McDonald’s Corp. president and CEO Steve Easterbrook and members of senior management provided an update on the company’s Turnaround Plan during the its recent investor meeting.
“The cornerstone of our System is our powerful and enduring brand. While we are still in the early stages of turning around our business, we are gaining momentum by focusing on our customers and what matters most to them – hot and fresh food, fast and friendly service and a contemporary restaurant experience at the value of McDonald’s,” said Easterbrook. “My priorities for McDonald’s as a modern, progressive burger company are three-fold: driving operational growth, creating brand excitement and enhancing financial value. We are taking bold, urgent action to reset the business and prepare the Company for the next chapter of its history.”
“Our turnaround depends on this: we must run great restaurants each and every day,” Easterbrook continued. “We’re leveraging our competitive strengths: iconic menu items that customers love, a unique franchise model that empowers local entrepreneurs, size and scale that makes operational investments efficient and a global, well-diversified geographic footprint. Together, these brand attributes provide McDonald’s with the foundation and capabilities for continued success.”
New Refranchising and G&A Targets Announced
During the meeting, the Company provided an update on the financial areas identified earlier this year including ownership strategies, capital structure, asset optimization and overall spending. Specifically, the Company provided the following updates to its financial targets:
- Refranchising – target raised from 3,500 restaurants to 4,000 restaurants, which accelerates the pace of refranchising and increases the global franchised percentage from the current 81% to about 93% by the end of 2018. This positions the Company to meet its new longer-term goal to become 95% franchised. The majority of the refranchising will take place in the High Growth and Foundational Market segments.
- Net annual G&A savings – target increased to $500 million, the vast majority of which will be realized by the end of 2017. This reflects a $200 million increase over the previously announced G&A savings target and represents a nearly 20% reduction from the Company’s G&A base at the beginning of 2015. These savings will be realized through refranchising efforts, streamlining across corporate, segment and market organizations, primarily in non-customer facing functions, and realizing greater efficiencies in the Company’s Global Business Services platform. This target excludes the impact of foreign currency changes.
Financial Performance Expectations for 2016
“Beyond our financial opportunities, we’re focused on returning critical markets to sustainable revenue and income growth, and we have raised the bar on expectations for our performance,” said chief financial officer Kevin Ozan. “Given the significant changes planned to our restaurant ownership mix and that we are in the early stages of our turnaround, we are focused on the following constant currency financial targets for 2016, which are more consistent with our previously stated long-term average annual constant currency financial targets:
- Systemwide sales growth of 3% to 5%
- Operating income growth of 5% to 7%, excluding potential charges in 2016 associated with executing against our refranchising strategy and cost-saving initiatives
- One-year return on incremental invested capital in the high teens
- Capital expenditures of approximately $2 billion, split between opening about 1,000 new restaurants and reinvesting in existing restaurants.”
As the Company evolves to a more heavily franchised structure, capital expenditures are expected to modestly decline over time. Reinvestments in Experience of the Future around the world and reimaging the remainder of the U.S. restaurants will be the key variables impacting changes in capital expenditure levels beyond 2016.
“Our confidence in the future of McDonald’s is well-founded. We have set in motion a series of changes in how we do business that will turn around our business at a time when the informal eating out industry continues to grow around the world. As we look to capitalize on this opportunity, I am inspired by the dedication and resilience displayed throughout our U.S., International Lead, High Growth and Foundational Market segments – each of which is making a meaningful contribution to the Turnaround Plan. Moving forward, we will continue to measure our progress and be held accountable at each step throughout the turnaround as we work to deliver sustained profitable growth,” concluded Easterbrook.