Call participants:

Mike Flores -- Investor Relations Officer

Steve Easterbrook -- President and Chief Executive Officer

Kevin Ozan -- Chief Financial Officer

David Palmer -- RBC -- Analyst

Andrew M. Charles -- Cowen & Company -- Analyst

Eric Gonzalez -- KeyBanc -- Analyst

Brian Bittner -- Oppenheimer -- Analyst

Matthew J. DiFrisco -- Guggenheim Securities -- Analyst

John Ivankoe -- JP Morgan -- Analyst

David E. Tarantino -- Robert W. Baird -- Analyst

Jeffrey Bernstein -- Barclays Capital, Inc -- Analyst

Andy Barish -- Jefferies -- Analyst

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