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McDonald's Corp  (NYSE:MCD)
Q2 2019 Earnings Call
Jul. 26, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to McDonald's Second Quarter 2019 Investors Conference Call. [Operator Instructions]. [Technical Issues] 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 Cieplak, Investor Relations Officer for McDonald's Corporation. Mr. Cieplak Sadler, you may begin.

Mike Cieplak -- Investor Relations Officer

Good morning everyone and thank you for joining us. With me on the call this morning are President and Chief Executive Officer, Steve Easterbrook, and Chief Financial Officer, Kevin Ozan. Today's conference call is being webcast live and is also being recorded for replay on our website. Before I turn it over to Steve, I want to remind everyone that the forward-looking statements in our earnings release in 8-K filing also apply to our comments.

Both documents are available on our website as our reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.

And now, I'll turn it over to Steve.

Steve Easterbrook -- President and Chief Executive Officer

Good morning. We are pleased to be speaking to you today from our corporate headquarters in downtown Chicago, where we recently celebrated our one year anniversary in this contemporary urban facility. Returning to Chicago was a deliberate move to get closer to our customers and the trend shaping business and society today. Our new facility was designed to be a modern and inspiring environment, a catalyst for our evolving culture.

A move is also a metaphor for the momentum we're seeing across our business. Momentum has been building since we first launched our turnaround plan. As we've recently passed the full year mark, I thought it would be important to spend a few minutes reflecting on our journey. Back in May, 2015, I announced our initial steps to reset and rebuild our business, including our threefold priorities of driving operational growth, returning excitement to our brand and unlocking financial value.

At that time, we were keenly aware that the pace of change inside McDonald's was being eclipsed by the pace of change outside our business. We knew we had to evolve with our changing market and consumer dynamics, and we knew incremental progress wasn't going to cut it. Returning to a growth company was going to require big, bold steps and greater personal accountability. We knew success will be determined by the fast beating the slow, by choosing progress over perfection and moving with a sense of urgency. So, we set out on the journey to become faster, smarter and more responsive to changing consumer expectations. We restructured to be closer to customers and faster at the point of impact, we refranchised the drive growth and bring greater insight on a local level. We increase accountability and financial discipline and return cash to shareholders. Most importantly, we returned to operating growth. Indeed, within two years, we established a strong foundation, one that was fit for purpose and broaden the business to a place where we could begin accelerating growth again. That led to the launch of our velocity growth plan in March of 2017. The plan is rooted in building on the fundamentals that have served our company so well for over 60 years, it's about running better restaurants, offering a compelling menu of delicious and affordable food and complementing that with hospitality and convenience for our guests. We know that when we create delicious feel good moments for customers, every visit, every day, customers recognize our efforts and reward us with repeat visits. We also know that we must continuously complement that work with big and powerful moves that keep us relevant and inviting for new generations of guests. We deployed three accelerators to help us do just that. Our experience of the future or EOTF, digital and delivery. With these efforts, we are focused on actions, have the biggest benefit to the most customers in the shortest possible time. That's the path to becoming a better McDonald's. Four years in, we did the hard work to put the velocity growth plan and accelerators firmly in place, and we are energized by the broad-based strength in our results.

For the quarter, global comparable sales increased 6.2%, which marks four full years of quarterly comp sales growth. This was complemented by positive global comp guest counts. During the quarter, we made strong gains in running great restaurants. We still have work to do because speed of service is important to our customers, seconds matter and impact decisions they make on repeat visits. We're leveraging the power of the system, franchisees, suppliers and employees to reduce menu complexity, improve operational procedures, deploy new drive-through through competitions and incentives, adopt best practices for staffing and leverage new technologies to make it easier for our teams to take responsibility for performance.

And we're encouraged by the results we're seeing. We set market level targets early this year and a job service times across many markets globally. We're providing a better experience for our customers, and with that, seeing record high customer satisfaction scores this summer.

Here in the US, the plan we've built with our franchisees is ambitious. Collectively, we recognize the need for change. I knew it would be hard work. We spent 2018 deploying major initiatives, including a new value platform, fresh beef delivery, EOTF modernization and the restructuring of the US field operations.

At the beginning of this year, we said 2019 will be a year to execute on running better restaurants and optimize the initiatives we deployed last year. In Russia, business with franchisees around the country, I'm seeing the result of focused execution against the plan. Importantly, average franchisee restaurant cash flow has grown eight consecutive months through June, fully overcoming the decline we saw in 2018.

Across our international operated markets or IOM, we are seeing continued success, consistent execution against the velocity growth plan is a winning formula. I had the pleasure to visit Italy during the quarter and witness firsthand the rigorous focus on operational innovations and improvements. Italy now has posted 10 consecutive quarters of comp sales and guest count growth with double-digit comp sales and guest count growth for the quarter. In fact, Italy has outperformed the local informal eating out or IEO category for nearly two years now. I saw similar energy and focus when I went from Italy to Poland, which also posted strong comp sales and guest count growth for the quarter. This high-performing market was an early adopter of EOTF and digital. In Warsaw, I saw the positive impacts our guest experience leaders have on hospitality, as they greet the customers with a special warm that made guests feel welcome. Italy and Poland are great examples of markets where we stir the best practice and replicate it at scale across other markets, whether around EOTF rollout, hospitality, operations, all digital, ideas originate in one market and rapidly move to another, creating an environment where all boats rise.

Now let me turn it over to Kevin for a deeper dive into our comp sales trends by markets and performance drivers.

Kevin Ozan -- Executive Vice President and Chief Financial Officer

Our top line momentum remains strong. As Steve mentioned, global comp sales increased 6.5% for the quarter with each operating segment contributing meaningfully to our growth. In the US, comp sales were up 5.7%, our highest comp sales increase since the launch of all-day breakfast back in the fourth quarter of 2015. And once again, we also grew comp sales across all-day parts.

Performance drivers for the quarter included proven value in deals such as our national 2 for $5 Mix & Match promotion featuring our core menu items, as well as other locally relevant offers. Our renewed focus on our iconic core menu resonates well with our customers. Since switching the fresh beef for our quarter-pound burgers just over a year ago, our sales results and positive customer response confirm it was the right strategic move. In the first half of 2019, we sold over 55 million more Quarter Pounder burgers compared to last year, a combination of both deal offers and line extensions, featuring bacon and deluxe builds on our classic Quarter Pounder with cheese helped to boost sales.

Similar to last quarter, the sales benefit from our modernized EOTF restaurants contributed to our overall US comp performance, which we expect to continue for the remainder of 2019. By taking learnings from completed projects, we've successfully reduced construction downtime and we're also recovering sales quicker after reopening. During the quarter, we converted an additional 600 restaurants to EOTF for a total of a 1,000 projects completed in the first half of this year. We still expect to complete a total of about 2,000 projects for the full year.

Strong average check growth from both product mix and pricing continues to fuel our top line in the US. We're seeing success with offerings that increase average check, traffic and cash flow, such as our current worldwide favorites, LTO. However, returning to guest count growth in the US remains a top priority in the street fight for market share.

Turning outside the US, strong balanced results continued across the international operated segment with comp sales up 6.6% for the quarter. Each of the markets within the segment grew comp sales in nearly all of the markets also grew comp guest counts. Strong results in the UK, France and Germany were key contributors to the segment's growth. The UK marked its 53rd consecutive quarter of comp sales growth and increased market share versus our competition across all-day parts. Maximizing delivery was a key success factor for the market along with menu innovation, such as the bacon roll breakfast sandwich and the Taste of America burgers LTO. France has been successful with both its premium and core burger offerings, balanced with a compelling value platform, helping the market to again achieve record high market share. France now has nine consecutive quarters of both comp sales and guest count growth. And Germany is maximizing contributions from EOTF, our core menu and strong value messages, all of which resonate with our customers. Germany also gained market share versus competitors and customer satisfaction scores are up.

In the international development of license segment ,comp sales increased 7.9%, with sales and guest count growth across each geographic region within this segment. Results across our three largest markets drove the strong sales performance, with double-digit growth in Brazil, strong comps in Japan and positive performance in China. Accelerated new restaurant growth by our strategic partners primarily in China, led the segment to grow systemwide sales by 10% for the quarter in constant currencies.

Now, I'll turn it back to Steve to further discuss the growth accelerators driving our global business.

Steve Easterbrook -- President and Chief Executive Officer

Over the past four years, we've seen unprecedented changes in the global consumer landscape. With this proliferation of change, consumers today expect more from us, quality, service and convenience are more important than ever. And of course, delicious food served by welcoming people is absolutely essential. Accelerators of our velocity growth plan are all about giving our global customers more control over how they order, how they pay and how they're served their food.

In the US, we've made significant progress in modernizing our restaurants through our Experience of the Future initiative. We have now modernized over 8,500 US restaurants. Today, customers are much more like to visit an EOTF restaurant than they were just a year ago. At the end of May, I was honored to join our team in New York for the opening of our new Time Square Restaurant. A three storey restaurant is a major brand statement on how we are providing a better customer experience through deco, enhanced customer service and seamless order and pay technologies.

Our major IOM markets have had Experience of the Future for some time and we're continuing to unlock this potential. For example, in Australia and our major European markets, over 40% of in-store customers now use kiosks when dining with us, taking control of how they order, customize their food and select how to be served. From New York to Sydney and most places in between, our restaurants are not just ready for the future, they are meeting customers on their terms today.

Delivery is another area where we are taking bold action to meet customers' expectations for high quality food on their terms with increasing demands for convenience and speed. We've made significant progress on delivery the past two years and have room to grow in a largely untapped market with great upside. Driving customer awareness and trial about McDelivery remains a top priority.

Globally, we expect delivery to be a $4 billion business in 2019 from McDonald's and franchise restaurants. Across our major markets, we have maintained double-digit delivery sales growth in restaurants offering the service for more than 12 months. In the UK and Spain, delivery now accounts for greater than 10% of sales in restaurants that offer delivery. In the US, Mcdelivery with UberEats is now available in more than 9,000 restaurants, which is more than half of all McDonald's US restaurants.

We're also continuing to add new partners that allow us to scale and deploy delivery to meet untapped customer demand. We recently announced a partnership in the US with DoorDash to expand the availability and accessibility for customers to receive our delicious food wherever they are. We will quickly scale with DoorDash across the US to provide customers with a choice of delivery partners. In Canada, we've seen incremental strength in delivery with our second national partner, Skip the Dishes. We offer delivery in 850 restaurants in Canada, many of which offer delivery from both partners. Multiple delivery partners now are also the norm in Italy, Spain and Russia, where we're learning from our partners, while driving increased delivery orders.

We're also taking bold action on digital. Since closing the Dynamic Yield acquisition in April, we launched the decision logic technology on digital menu boards in drive-throughs across multiple regions in the US. Customers have responded to the point of sale suggestive selling by adding French fries, drinks, Chicken McNuggets and other favorites to their orders. We're already seeing an increase in average check by improving our ability to offer customers what they are likely to want with suggestions based on time of day, weather and items already in customers' orders.

We introduced Dynamic Yield technology in Australia this month. I want to increase the number of drive-throughs in the US using this technology from about 700 today to over 8,000 in the next two weeks. By year-end, we plan to integrate the technology in nearly 100% of our drive-throughs in both markets. This is another example of using technology to create more engaging experiences for our guests. The technology infrastructure we've built over the past three years to support our velocity growth plan and accelerators is fundamental to our transformation, it's a reflection of what our customers' demand from us, and it's not static. Digital capabilities change by the day and impact what customers ultimately expect from us. The technological ecosystem we're building will enable us to meet these rising expectations, positioning us for new opportunities to elevate and transform the customer experience.

Now, I'll turn it back over to Kevin for a look into the financial results for the quarter.

Kevin Ozan -- Executive Vice President and Chief Financial Officer

Adjusted earnings per share of $2.05 grew 7% in constant currencies for the quarter, when excluding impairment and other strategic charges from both the current and prior years. Our results benefited from strong operating performance for the quarter. Revenue grew 3% in constant currencies as our comp sales growth more than offset the impact of refranchising activity. Adjusted operating margin for the first half of the year was 43.2%, an increase of 30 basis points versus last year.

As a result of our refranchising efforts over the past few years, the largest component of our operating income is our franchise margin dollars. With growth of 9% in constant currencies for the quarter, franchise margin dollars now represent nearly 85% of total restaurant margin dollars. Our consolidated franchise margin percent declined 100 basis points, as our strong sales performance was impacted by higher EOTF related depreciation in the US as well as 70 basis points from the lease accounting presentation change that I discussed last quarter. As a reminder, this presentation change has no effect on our franchise margin dollars, but the impact to our franchise margin percent will be ongoing.

Turning to our company-operated restaurants. Consolidated margins grew 20 basis points to 18.1% for the quarter. IOM segment company operated-margins were flat versus prior year, as our strong sales performance was offset primarily by higher labor and other costs such as delivery commissions. US company-operated margins grew 40 basis points to 16.3%, reflecting strong sales performance and refranchising, partially offset by continued commodity and labor pressures along with higher EOTF-related depreciation. Second quarter pricing for both the US and the big five markets in the IOM segment was up about 2.5%, while commodity costs were up a similar amount across these markets. In the US, we expect commodity pressures to ease somewhat in the back half of the year and still expect our grocery basket to be up 2% to 3% for the full year. For the big five markets in the IOM segment, we expect the full year commodity cost increase to be up roughly 2.5%.

G&A was 2.1% of systemwide sales for the quarter and flat to prior year in constant currencies. We still expect G&A for the full year to remain relatively flat in constant currencies versus last year as we continue to invest in digital and technology capabilities. Our effective tax rate was 24.5% for the quarter and we continue to expect a full year tax rate between 24% and 26%. Foreign currency translation negatively impacted our second quarter results by $0.07 per share given the strength of the US dollar. At current exchange rates, we expect the foreign currency impact to less than $0.02 to $0.04 for Q3 with further easing into Q4. Our estimated full year headwind remains at $0.18 to $0.20. As usual, this is directional guidance only, because rates will change as we move through the year.

Now, I'll turn it back to Steve.

Steve Easterbrook -- President and Chief Executive Officer

I began my remarks this morning by talking about momentum. The momentum we are building is apparent to our customers who seek the convenience and value of McDonald's great-tasting food, is apparent to our people, is apparent to industry observers who are watching our transformation. Getting to these results wasn't easy, and we need to continue to work hard to sustain performance, as we face macroeconomic and industry uncertainties around the world. However, we remain confident in our strategies, customers are rewarding us for the investments we are making to offer them great-tasting food, a modern and hospitable environment, an unparalleled convenience.

We all want to be associated with companies, organizations and brands that engage and inspire us, brands that are inclusive, fun, relevant and successful, brands that strive to improve communities and societies at large. That's where we're headed as we continue to unlock the potential of the velocity growth plan and these accelerators. And this is why you'll see us continue to focus on our innovation and technology pipelines, this is our version of success, we are building a better McDonald's through a culture of innovation, focus on a better customer experience, a culture that strives to make the jobs of Russian employees easier and a culture that is focused on sustaining long-term growth. This is our mindset as we push ourselves to execute our velocity growth and accelerators with a strong sense of urgency, passion and commitment.

With that, we'll open it up for Q&A.

Questions and Answers:

Operator

[Operator Instructions]. Our first question is from Andrew Charles with Cowen.

Andrew Charles --

Great, thanks. Steve can give a little more context for the next growth in the US that seems to be accelerating? You certainly outperformance outside the lower ticket breakfast occasion, if that's continued as well as lapping dollar one to three from last year helps, but I think investors are wondering about the undones, the customer's ability to continue to pay up to any growth in traffic. Relatably, the most tangible driver may be dynamic even as we look forward. In the 700 stores that have added the initiatives so far, have you experienced a consistent lift to sales, particularly on mix wants to drive-through add initiative or have the lift to sales been more varied? Thanks.

Steve Easterbrook -- President and Chief Executive Officer

Thanks, Andrew. As you say, clearly this is a check-driven sales comp growth in the US. What I think is encouraging for us and gives us confidence that we've got more sustaining platforms it's the balance of how that check is built. So about two-third is through product mix, 1/3 through price. I think that's a fairly healthy balance. When you drill into it, there's a number of elements that play -- helping with this. So, we just look at some of the menu activity and promotional activity through the quarter, for instance. There was a good local co-op initiative, which most or many of the local co-ops initiated, particularly through the Easter period on the filet of fish promotion, which gave us an incremental lift.

We've been pleased with the way the Worldwide Favorite Promotion has worked, and that's meeting and maybe even slightly exceeding our targets and that's giving us incremental business. As we continue to innovate around the whole of the group platform, the Quarter Pounder cheese with, just different options around lettuce and tomato, that also works along with... We actually realized that on the Happy Meal business, particularly now we've reestablished relationship with Disney. So I think there's a number of elements through just the menu and marketing piece that given us... Building on platforms, it's taken us a while to invest in operationally embrace, but it is now beginning to deliver more consistent results.

Also, we are seeing as we convert the EOTF restaurants here, we're getting an incremental sales lift from that, some of which will come through growing and increasing use of the self-order kiosk where we generate higher average checks as we've mentioned before. Alongside delivery, don't forget delivery, remember, as that becomes a larger part of our business, we're still seeing about twice the average check on the typical delivery order as well. So there is a number of contributors, no, it's not a one single contribution. If you look through right across the business, I think is the culmination. A lot of the initiatives that we've been investing in the last two or three years are beginning to come together, which is giving us encouragement. On dynamic yield, we've been really pleased, I've got to say it's on a three-months in, couldn't be more pleased with the integration of dynamic yield, both as a company and as a culture, but also frankly, getting the capabilities into our restaurants. So we've been running 700 restaurants now for the best part of two and a half months. We are seeing consistent trends across different day parts, different days of the week across those 700, and that's certainly encouraging us with the support of our owner-operators, of course to quite significantly accelerate the rollout. We know that technology works, we can plug it into our existing Outdoor Digital Menu Boards. So we're going to go from about 800 now to 8,000 by this time in two weeks time, which is fantastic.

We would expect to see, we have no reason to believe the kind of this we'll begin to see, and I don't want to go into those details, but the kind of this we're seeing at the moment, we would expect to continue across the accelerated rollout. What also have been really encouraging to us on [Indecipherable] on the subject to yield. We've taken it into our first international market, and have gone very, very quickly from about 20 restaurants to 150 in Australia. The reason that's important is because, and I don't want to get too much into it, but the content management system, the kind of the brain which holds all the data, which dynamic yields product works after then produce what we can show on the Digital Menu Boards. Internationally, they have one typical content management system and the US has another.

We've been able to prove very, very quickly that the technology works on both platforms, which really indicates this is ready for a global expansion. So we'll be careful that we don't get over our skis on it, but the pull from the market is strong, the excitement from the owner-operators is great. And the most probably rewarding or one of the most rewarding analysis, one of the business results is-- it just makes the managers and crew life easier in the restaurant as well. And it would have taken process a little quicker because we don't have to sell manually suggestive sell, the technology does it for you. So [Indecipherable] plenty of wide variety of initiatives are helping support that, and not least, by the way, just the fact that we're actually running the restaurants better. The focus we put on the drive-throughs, which I spoke about the last quarter, we are seeing drive-thru time dropping almost all of our major international markets and notably here in the US as well. So, I can talk maybe more about that later.

Operator

Our next question is from David Tarantino with Baird.

David Tarantino -- Baird -- Analyst

Hi, good morning. And Steve, I guess, while we're on the subject of speed of service. I just wanted to ask, I guess at the opening remarks, you talked about having a philosophy of not focusing on incremental change but focusing on more step changes in your overall strategy. So I'm just wondering if there is something on drive-through speed that can accelerate the progress you're seeing. It seems like it's been fairly shallow so far, but perhaps I'm mistaken on that. And then maybe one clarification at the end, I just want to understand the traffic growth or traffic decline in the US in Q2. Did that change from what you saw in Q1 or did it remain around the same level? Thanks.

Steve Easterbrook -- President and Chief Executive Officer

That was great, Well, let me take the drive-through one. Once a year, we get our leaders from around the world together, so probably 60, 70, including the margin directors from our top 20 markets. And we got together start of March, and while... Clearly, it's been a really strong performance across the last three to four years. There's certain areas where we know we need to do better. We had a [Indecipherable] conversation. I was told of March, and we collectively agreed that we were going to renew some emphasis on the drive-through on the service time, and we've gone the wrong way in most of our markets for three of four years. The reasons we could understand as we've added more to our business, but we knew that wasn't a sustaining trends. So, when we talk about progress in the drive-thru, frankly, it will improve, we want to get incremental improvement week to week to week. So that each time a customer comes back, so a week or two later, they can notice a few seconds difference. There's a ton of things that we've done. We've had 10 to 11 initiatives [Indecipherable] All the stuff from many simplification moves that you would have read about, particularly here in the US where we streamline the late-night menu. We're moving at the Signature Crafted, which were signed up service times and giving some of the local co-ops a chance to roll back some of the all-day breakfast rollout from the second phase. So those things just help smooth the operation in the kitchens.

We're also introducing -- increasing and using technology and diagnostic tools, our managers and crew can see in real-time in the drive-through lanes, they can basically decompose the various elements of a drive-through visit for a customer into its constituent second. So how long are we taking to take the orders, how long are we taking to take the payment. How about how long it takes us to gather the food and present it? How many calls we're asking to pull forward and bring the food later? And just with the attention, we're beginning to see notable changes. So it's clearly kicked off really by the start of this quarter.

Just to give you a slight sense of order book we're seeing already, in June, for example, in the US, we saw a 15-second reduction year-on-year and service on to the drive-through, which I would say is more of an incremental. I think that notable, and clearly, that's rewarding. For customers is a smoother journey. It also helps us with throughput as well. So, there is certainly a lot more to do. But I'm really encouraged. And there's certain other international markets that are seeing double that type of reduction with the folks they're putting on. So there's more to come.

Kevin, you might want to talk a little bit to traffic device?

Kevin Ozan -- Executive Vice President and Chief Financial Officer

Yeah. David, regarding gas accounts in the US in the second quarter, I'd say there wasn't a meaningful change in the underlying guest count trend in the US. The actual number for the second quarter was, I'll say less negative than the first quarter, but there were some specific things in the second quarter, some of which Steve mentioned earlier, things like the calendar shift with Easter timing this year versus last year, a little bit benefit in the second quarter. As Steve talked about the filet of fish, we had about 70% of our co-ops that offer the Fillet-O-Fish in Q2, that helped drive sales and guest counts, and then Worldwide Favorites obviously was an LTO that helped the second quarter too.

So while the actual number was less negative in the second quarter, I'd say there really hasn't been a meaningful change in the underlying trend.

Operator

Our next question is from Jeff Bernstein with Barclays.

Jeff Bernstein -- Barclays -- Analyst

Great, thank you very much. Just following on that, one clarification, if you could just provide some color on the breakfast side of the business in the US. I got the impression last quarter that you were keen to see that breakfast had turned more favorable. I'm wondering if you can talk about whether there was any accelerating momentum in the quarter, where it stands a percentage of sales and maybe how breakfast compares to the rest of the day. And then I just wanted to ask one of the thing. Should we expect, Kevin, an update on the return of cash targets as we now finish out '19? Are we going to get another three-year bucket as we look out the next few years or how should we think about the outlook for that going forward? Thank you.

Steve Easterbrook -- President and Chief Executive Officer

Hi, Jeff. I'll take the first one. We did see a better trading performance in the breakfast day part in quarter two in a combination of local activity with the local co-op support, but we did get to see some strong results out of cafe initiatives on the donuts sticks that will be launched in the first quarter as well. So on the day part, we grew sales, it was still the slowest growing day parts among the day but we are back to a solid sales growth. There is still guest count declining. As I think we've mentioned before, there's plenty of other entrants who are competing in the breakfast market. Yeah, we don't have it all our way the bypass we used to back in the day. So, it remains competitive, we got sales growth, we're encouraged by that, but we know we've got more work to do.

Kevin Ozan -- Executive Vice President and Chief Financial Officer

And regarding the return of cash target. So, as you know, this year we will complete our three-year $25 billion target. We're on track to do that. So we'll finish that this year. Later in the year then, we'll provide an update as far as what that means going forward, past beginning in 2020.

Operator

Our next question is from John Glass with Morgan Stanley.

John Glass -- Morgan Stanley -- Analyst

Hi, thanks, good morning. Can you update us maybe on the US franchisee relationships? In particular, I think you slowed down the EOTF rollout in concession to them, but now you're talking about profits for eight months rising. Is there a greater enthusiasm to embrace this maybe in pull forward, some of the things you've talked about in '21 and '22 and get it done faster. Can you also talk about maybe where they stand or where you stand on delivery? I think there was some friction around commissions, and so the economics of that? Have you resolved some of those issues? And I think there was some adjustments you may plan to make in the back half, just what those adjustments to a royalty rent relief associated with that. Thanks.

Steve Easterbrook -- President and Chief Executive Officer

Yeah. Thanks, John. As I've said before, 2018 was a really hard work year. I mean, both the owner-operators and the company invested a lot of time, a lot of effort, a lot of money in really kick-starting the big about vision as the plan they built. And that does create tensions at a point in time, and that's natural, we worked our way through. I would say that by easing off the speed of the EOTF gave those owner-operators who wanted a bit of a breathing room were able to select that and push one or two projects out which gave them a lot more confidence and comfort. That said, the results we're getting from the EOTF rollout are really strong and very similar to what we've seen elsewhere in the world.

So you'll find the majority of owner-operators are sticking with the original plan, the accelerated plan, really to complete their businesses by the end of 2020. It will be optional for owner-operators to pull their projects forward if they want to in 2021 and 2022, they're welcome to, we'll be ready for it. I think what it has also given us is we are wonderful learning organization as a system. We are always striving, curious to get better. If we look at the performance of EOTF, just as an example, you mentioned that the downtime of the projects were about two days to four days better this year than we were in 2018, which clearly helps get the business back on track.

The time to recover the sales is in when you reopen and getting ourselves back up to the levels, that recovery time is quicker. I think we saw the dip during the closure is a little less this year than it was last year. So I think our execution around these 2,000 projects this year is sharper but probably those three elements, which again, builds confidence in the owner-operators that is going to be a stronger business outcome for them. With delivery, yes, we are clearly keen to roll this out, the owner-operators and obviously a great business opportunity. We have around the world, work with our owner-operators in each of our markets to find an arrangement with them as to how we can best take some of the heat out of the commission costs that they face in order to make it encouraging. We want them to make money out of it. And we as a company will make money as a result.

So I think we're in a far better place. I think probably the two indicators just here in the US that will demonstrate the confidence the owner-operators have is that once we settled on this new rent arrangement with them, I think it was within about a week they voted on a national marketing campaign with UberEats to put some marketing dollars behind delivery and the eagerness with which they've embraced the second, third-party operators, being DoorDash.

I've mentioned in my opening comments, we got around 200 restaurants in Houston on DoorDash at the moment. And that's just really making sure we can integrate the technology and get the operation right. By the end of August, we're going to have probably two waves of around 4,000 plus restaurants. So we'll be up about 9,000 on DoorDash by the end of August Again, just showing the speed we're going and the hence the unrelated [Phonetic] commitment behind it. We got already about 9,000 with our key strategic partnes ,who is UberEats, there is no product crossover, there's going to be about additional 1,200 restaurants that have either one or rather depending on coverage. That means that we got about 8,000 which will have to third-party operators.

And yeah, we've seen around the world that does give us good incremental delivery business. I mean customers are typically, not solely but typically loyal to one third-party operator app. So we know what we've seen from Canada when we added Skip the Dishes to the UberEats platform. We've also seen elsewhere around the world, such as in Italy, where we got three, where we got Glovo, Deliveroo and UberEats. So we got good experience of working with multiple delivery partners and we are confident the incrementality will come with it. And then, as a result, the cash flow to the operators. But ultimately, the mood of the operators, I think are feeling much more confident. By May of this year, their cash flow growth eclipsed the decline that they saw in 2018. So as you can imagine, that gives people a great sense of satisfaction, June continued, thus we've now eight months in a row

cash flow growth and they're confident and committed to maintaining that trend for them because they committed a lot of this plan, they committed a lot to our business and we want them to build business wealth and success.

Operator

Our next question is from Greg Francfort with Bank of America Merrill Lynch.

Greg Francfort --

Hey. Yeah, thanks for the question. Just maybe going back to the drive-through times, can you quantify how much of those were up? And then, I guess the question is how much have you recaptured with this? Second, what percentage have seen in an increase the last few years? And then how much opportunity do you think there is going forward and what's the key strategy to address that? Is there changes you have to make on the product front or menu front to capture more time savings? Thank you very much.

Steve Easterbrook -- President and Chief Executive Officer

I'm going to get into all the details of drive-through service, they do differ by country as well, obviously, depending on how busy to drive-throughs are. I mean you've got -- we got certain markets in Europe where the drive-thru is only about 40% of the business of a drive-thru restaurant was here in the US, it can be upward 70%, 75%. So, a creative totally different service time dynamic. I would say across the major markets, as we sat down in March, we wanted to set ourselves by the end of the year to be about 30 seconds better, which we knew would be notable, and not to be notable to the customer and also then business enhancing is [Indecipherable] through, but particularly in those peak service types, obviously, that's the most critical time to do it.

There a number of different initiatives to it. I mean, somebody just getting the focus. Understandably, with the aggressive rollout of experience the future, there was a heightened focus in store front counter dining area, we're just rebalancing that, so some of it is just the focus on the dry food, people positioning, making sure we're staffing right training and the basics. But there are certain things, for example of menu and I think we got a far more forensic ability through global operations team in our innovation center now to analyze the complexity of our menus by market and identify those slower-moving items that really are not contributing much the incremental margin, and certainly not selling in many volumes but create barriers to service.

So, I know the diagnostic tools, the forensic tools we have now is providing the information into each of the markets they can make smart many decisions. But it's not just about the menu, is around technology as well and actually just making it fun. We've had a number of service competitions around all of the markets, particularly now we're giving these tools to the restaurants, to the managers. But I first saw the drive-thru time of tools in Canada, probably 12 months to 18 months ago and then saw them rollout out in Europe, probably about 12 months ago, and the majority of the US drive-throughs now. Probably what captured my attention more than thing else was the enthusiasm the managers and the crew had for that kind of local competition, how are you doing versus the drive-throughs in your area or the drive-throughs in owner-operator group or the drive-through who is of a similar volume to you. So we can use these tools in many ways to identify where the barriers are, to actually just make it fun, incentivize and to get the enthusiasm of management and crew.

So more to come. I'm encouraged with where we are at. We got some markets restructuring 30 seconds, 40 seconds quicker now, just three or four months in. So they've got a bigger opportunity themselves but they make a good headway. And the US, I'm proud of where the US is at. I know they are focused on getting better than the 50.

Operator

Our next question is from Dennis Geiger with UBS.

Dennis Geiger -- UBS -- Analyst

Great, thanks for the question. I wanted to just ask a bit more about the US guest counts. Maybe if you could just highlight a bit more where you're seeing progress and where the biggest opportunities are to continue to show that improvement. And then, I guess within that context, Steve, I think you've talked in the past about a growth strategy to retain customers, regain customers and convert casual customers, any update there you could give, specifically on the converting the casual customer and if that's still how you're thinking about getting that guest count up in the US? Thank you.

Kevin Ozan -- Executive Vice President and Chief Financial Officer

And Dennis, it's Kevin. I'll take a stab at then Steve can chime in. As far as progress or opportunity, I think as we've talked about, certainly one of our biggest opportunities continues to be at breakfast. As Steve talked about, there has been a lot of new entrants into that space. So there is not many players that are growing guest counts at breakfast or really in most of the day parts, but new entrants have caused a scattering, I'll say of the existing guest counts along just more units. As far as retain, regain, convert, the convert strategy for us was always around opportunities in either other day parts or other areas that we didn't have our fair share, if you will. So areas like coffee and snacking and areas that are potential further growth opportunities but we are not as strong in some of those areas, that wasn't necessarily taking some of our existing customers and just having them come more frequently. So there still are opportunities in some of those areas, again, like coffee and snacking. I think the way we think about it is, there is an opportunity, and that's is what kind of one of the purposes of both EOTF and our digital, is to take take our existing relationship with customers and expand that relationship through digital means, whether that's through apps, for the loyalty program at some point, but the whole customer relationship where we can get to know and personalize offers easier and better for our existing customers. That's one of our big opportunities. The US guest counts will continue to be a, we call it a street fight just because it's a very competitive environment here in the US, but I do think there is more of a focus on what do we need to do in the various day parts, again, breakfast probably being the biggest opportunity for us to regain some of those guest counts that we lost. And really is about, we call it losing guest count, is not losing customers, it's losing customer visit. So customers that may not be visiting us as often as they were historically. And if we can regain some of those additional visits, especially at breakfast time, which is, as you know, a very habitual ritual, and so, if we can get those customers coming to get a breakfast time, it would be a huge benefit.

Steve Easterbrook -- President and Chief Executive Officer

Just to support Kevin's comments, particularly around the, if you like, the technology ecosystem we're building here. For us to have a personalized relationship with our customers, which I think will be valuable to us and also make it valuable to them, we've got to find ways for them to identify themselves when they enter the drive-thru without slowing the drive-thru process down, identify themselves at the sale for the kiosk, again, with... Even though there is less pressure on time there, you don't want to slow them down. Or for example, if they're having home delivery and when we get some routes delivery through the McDonald's app and we're working with a partner of UberEats, we're going to be getting the ability to route those orders through the McDonald's app. Once we can start to link drive-thru transactions to install transactions to home delivery, we start to build a really good picture of our customers individually person-by-person. I think that will be incredibly valuable for us to make ourselves more relevant and more interesting to those customers. And from a customer perspective, just maybe experience smoother and more enjoyable. So you can expect to hear more. There are certainly some initiatives we work on the market right now on those, nothing to say at scale yet, but I can assure you the culture of innovation that we've got going here is playing out. We've got a number of initiatives in number of our markets where we're learning very, very quickly how best to identify customers or customers to choose to identify themselves, is a better way of saying it, at the drive-thru. At the end of store, we believe we got the home delivery piece already initiated, and we're excited about what that could offer the business.

Operator

Our next question is from Jon Tower with Wells Fargo.

Jon Tower -- Wells Fargo -- Analyst

Great, thanks. I just want to talk quickly on the unit growth. I think today you bumped up your expectations for 2019 to 800 stores net. Over the past two years, you've seen a nice jump in absolute net numbers. So, can you discuss whether or not you expect this type of net openings to persist in the future? What's fueling this growth? Are franchisees and new markets seeing better returns than in the past? Thank you.

Kevin Ozan -- Executive Vice President and Chief Financial Officer

Yeah. Thanks, John, for the question. Couple of things, first, related to the, I'll call it chain, slight change in guidance in the outlook section of the release. Really, what's driving net additions number of about 50 higher than it was last quarter is less closings. So our gross openings number for this year will be similar to what we thought it was going to be, but the closings that we originally anticipated beginning, they were a little bit lower, and about half of those are in our development a license markets and about half of them are in the international operated markets, half of the change in closings, that is. As far as how we think about unit growth, there is still a lot of potential, even in our mature markets. So markets like Canada, France, Italy, Spain have a lot of opportunity to continue growing new units, and the US even long-term, we believe. Now, what is helpful in the way we've changed our business model is what you actually see is right now substantially the large portion of openings are in our development of license markets, China and the other DL markets which use their capital, so it's a pretty efficient way for us to grow. So you should expect to see continued growth in new units, again, both in the DL markets by our partners as well as in our more mature markets that we own like the ones I spoke about.

Steve Easterbrook -- President and Chief Executive Officer

Just add on to that. I just want to give a shout out to some of the mid-size operated markets. Recently, I've been in Italy, Poland, Netherlands, these markets are doing double-digit sales comp on top of double-digit sales comps, and hence that's creating clearly, significant increase in volumes and throughput in the restaurants, putting some capacity pressure on.

So, I can tell you the desire in the market is to start to pick up the openings a little bit. I'm heading out to Russia in about two months time to spend some time there with the team. And again, with the strong growth in both guest counts and sales they're seeing, I know they have an ambition for growth. And if you remember, we previously called our segment, the high-growth segment, and that was because we expected them to grow units at a greater pace than the perhaps the more mature markets.

So, we are keeping a real close eye on it, and the stronger we grow the business, then the stronger the confidence level is through the units as well. So more to come by the end of the year.

Operator

Our next question from Brian Bittner with Oppenheimer.

Brian Bittner -- Oppenheimer -- Analyst

Hi, thanks for the question. Can you guys talk a little bit more about your store level margins in the United States, it's the first time, they've expanded in five quarters, and certainly were a much healthier level than all of us analysts were forecasting. I know you said refranchising was a positive impact, Kevin. But I think probably a similar impact as you've seen in recent quarters. So are the franchisee using a similar margin trend change this quarter, and if so, what drove that?

And then just following up on the EOTF, can you tell us what the net impact you believe the EOTF was on comps this quarter and how you expect that to change into the second half? Thanks .

Kevin Ozan -- Executive Vice President and Chief Financial Officer

Yeah. Thanks, Brian. Let me start with the store level margins, and I guess I'll talk about company-operated margins because obviously we have -- those are our restaurants, I can see a lot of detail related to those. I'd say one of the big differences is certainly comps in the second quarter were higher than they were let's say in the first quarter, and obviously higher comps definitely help that. But the other thing I'd say there is there's a little bit more stability in the restaurants in 2019 and 2018. Steve talked earlier about hard work and all the things that we threw at the restaurant in 2018, including EOTF, a lot of projects, fresh beef, the restructure we did in the field, all those changes that impacted the restaurants. And so, as we've now, I'd say stabilized the business a little bit and just have less overall initiative deployment as well as slowing the pace or getting near the end of refranchising, the restaurants are now able to just focus on running the restaurants as efficiently as possible. So we saw more efficiency labor productivity in the second quarter than we saw in the first quarter and last year.

On the franchisee side, we've talked about their cash flow is up, so their unit level economics have been doing well similarly. So, I think that's probably the biggest change as far as what we're seeing in margins versus last year certainly.

Related to EOTF, I'd say the benefit in the second quarter was a little higher than it was in the first quarter and we would expect that to be relatively similar for the remaining quarters of this year. As we said, we completed about 1,000 projects this year, but so far this year, of our 2,000 that will complete in total, but that's coming off of finishing about 4,500 last year, so we have a big base of projects that are now complete that we are seeing the benefit of in addition to improvement in how we're doing those projects as Steve talked about, less downtime, quicker recovery etc. So we expect that those EOTF benefits to continue. And obviously, as we have completed more projects that certainly helps future results.

Operator

As we near the top of the hour. We'll take one final question from Sara Senatore with Bernstein.

Sara Senatore -- Bernstein -- Analyst

Thank you very much. I just have two quick follow-ups if I may. The first was on the EOTF and traffic in the US. I had been the impression that last year, part of the issue was during the store closures you lost some traffic. And I would have thought you would have gotten that back this year, but it sounds like you haven't gotten the traffic back so much as the customers that are still going to McDonald's, they're just spending more and EOTF is supporting that. But I just wanted to understand the dynamic there between enlapping the closures.

And then just on China, are you seeing any cannibalization, we've noticed across the board a lot of restaurants taking unit growth in China and seeing their comp decelerate accordingly. Is that something that you have to contemplate or are you still so under-penetrated? It's not really an issue there?

Kevin Ozan -- Executive Vice President and Chief Financial Officer

I can start with the EOTF. Related to EOTF, so last year, as you mentioned, we had restaurants closed. The one thing needed to be -- primarily the one that had the big projects, what we call non-modernized, so the ones where we needed to do a remodel plus the EOTF components. This year, while there is less number of projects being done, there are a higher percentage of those non-mods being done. And so while we've gotten better at reducing the amount of time that they're closed, we still have some of those closures. Now, that isn't the only issue obviously related to traffic though again, to be fair, we were losing traffic before we started the EOTF and that won't fix all the issues related to traffic. So the traffic piece is beyond just the EOTF as we've gotten better and done more with EOTF projects, we're getting better at completing those, but that in itself won't resolve all of the traffic issues.

Steve Easterbrook -- President and Chief Executive Officer

Just to pick up on the China question, Sarah. We have really strong systemwide sales growth in quarter as well. So the call business is robust, and I would say probably exceeding the opening plans that was initially expected.

I think if you look at the five-year period ending 2022, our partners are looking to exceed more than 2,000 openings, they're certainly on track for that at the moment, and having [Indecipherable] recently, they are in very confident mood about the state of the business. It's incredibly competitiv. You've seen the pace at which other people are expanding, but it is a huge market. The emerging middle class, the greater affordability of the mass population then is heading toward Western QSR type of average checks in the affordability.

So it's certainly a market we're excited about. We're very comfort about the long-term future there. I'm really pleased with the way the partners are working out as well. They're doing a terrific job. So it will be more than 400 openings this year after about 400 plus last year as well. And if they can keep the sales comps growing at the same time, then clearly that indicates a healthy position to the business.

Mike Cieplak -- Investor Relations Officer

Okay. Thanks everyone for joining us. Have a good day.

Operator

[Operator Closing Remarks].

Duration: 62 minutes

Call participants:

Mike Cieplak -- Investor Relations Officer

Steve Easterbrook -- President and Chief Executive Officer

Kevin Ozan -- Executive Vice President and Chief Financial Officer

Andrew Charles --

David Tarantino -- Baird -- Analyst

Jeff Bernstein -- Barclays -- Analyst

John Glass -- Morgan Stanley -- Analyst

Greg Francfort --

Dennis Geiger -- UBS -- Analyst

Jon Tower -- Wells Fargo -- Analyst

Brian Bittner -- Oppenheimer -- Analyst

Sara Senatore -- Bernstein -- Analyst

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