McDonald's Corporation (MCD) Earnings Call Transcript & Summary

Good morning, again. I'm Dennis Geiger, restaurants analyst at UBS. I'm pleased to welcome and excited to have with us this morning, Kevin Ozan, CFO of McDonald's. McDonald's is the largest restaurant chain in the world with more than 40,000 restaurants globally with leading share and momentum in many of those key markets and has an accelerating unit growth trajectory. So we want to welcome Kevin, Thanks so much for joining us this morning, Kevin.

Yes. Thanks for having me, Dennis. Good to see you.

Terrific. So I want to start out maybe first, Kevin, with the announcement that you and the team made yesterday. McDonald's announced the decision to temporarily close 850 restaurants in Russia, while continuing to pay more than 60,000 employees in the country. Can you talk about that decision?

Yes, sure. Certainly, since the beginning of this crisis, our #1 priority has been our people. So we previously indicated that we're -- we've been continuing to pay salaries of all of our Ukraine folks, even though, obviously, all the restaurants there are closed. To your point, yesterday, we announced that we were temporarily closing all of our restaurants in Russia, and pausing all of our operations there. As you would imagine, this is a really challenging and complex situation for a global brand like us. We've been doing business in Russia for decades. We are certainly a part of the communities throughout the country where we feed and support a lot of people in the country. We've indicated that we will continue to pay all of our employees in Russia. That's both staff and restaurant employees. We're working through the exact impact of all of that right now, but it also will include things like paying our lease costs. We're mostly leased sites in Russia. We'll have some supply chain related costs and some various other costs. In total, right now, and again, we're working through all the details, we believe that it will be roughly around $50 million per month or about $0.05 to $0.06 per month. We expect this to be temporary, and we certainly don't take this decision lightly. But for us, this is about doing what we believe is the right thing to do, both for our global business and for our local people. So we'll continue to assess the situation and hopefully, can keep people updated as things progress.

Great. I appreciate that color, Kevin. I want to shift to the momentum that the brand and the business have had in recent years. Maybe you could talk about that top line momentum that you've had over the last several years and really discussed how the brand has been able to generate that level of elevated success and growth at scale. Perhaps you could briefly touch on sort of how you were able to transition the business over the last many years to one that is now really taking share in most key markets globally and continues to do so.

Yes, great. Certainly, things were a little different before COVID. We had a lot of momentum on the international side of the business going into COVID at the beginning of 2020. U.S. business was kind of getting to the point where we were completing a lot of our modernization efforts, and we're starting to see some good progress. What we've seen over the last couple of years, let me -- if I start with the U.S. Certainly, the U.S. momentum has accelerated, I'll say, during the -- during COVID over the last couple of years. In 2021, we saw comp sales of roughly around 14% in the U.S. That was our highest annual comp that we could find on record in the U.S. And in the international markets, it's a little bit more of a mixed bag depending on the country. But certainly, coming out of COVID and heading into this year, we feel good about where the international side is. The business really has been driven by the development and execution of the strategy that we developed a couple of years ago now, what we call Accelerating the Arches. It's really about building on our competitive advantages to strengthen our brand and grow market share. So it's built around what we call 3 pillars, our MCD pillars, M relating to maximizing our marketing, which is about balancing both sales building marketing and brand building marketing. C, which is about the core menu and focusing on core menu. Our core menu makes up about 75% of our food business. Certainly, with a big focus on growing chicken because that's a faster growing protein than beef around the world. And then on the D side, what we call the 3Ds of delivery, drive-thru and digital. And if I just touch for a second on each of those on the digital side. Digital certainly has accelerated during COVID. No surprise to us along with the rest of the world. But what we've seen is in our top 6 markets in 2021, our digital sales grew to about $18 billion or roughly 1/4 of our sales in those markets, which was about a 60% increase over the prior year. And we're certainly on our way to building what we believe will be the world's largest loyalty program on the digital side. And delivery, fortunately, we have gotten into delivery in a big way prior to the pandemic, but that has only also accelerated during the pandemic. So we've seen that business continue to grow. And I think much of those behaviors we're seeing are still sticky post COVID. And then on the drive-thru side, again, fortunately, we have drive-thrus in about 95% of our restaurants in the U.S., a little bit less than that percentage wise on the international side. But certainly have much more drive-thrus than any of our competitors in just about every international market also. That's been extremely helpful, certainly throughout COVID. And again, I think some of that behavior will be sticky post-COVID.

That's great. And I want to touch on kind of that post-COVID. I think you probably spoke to some of it just there. But the brand really almost from the beginning of this was highly resilient, especially in the U.S. and other key markets. The teams did a great job, obviously, of kind of managing the challenges over the last couple of years. Just curious how you think about the post-COVID opportunities, be that in the U.S., be that globally and how the brand is positioned on the other side of this?

Yes. Yes, it's an interesting question and one that has evolved, I'll say, over the last couple of years because as we all went into COVID, nobody knew how long it was going to last, what kind of consumer behaviors were going to be changed, et cetera. But what we have seen is what we believe is we've got some inherent competitive advantages that helped us throughout COVID and will continue to help us as we are coming out of COVID, God willing. And some of those are things like size and scale where investments in things like technology and marketing, the broader you can leverage some of those investments, we're seeing a benefit to that. And so size and scale, we believe is an advantage in certain of those types of investments. Certainly, I mentioned the convenience factor of things like drive-thru. The fact that we've got drive-thrus in most of our restaurants around the world certainly is a big competitive advantage as a lot of other folks are now scrambling to try and build drive-thrus. And then on the delivery side, one of the pieces of information that we often throw out there is in our top 6 markets, roughly 75% of the population lives within 3 miles of a McDonald's. From the convenience side, that's extremely helpful, obviously, for things like delivery. And then lastly, I'd say on the competitive advantages just our core menu. We've got billion-dollar iconic brands from things like Big Mac and Quarter Pounder and chicken nuggets and certainly the fries. So we have -- we purposely built our Accelerating the Arches strategy really around putting the customer and the customer experience first. And you may have seen or would have seen last year that we announced our first Chief Customer Officer, Manu Steijaert, who really now kind of corrals the resources within the company to make sure that we're working on making the customer experience as frictionless and memorable as possible. So I think it really now is about just executing on our plan. We believe we've got the right strategy. We believe we have some competitive advantages. It now comes down to just making sure that we're executing that strategy in a good way across the world.

That's great. And I want to talk about what may be executing on that strategy means, but particularly in the U.S., again, where you've had tremendous momentum in recent years, a strategy to kind of near and longer term seemingly maintain that. I know it becomes -- I think it becomes harder to continue to maintain that momentum and that level of success going forward. But McDonald's is probably one of the few brands that has a track record historically of demonstrating that kind of outsized momentum for long periods of time. And many of your key markets across the world have shown that as well. So I wanted to ask how you're thinking about that underlying momentum in the U.S., in particular, going forward and the potential that even from here, we could see a multiyear period of continued outperformance from you folks and from the brand?

Yes. It's interesting, as you mentioned, momentum is an interesting phenomenon. What we've seen historically is when you start building momentum and can keep executing in a good way, that momentum just builds upon itself, it can be multiple years. I remember for a long time, people kept asking back when I was in Investor Relations 10 years ago, like the business is doing so well, but what do you have left? How are you going to keep it up. And it is amazing when you get momentum, you don't need to have a ton of new products or huge innovation. Just executing on the plan really well can keep some of that momentum going. So what we've seen in the U.S. is really some of the playbook that has been successful on the -- in the international markets. It's things like modernizing the estate. So we were a little behind in the U.S. versus the international side, but the international side has always been pretty modernized. We've now spent the last several years modernizing the U.S. estate. Will be pretty much complete by the end of this year. So that just starts giving people a little bit different perception of the brand, different feel of the brand where they feel better about the brand. Our unit economics in the U.S. have now grown where our average unit volumes in our restaurants are roughly $3.4 million for each restaurant. So we've got good unit economics. Our franchisees are very financially healthy which means they have the ability to invest in important things like their people, equipment, new restaurants if they want to acquire some new restaurants. And then we've also been making good progress on things like marketing initiatives, getting a little bit more creative on our marketing, strengthening our digital offerings by putting in loyalty last year and then focusing on some of our core menus like crispy chicken that we implemented last year. If I think about 2022 specifically, the focus again in the U.S. is going to be on execution and it's kind of in 3 primary areas. Our people, certainly, labor and the people side is an important aspect of the business right now. So investing in pay benefits, the development of our folks and making sure that they're having good experiences, the whole crew experience is one important aspect, that employee value proposition. Chicken, again, we implemented our new chicken sandwich last year. It's been sustaining at levels that probably exceeded our original expectations but are continuously building upon the initial growth, but still only about 40% of the population in the U.S. has actually experienced or tried that new chicken sandwich. And we know that on average, about 80% of the country visits us every year. So there's still a lot of room to get more people to try that chicken sandwich. And then the third key area for us this year will be on the digital side. Again, we implemented a loyalty program in July of last year. That has been building up, but still has a lot of room to continue to gain more people into that.

That's great. And it's a great point that I think a lot of us and investors don't always appreciate that you made earlier about momentum. And when you have it, it becomes not tough to lose, but it -- momentum begets momentum to some extent in addition to everything else you're executing on. I want to shift, as you talked about people, Kevin, as one of your key priorities for '22. Maybe you could talk a little more about the current operating environment in the U.S., in particular. What you're seeing across the system with respect to staffing, cost inflation, pricing. And there's a lot there, I know, and I know you gave us comments recently on this. But just how you kind of think about those dynamics playing out through the year within the U.S. in particular, certainly can touch on international, if you like.

Yes, there is a lot there between staffing, inflation. Let me try and hit a little bit on each of those. Certainly, on the staffing side, both in the U.S. but even broader across the world, there are generally some industry-wide labor shortages. And I think it's probably even beyond our industry. But what we've seen, December and January were a little bit challenging as Omicron kind of hit around the world. Since then, we're starting to see things ease a little bit, what we're hearing from our teams are things are getting a little bit better. I don't want to overstate it, but things are moving in the right direction and are getting a little bit better. And in general, we're seeing our restaurants doing a little bit better than much of the competition. So we're starting to feel a little bit better on the staffing side. Turnover is still a challenge in both the U.S. and many of our large international-owned markets. So we need to make sure that we've got the right employee propositions to be able to both recruit and retain employees. But hopefully, that's starting to move in the right direction. On the inflation side, we are seeing both labor and commodity inflation. On the commodity side in the U.S. in 2021, we saw our food and paper increasing roughly around 4% for the year, and we expect this year that probably to be more like double that. Most of that pressure will -- we expect to be in the first half of the year, but it's really broadly across our entire food basket, primarily beef. We are seeing similar dynamics in the international markets, substantially higher inflation in '22 than '21. A little bit unknown yet of how some of the recent activities will impact any of that. But certainly, we expect higher inflation in 2022 than we've seen in 2021 or really have seen in a long time. What that does then is put a high importance on getting -- on strategic pricing and making sure that we're pricing in the right way. In the U.S., in 2021, we increased prices overall roughly 6%. The positive of that is we still saw flow-through to historical levels, kind of like how much of that is actually getting down through sales. Roughly 70% to 80%, which is in line with what we had seen historically is still flowing through. But that's something we definitely need to keep a close eye on, both in the U.S. and internationally. Generally, as you know, our prices are set by our franchisees. They generally use a third party to help them with some of the strategic decisions. The third party takes a consumer-based research approach, looking at kind of local market conditions, competitive environment, et cetera, to help them set those prices. We generally will take smaller, more frequent increases than less frequent large increases. And we do try and tailor all of those increases to local market approach based on what's going on in those markets. The biggest thing we just need to keep -- make sure we keep an eye on throughout this year is pricing to try and offset some of the commodity and labor pressure, but making sure that we still have the right consumer metrics that we are viewed as good value for money. And we do a lot of consumer research to make sure that consumer perceptions on value throughout our menu, continue to be favorable. So right now, that's still in line, but it's something we'll need to keep a close eye on throughout the year.

That makes sense. That's great. I want to pivot just over to the international markets for a second, Kevin. We talked about the U.S. momentum. So looking at international, many of your key markets around the world now kind of back and exhibiting strong momentum in a lot of cases, well above pre-COVID sales volumes for many markets at this point. So curious how you're thinking about the sales and the profitability recovery opportunity or opportunity for further gains from here in key markets or in kind of your international segments. Just how you're thinking about that right now?

Yes. As I mentioned, I think early on or at the beginning, fortunately, we entered into COVID in really good strength in most of our excuse me, international markets. So we came into COVID with a good momentum, a modernized estate, so a good business. Certainly, COVID caused some bumps, ups and downs in many of the countries throughout the world. What we've seen is varied performance depending on the country and primarily dependent on the extent of government regulations, restrictions throughout the country, et cetera. So we have certain countries like U.K., Canada and Australia and our international owned markets, where we've seen really good strength throughout COVID. Australia had a few months where they had some more restrictive lockdowns at the end of 2021 based on what was going on there. But if I think about the 2-year period, 2020 and '21, those 3 markets of our large ones really held up really well and are coming out of the pandemic with really good strength and momentum in the business. A couple of other markets like France and Germany. We haven't fully recovered throughout '21, our 2019 sales volumes yet. So we're a little bit more in recovery mode as we go into 2022. Early signs seem to be positive of things moving in the right direction. Again, assuming nothing goes backwards related to COVID. But there will be a couple of countries that are still just recovering and then hopefully exceeding 2019 levels throughout the year. The positive is even through the pandemic, we have seen strong customer demand for our brand in most markets. We have generally gained market share in most of those international markets. Similar to the U.S. and maybe even a little bit more, we've seen off-premise channels be a competitive advantage and be accelerated during the pandemic. Again, the drive-thru business isn't as high internationally as it is in the U.S., where in the U.S., it's almost 75% of our business probably right now. Not quite as high as that on the international side, but certainly elevated versus where it was pre-pandemic and likely a little bit elevated post-pandemic. We have seen some countries significantly accelerate the delivery business. Places like the U.K. are doing -- many of the restaurants are doing over 100 delivery orders a day. And so that's been a key aspect of the growth throughout the pandemic. And as I think about 2022 on the international side, we will have some of the same headwinds that I talked about in the U.S. as far as commodity, labor inflation, some labor availability, some supply chain challenges. But I think we've got good momentum in those countries that have been doing well. And I think the countries that are coming out of it are starting to see a good pickup in consumer demand. And so we feel pretty good about the delivery growth, the digital growth, drive-thru still working well and core menu continuing to do well.

That's great. Terrific. I want to shift over to one of the 3Ds, talking about digital, digital really, tech broadly. It's been a significant area of focus for the company and a good source of investment, I would say, over the last several years. Can you talk about sort of how the company and the brand are positioned on technology right now? Perhaps maybe where some of the biggest opportunities may lie? Whether it's the app and the digitization of the drive-thru at some point or automation. Again, I know a lot there, Kevin, but I love to kind of touch on that side of things.

Yes. As you know, we've invested heavily in technology over the last several years now. Part of that was to get our infrastructure and our tech stack closer to where it needs to be. If I go back and think about how we grew up as an organization, we grew up pretty decentralized throughout the world and had organizations in each country and therefore, some different tech stacks in many of our countries. What we've needed to do is get on to a common tech stack, common platforms so that when we do introduce something like loyalty, for example, we can deploy it across markets in a much quicker way. Historically, it would have taken one by one in a long time to be able to deploy that because we had to go take loyalty, for example, and integrate it into a different tech stack in every country. Now that we're on a relatively common platform in most of our major markets, we're able to do something like loyalty and get it out to all of our big markets in a relatively short period of time. So getting that infrastructure and tech stack was really important for us to be able to move quicker and be more agile on new products that we want to be able to roll out more broadly. Having said that, I think we have found that investments in digital and technology are going to be ongoing investments. It isn't a invest and then relax for years and years because the world continues to change. We need to keep upgrading things like our app and our tech. And so I think there's going to be an ongoing investment that's going to be required in our tech and digital space. Again, I think that's where our size and scale is helpful that we're able to take those investments, leverage them across our entire system and then certainly have enough free cash flow after those investments to be able to do what we want with free cash flow. I think in the near term, what we'll see some of the focus areas on is, it is on things like the app, loyalty, CRM kind of the way we interact and relate to customers. And things like -- right now, one of the things we're in early phases of in the first country is integrated delivery, meaning that people can go and order delivery from our app. It's just getting ready to go into our first country, and we'll roll that out into several of our large markets this year. So it will be about the app and digital and the loyalty program and things like that in the near term.

Great. I want to touch on loyalty. You mentioned it a bit just now. I think, just over a handful of markets now or very shortly. I wanted to talk about kind of the takeaways and the learnings so far from the loyalty program, U.S. globally, however you want to frame it up. But kind of where are you now? What's the opportunity looking ahead? Maybe love to kind of touch on that?

Yes. So right now, we currently have loyalty programs in more than 40 markets around the world, but we just started getting it into some of our larger markets. So in 2021, midyear, so we launched it in the U.S., by the end of 2021, we also launched in Canada and in Germany. It's just being launched as we speak in Australia and then it will likely get launched in the U.K., probably in the second quarter this year. So that's one of the examples. Like I was talking about the fact that we're now on this common platform and tech stack allows us to be able to do that the way we've been launching loyalty, for example. It's a good example of kind of how we can use personalization and one-on-one interactions with customers versus our historical way of mass marketing to everybody. Ultimately, the idea is the more that we know you as a customer, we can tailor offers, our interaction with you so that it's on a more personalized basis. We do believe loyalty is a multiyear comp driver. So we're certainly in early innings, having just launched it. Near term will be about, I'll say, recruiting, getting members into the loyalty program. That's kind of the first goal. Can you just get a lot of people into the program. We launched it in the U.S. in July. Right now, we have more than 30 million people enrolled in the program, about 21 million active loyalty members. But the initial [ fate ] period even through '22 will be about just getting people into the program. In future years, then we can focus on things like gamification, subscription programs, all the other things you can do once you have a loyalty program. Because what it's really about is it's not about getting a lot of new customers, it's about frequency and getting our existing customers to be able to come more often. One of the things we've seen even in the first 6 months in the U.S. is the digital frequency has increased about 10% in the U.S. So those -- our most loyal customers are coming about 10% more often, which is exactly what loyalty is intended to do, get those folks to be able to come and enjoy the food a little bit more often than they were. So we do see increased customer satisfaction with our digital customers versus nondigital customers, they like things like we're able to -- when they come through the drive-thru, we can greet them by their first name. And everybody seems to like that, both the crew and customers. So we think loyalty has got a lot of runway for multiple years. We're in the very early stages of it. But so far, I'm pleased the way it's been growing.

That's great. I want to touch on digital, Kevin, which you just gave some good comments on. Curious again, a little more on what you're seeing U.S. and international. Maybe if you've been surprised to some extent by the success of delivery over the last several years? And I guess, really benefits you're seeing and how you think about delivery from here? How much of a pull forward have we seen over the last few years? And ultimately, again, if you have any sense to share on kind of what the growth trajectory of that channel looks like for McDonald's?

Yes. Again, fortunately, we were able -- or fortunately, we did jump into delivery kind of full-fledged prior to the pandemic. So we at least were set up in all of our large markets, certainly to be able to have the delivery program operating. Today, we have delivery in more than 33,000 of our restaurants in about 100 countries. It's in about 90% of our restaurants in the U.S., about -- over 80% of our restaurants globally. And like I mentioned earlier, we have seen that channel grow significantly during the pandemic, certainly as people weren't able to get out and about as much during COVID, they found new ways to interact with the brand and delivery was certainly one of the significant ways that a lot of folks started doing that. We've seen many markets have double digit comps in 2021 on the delivery side over their 2020 sales. I mentioned earlier about the percentage of population that lives within 3 miles. So we're well set up from a convenience standpoint. What we're seeing is the behavior is still being sticky post-COVID. Now it's not at the levels that we've seen in 2021. It's settling in a little bit lower, but certainly substantially higher than pre-COVID. And I think the reason for that is, if you think about it, people who never use delivery before have now recognized the convenience of having -- not having to get up from your couch and getting the food delivered to you. A lot of those folks are not going to go back and say, "now, I want less convenience." And so we are seeing it still at an elevated level. I think it will continue to grow because people love the idea that you can order McDonald's and have it at your door in 30 minutes or so. We recently announced that we entered into some long-term global strategic partnerships with a couple of our largest providers, Uber Eats and DoorDash. That will help secure financial arrangements for the long term and also help us just focus on some of the important operational aspects of delivery, where we can unlock speed, accuracy and improve our operations related to delivery. So that's some of the focus now going forward.

That's great. I want to shift over to marketing, which you touched on, Kevin, a short bit ago. The marketing strategy, the execution really appear to have gone to sort of another level over the last couple of years for the brand. Seemingly, that has helped further increase brand relevancy with customers, has made the brand, I think, even more on trend. So I'm curious if you could talk about that marketing transition, if that's how you view it over the last few years, what it's done for the brand and really what it's done for your relationship with existing and new customers.

Yes. As I mentioned at the beginning, marketing is certainly one of our key 3 pillars in our strategy about maximizing marketing. And again, what that's really focused on is customer and customer experience and making sure that our marketing investment is a growth driver. So we've had the opportunity to be a little bit more innovative and creative in the last few years. I think we've been focusing on making sure that we're tapping into kind of today's culture, making sure that we're relevant to today's youth and culture. That includes then leaning into social media, that includes leading into things like digital to drive customer engagement. And what we've seen, both in the U.S. and across many of our markets is a better balance on brand building and sales building marketing initiatives. Sales building are more short-term focused on promotions or food products that are to drive sales in the near term. And those are important. We still need to do those. Brand building are longer-term initiatives that are going to help our brand in the long term. It helps customers the way they relate to the brand. It helps trust in the brand. And what we've seen in some of our markets who have been doing this for a long time is that, that brand building creative marketing is really important for long-term sustaining sales. We've seen that in places like the U.K. and France. And now I think the rest of our markets are making sure that they've got the right allocation of brand-building marketing. So in the U.S., that's things like even our famous orders that we've done in the U.S., which we started with Travis Scott and then it progressed through various other celebrities. It was an innovative, creative marketing promotion that was -- that really worked against all 3 pillars in our strategy. It was about cultural relevance tapping into today's youth. It was about our core menu. We didn't have to introduce any new products. So we used core menu to kind of drive sales of our core. And then obviously, we were able to activate that in a digital way. So it was a perfect example of how we bring to life each of the pillars across one marketing promotion. And really, I think now we're focused on making sure that we've got the right digital and other marketing that continues to tap into today's youth, today's culture and focus primarily on core products.

Great. I want to ask about breakfast a bit, I guess, U.S. specific, you can touch on global if you think it makes sense. But kind of returning, I believe, to positive breakfast comps relatively early in the pandemic, which is impressive despite the lack of normal routines for the customer and the consumer. What differentiates you from peers at this competitive daypart, you're the industry leader by far, it's a huge part of your overall business throughout the day. What differentiates you? And what can we expect from the day part moving forward from the brand?

Yes. To your point, breakfast for us has been a historically strong daypart, certainly in the U.S. and it's a really important part of our business to protect. Right now, it's roughly 25% of our sales in the U.S., and it's a higher percentage of our profitability. And the way we've been able to be successful over many years is, obviously, we got into breakfast early. Our execution and operations at breakfast generally have been our strongest. We have a lot of our more experienced crew that works the breakfast daypart. So if you go in a restaurant that's working well, during the breakfast time, you see that restaurant just humming as cars are going through the drive-thru. What's important to your point is the morning more than any other daypart, people are very habitual. They get into a morning routine. It obviously was certainly disrupted during COVID. But pre-COVID, certainly, there was a routine that people stopped at a certain place on their way to work, got generally similar products and went through the same routine every morning. We need to make sure as customers get back into some of these routines and probably looking for familiar and familiar favorites is what we've seen over the course of COVID that we're well positioned to do that. We have experienced double digit comps on a 1- and 2-year basis in 2021 at breakfast. So we continue to -- we've been able to continue to grow that daypart, even through COVID. I think even during COVID, when people -- a lot of people were working from home and not getting out, people were looking for a reason to run out, even if it was a short period of time at breakfast or at lunch, to be able to get out of the house just for a few minutes. And so it was a familiar thing that people can go run through the drive-thru, even if they had to go back home with that. So we were able to grow that breakfast daypart even during the pandemic, but it's certainly an important daypart for us to protect as we now come out. There's a big focus on operations, speed of service, as well as value at breakfast. Again, if inflation continues to be a headwind and a something that customers have to deal with, value at breakfast will be important. And the way we do value of breakfast is on a local basis. So there likely won't be any national promotions or anything related to breakfast for value, but we will see in the local markets value because it allows them to address both local taste, which are different in different parts of the country, as well as whatever competitive environment happens to be in each region.

That's great. I want to -- just in the essence of time, I want to make sure -- maybe I'll come back to the U.S., but I want to touch on some bigger picture points and themes. And particularly, unit development, Kevin, which I think you recently guided to global net restaurant growth for this year of, I believe, about 3.5% or so, notably higher than the growth that McDonald's has exhibited in recent years. And I think you highlighted really the potential for further acceleration towards that 4% level in the coming years. So can you talk about the drivers of that upside? Where that incremental growth is coming from? And really what that says about the health of the system globally despite the fact that you already have 40,000 restaurants?

Sure. Yes, to us kind of accelerating some of this unit growth isn't necessarily a brand-new strategy. We've -- we certainly, internally, have been talking for a little while about ramping up some of the unit growth as some of our large-scale modernization efforts like the U.S. are winding down. So as I mentioned earlier, we'll be substantially complete with the modernization efforts in the U.S. by the end of this year. That gives us the opportunity to now focus our teams and our capital on more new unit growth. So as you mentioned, our plan is to grow new units roughly 3.5% this year. That, again, is assuming that the situation in Russia is temporary, but roughly 3.5%. That on top of the 2% growth that we had in 2021 will drive roughly 2% sales growth in 2021 -- 2022, sorry. And the reason there's a difference there is because some of the areas that we're growing new units on are lower average unit volumes than our average around the system. So for example, we'll open roughly 800 units in China, those open up at lower unit volumes, it takes some time to grow over the first several years. So it's not an immediate -- as big and immediate contribution to sales growth as the unit growth is. But we do believe there's unit growth opportunity, both in many of the emerging markets, certainly like China and some others in Asia and Latin America, as well as in many of our -- most of our major markets. That includes the U.S., we believe there's opportunity. We'll return to net unit growth for the first time in several years this year. It includes places like Canada, U.K., France, Italy, areas that we have a lot of restaurants. But as we look throughout the country, there's still a lot of opportunity for us to continue to grow in those markets. We earn very good returns on new restaurants. So it's a good use of our capital. And also, one of the things driving the net unit growth is we'll have fewer strategic unit closings. We've had a couple over the last couple of years, specifically in the U.S. related to Walmart. So that will help drive up that unit growth. Post-2022, we think that 3.5% unit growth could be between 3.5% and 4% to your point.

Terrific. I want to touch on G&A and some questions from the audience around G&A as well. You've targeted G&A as a percentage of system sales this year, 2.2% to 2.3%. Curious how you think about the potential to further leverage G&A going forward? And perhaps if you could maybe tie that in with how you see operating margins trending following this year's targeted, I believe, low to mid-40s, as we look ahead over the coming years.

Yes. So over the last several years, as we've been investing in things like tech and digital and as I talked about, those investments will remain higher than they were previously. What we have been able to do is be more efficient with our, I'll call it, run the business or maintenance G&A, kind of all the other G&A that we need to incur to run the business, so that more of our G&A is now focused on growth drivers like digital. That's helped the organization be more efficient and really focus our spend time and resources and growing the business. As you mentioned, we said for 2022, that translates into our G&A being roughly 2.2% to 2.3% of sales and allows us to invest in those areas like digital technology and people that we need to invest in. Beyond 2022, we certainly expect to continue to grow sales at a reasonable clip. And so our expectation is that we'll therefore gain leverage as a percent -- on G&A as a percent of sales, post-2022. Similarly, on operating margin, we've mentioned that for 2022, we think that will be in the low to mid-40s range in 2022. That is being impacted in 2022 by some of that significant commodity and labor inflation that I mentioned earlier. But beyond 2022, and over time, as commodities and inflation eases and we gain leverage on G&A, the expectation is that we would also significantly gain leverage on operating margin. So we would expect that percentage to also grow.

Terrific. Related to that or somewhat related to that, I guess given the strong free cash flow that the business has generated over the last several years, curious if you could talk a bit more about -- or a bit about the priorities for that free cash flow, perhaps how you think about balance sheet and leverage if you can tie that in to your response as well going forward?

Yes. We communicated -- I forget when, yes, I think last year that our priority for 2021 was to get back to pre-COVID debt ratio levels by the end of the year, and we did that. So we accomplished that in 2021 from a debt leverage ratio. We -- obviously, as soon as the pandemic hit, we needed to take out some additional debt. Now we're back to where we'd like to be with a leverage ratio level. In 2021, we did grow free cash flow nearly 25% from 2019 to over $7 billion in 2021 with a free cash flow conversion of over 90%. So it's a pretty efficient business model for generating free cash flow and converting our income to free cash flow. We expect free cash flow to continue growing just as we expect continued sales growth and leverage on that sales. We expect the same leverage on free cash flow. Our long-term philosophy remains that our first use of free cash flow or our first use of operating cash flow is to invest in the business. That includes CapEx, that includes the tech digital investments I mentioned, that includes both new stores and reinvestments. After that then, the free cash flow we expect to return to shareholders through dividends and share repurchases over time. We've been prioritizing dividend. We'll continue to prioritize dividend. We know that's important to our shareholders, and then we'll use share repurchases for kind of what's left. From a balance sheet leverage, debt leverage ratio, we're relatively where we want to be. We'll look to maintain leverage ratios to support our strong investment-grade credit ratios and credit ratings, so that they remain kind of where we are right now.

That's great. Well, I think we are just out of time. Kevin, this has been great. Really appreciate the opportunity to spend time with you to kind of get some of your thoughts and insights on the business today. So thanks to you and thanks to you and the team for your time in meetings throughout the day today. We appreciate it.

Great. Thank you very much, Dennis, for both the time and the opportunity. I appreciate it. Have a great day.

Thank you.