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Edited Transcript of DNKN earnings conference call or presentation 26-Apr-18 12:00pm GMT

Q1 2018 Dunkin' Brands Group Inc Earnings Call

Canton Apr 27, 2018 (Thomson StreetEvents) -- Edited Transcript of Dunkin' Brands Group Inc earnings conference call or presentation Thursday, April 26, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David L. Hoffmann

Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada

* Katherine D. Jaspon

Dunkin' Brands Group, Inc. - CFO

* Nigel Travis

Dunkin' Brands Group, Inc. - Chairman & CEO

* Scott Murphy

Dunkin' Brands Group, Inc. - COO of Dunkin' Donuts U.S.

* Stacey Caravella

Dunkin' Brands Group, Inc. - Senior Director of IR & Competitive Intelligence

* Tony Weisman

Dunkin' Brands Group, Inc. - Senior VP & CMO of Dunkin' Donuts U.S.

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Conference Call Participants

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* Andrew Marc Barish

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Andrew Michael Charles

Cowen and Company, LLC, Research Division - Director

* David E. Tarantino

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* David Sterling Palmer

RBC Capital Markets, LLC, Research Division - MD of Food and Restaurants and Consumer Analysts

* Gregory R Badishkanian

Citigroup Inc, Research Division - MD and Senior Analyst

* Gregory Ryan Francfort

BofA Merrill Lynch, Research Division - Associate

* Jeffrey Andrew Bernstein

Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst

* John Stephenson Glass

Morgan Stanley, Research Division - MD

* John William Ivankoe

JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst

* Matthew James DiFrisco

Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst

* Matthew Robert McGinley

Evercore ISI, Research Division - Restaurant Analyst

* Nicole Miller Regan

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Peter Mokhlis Saleh

BTIG, LLC, Research Division - MD and Senior Restaurant Analyst

* William Everett Slabaugh

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Dunkin' Brands First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Stacey Caravella, Senior Director of Investor Relations. You may begin.

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Stacey Caravella, Dunkin' Brands Group, Inc. - Senior Director of IR & Competitive Intelligence [2]

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Thank you, operator, and good morning, everyone. Speaking on today's call will be Dunkin' Brands' Chairman and Chief Executive Officer, Nigel Travis; President of Dunkin' Donuts U.S., Dave Hoffmann; and Dunkin' Brands' Chief Financial Officer, Kate Jaspon. Today's call is being webcast live and recorded for replay.

Before I turn the call over to Nigel, I'd like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during the call. Our release can be found on our website, investor.dunkinbrands.com, along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures.

Now I will turn the call over to Nigel.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman & CEO [3]

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Stacey, thank you. Thanks to everyone for joining today's call to discuss our first quarter 2018 results. These results were delivered against a tough backdrop, which included the national rollout of menu simplification, continuing intense competitive activity as well as adverse weather.

As I have said on prior calls, in fact, many prior calls, we're not immune to current the macro environment. It is an increasingly challenging environment for retail and restaurants. Value wars among QSRs fighting for market share, minimum wage increases and low unemployment, these are all realities our franchisees are seeing and feeling in the business.

And of course, the consumer is changing. Retail is changing. And we are responding to these changes positively with the Dunkin' Donuts Blueprint for Growth, a 3-year plan designed to transform Dunkin' U.S. into the #1 beverage-led On-The-Go brand. As outlined at our Investor and Analyst Day in February, Dave and his team have been hard at work operationalizing this blueprint. And while our first quarter performance was a little bit choppy, just as Dave predicted it would be, we are pleased with the progress that we, along with our franchisees, have made with the plan. And let me tell you, I'm truly excited about the work being done.

Before I hand over to Dave, I would like to call out a few notable achievements for the quarter. First, our franchisees achieved strong restaurant growth in the quarter, adding 71 net new locations globally. 56 of these were domestic Dunkin' locations. And we continued our trend as one of the fastest-growing retail concepts in the country in terms of net unit growth and, likely, the fastest in terms of a large franchise operation. That sets us apart.

Secondly, retail sales of Dunkin'-branded CPG products grew by more than 10% in the first quarter, according to IRI data. Our total portfolio of CPG products across both brands delivered $220 million in retail sales in Q1, including $34 million in ready-to-drink sales. Our growth in CPG, again, is unique in our industry, and we have a strong, solid pipeline of new products, which Dave will touch on later.

Other highlights of the quarter included the unveiling of the first iteration in the U.S. of our next-generation Dunkin', which many of you experienced on Investor Day. And of course, we entered into a $650 million accelerated share repurchase program during the first quarter. The accelerated share repurchase illustrates our continued commitment to utilize our strong balance sheet to return capital to shareholders. More on that later from Kate.

Lastly, I'd like to highlight that while we were confident in the 2017 menu simplification test results and we knew it was the right thing to do as we progressed with the Blueprint, we also knew it was an unprecedented effort for the Dunkin' system, going from 1,000 to 9,000 restaurants, with a new simplified menu. We're proud of the team effort that it took to execute this program despite the other headwinds we were facing in the first quarter. Dave, of course, will get into this in more detail.

And with that, I'll pass you over to my friend, Dave Hoffmann, to discuss the Q1 performance of Dunkin' Donuts in the U.S.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [4]

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Thanks, Nigel. As we have spoken about on previous earnings calls and at our Investor Day, the Dunkin' U.S. Blueprint for Growth is all about delivering strategic sequencing that will result in a more modern and transformational expression of the brand. We are pleased with the progress we are making on this multiyear plan and on the momentum we have built with the franchisees to solidify Dunkin's positioning as a beverage-led On-The-Go brand.

And as Nigel said, in the first quarter, we completed a critical element of the Blueprint with the national rollout of menu simplification. This massive undertaking resulted in a 10% reduction of required menu items as well as the elimination of another 23 optional products, most of which were slow moving, complex and off strategy. Fundamental to the success of the rollout was our level of partnership with the franchisees during this process. Their support and collaboration was unparalleled, and we were pleased to hear from many of them about how happy they are with the streamlined restaurant.

Today, the simplified menu is in 100% of the Dunkin' U.S. system. We expect to see an impact to comparable store sales of about 100 basis points in the months following the launch, similar to what we experienced in the test markets. We continue to believe that over the long run, the simplified menu is an investment in a better environment for our people by taking complexity out of the restaurants. This, in turn, will enable the crew to deliver a better guest experience, improve order accuracy, drive franchisee profitability and, ultimately, increase restaurant-level margins.

Okay. Looking at overall first quarter sales results. Dunkin' U.S. systemwide sales grew 3%, driven by new store growth. Comparable store sales were down 0.5% as ticket growth was offset by traffic declines. Menu simplification, combined with winter storms were the biggest headwinds to comp sales and traffic in the first quarter. We estimate that unfavorable weather accounted for roughly a 60 basis point drag to comps.

From a category standpoint, beverage sales were driven by a terrific promotion with the Girl Scouts, which brought together 2 iconic brands and focused on our biggest categories and flavors that customers love. Q1 was also another record-setting quarter for breakfast sandwich sales, benefiting from national and local value promotions and our more premium brown sugar bacon chipotle breakfast sandwich.

During the quarter, we continued to see proof that Dunkin' as a brand is a consumer destination on holidays and for celebratory events like Valentine's Day, St. Patrick's Day, Fat Tuesday and, of course, March Madness. We had our highest daily donut sales on record this past Valentine's Day, a 10% year-over-year increase, with more than 70% of donut transactions with an attached product. You will continue to see us make a big deal about the holidays at Dunkin', particularly leveraging our donuts in a fun and playful way.

Looking ahead, we are committed to offering our guests great-tasting, craveable products at compelling prices, and we will continue to explore ways to drive all-day traffic into our restaurants. We are testing everything from value offers to new product innovation, to platforms like the Dunkin' Run snack menu, which began testing in a handful of shops in the Boston area a few weeks ago.

Other progress against our strategic Blueprint during the first quarter included adding approximately 500,000 new members to the Perks loyalty program for a total of nearly 8.5 million guests. With our Perks program now nearly 4 years old, our strategic focus has shifted from using our loyalty program primarily as a tool to provide value offers to using it as an engagement platform to deepen our relationship with our customers and drive incremental sales and more profitable transactions. We will continue to navigate the balance between recruitment and engagement initiatives and focus on increasing our Perks members' spend through more one-to-one marketing and personalization.

We're also focused on driving more On-The-Go mobile ordering adoption by giving it more visibility in the restaurants and through dedicated advertising like the spots we ran for mobile order and pay during the Winter Olympics, in conjunction with our sponsorship of the women's U.S. hockey team. During the Olympics, our On-The-Go transactions as a percentage of our overall business reached record highs as we brought in more new users and increased usage among our existing base. As we continue to expand the number of guests who use On-The-Go, our retrial rate continues to be strong at approximately 80%.

Finally, in keeping with our strategic Blueprint, we are focused on making the Dunkin' brand even more accessible, first, by growing our restaurant base; and, second, by offering branded consumer packaged goods through channels outside of the restaurants. And as Nigel mentioned, we made good progress with both during the quarter. Retail sales of branded CPG products saw double-digit growth in the first quarter. Dunkin' K-Cups continued to outpace the category, while our line of ready-to-drink bottled iced coffees remained strong.

Recently, we introduced the new ready-to-drink flavor Cookies 'n Cream, which we feel is right on strategy with our flavor heritage, and concurrently launched Baskin-Robbins Dunkin' -- flavored ice cream as well. We will continue to leverage CPG to build our brand presence in developing markets, expose new consumers to our products and, ultimately, bring them into our restaurants for the full Dunkin' or Baskin experience.

As for restaurant growth in Q1, Dunkin' U.S. franchisees opened 56 net new restaurants, the same as in the first quarter of 2017. Franchisees also completed 55 remodels during the quarter. We are especially excited to have unveiled the first iteration of our next-generation concept restaurant in 2 markets during the quarter, that was Quincy, Massachusetts and Corona, California. These restaurants offer the first look at the brand's U.S. store of the future, including the debut of the first-ever drive-thru lane dedicated exclusively to mobile ordering. We are committed to providing our guests with unparalleled convenience and are pleased to give our customers even more choice in how they use us as an On-The-Go brand.

At Investor Day, we shared that our main focus for 2018 development will be on quality, openings and on validating the next-generation prototype design. Today, we have opened a handful of NextGen restaurants, both new and remodeled locations, and response to the design from the franchisees and guests have been overwhelmingly positive on top of the many positive responses we've received from many of you at Investor Day as well.

The next-generation restaurant is the true embodiment of our Blueprint for Growth and is key to transforming Dunkin' into a beverage-led On-The-Go brand. The new store designs bring together all of the strategic initiatives we are making and turns them into customer-noticeable change, which we know is key to driving comp sales growth and profitability for our franchisees.

Okay. So let me close by saying we are extremely, extremely excited to have recently named a new creative agency, BBDO Worldwide, to help us further articulate our brand vision to the public. We believe they are the best partner to accelerate the transformation of our brand and will help us to think creatively about our marketing initiatives going forward.

As you've heard me say before, the Dunkin' U.S. Blueprint for Growth is all about deliberate, strategic sequencing, and we are solidly on track to transform this iconic brand with our great, great franchisees and ensure long-term success for years to come.

And with that, I'll now turn it back over to Nigel to cover Baskin-Robbins U.S. and international.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman & CEO [5]

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Dave, thanks. Baskin-Robbins U.S. comparable store sales were down 1% during the first quarter. Average ticket was up for the quarter but traffic declined largely as a result of the cold, wet weather across the country. Weather accounted for approximately 300 basis points of negative impact.

Despite the negative comp growth, we're optimistic about the strength of our beverage and dessert categories. Increases in beverages came largely from our core shakes category, which we reformulated and put renewed focus on during Q1. Polar Pizza, the newest item in our desserts category, saw double-digit growth during the quarter. Importantly, our value programs performed well, with Celebrate 31 and cakes starting at $12.99 all driving incremental transactions and sales.

Now just changing a little bit the subject for Baskin-Robbins, and we don't talk about this very often, but drive-thrus are a strategic opportunity for Baskin-Robbins, similar to Dunkin', as drive-thru locations consistently outperform non-drive-thru locations. B-R stores with drive-thru locations have a higher beverage mix, which drives more occasions through repeat visits, and we aim to add to the 100 or so currently in existence.

Additionally, we just launched a new advertising campaign called Baskin-Robbins Got Me Like that captures the joy and unabashed optimism people feel when they visit a Baskin-Robbins shop. The campaign is geared towards younger Baskin-Robbins audiences and marks a strategic shift for the brand away from product-focused advertising to a more emotionally driven campaign. So far, the feedback from customers has been positive. We're seeing a significant uptick in consumer engagement across social media channels.

Now on to international. During the quarter, we continued our work to stabilize our international businesses and, along with our franchisees and licensees, focused on driving traffic through value offerings, product innovation and by making the brands more accessible to customers through technologies. We continue to be encouraged by the new Dunkin' Donuts International store design, with more than 50 of these newly designed restaurants located in 8 different markets outside the U.S.

Baskin-Robbins International had a good start to the year, particularly in terms of systemwide sales and remains focused on ice cream gallon consumption across the business through stores, through delivery and through consumer packaged goods. Sales outside of the restaurants have expanded the brand's touch points, making Baskin more accessible and driving incremental ice cream sales throughout the year.

Delivery of ice cream continues to be an opportunity, and I'll talk about ice cream as that's generally more important in international than Dunkin'. For the 2 brands together, we have tests under way in 27 markets across both brands. Based on the success that our Middle East and Asian franchisees are experiencing, we are working with partners to roll out delivery programs in additional markets, increasing our capability and scale through the use of third-party aggregators, in-house call centers and direct. Early results have shown incremental sales and increased average ticket.

Now I will turn it over to Kate to cover our financial results.

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Katherine D. Jaspon, Dunkin' Brands Group, Inc. - CFO [6]

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Thanks, Nigel. Before I dive into the financials, I'd like to remind everyone that our first quarter results reflect the adoption of the new revenue recognition standards and that the prior year period results have been revised as well. Revenues for the first quarter increased $5 million or 1.7% compared to the prior year period due primarily to increased royalty income as a result of systemwide sales growth as well as an increase in advertising fees and related income, offset by a decrease in sales of ice cream and other products.

Operating income and adjusted operating income for the first quarter increased approximately $3 million or 3.5% and $3.6 million or 3.9%, respectively, from the prior year period primarily as a result of the increase in royalty income and a reduction of G&A expenses. These increases in operating income and adjusted operating income were offset by a decrease in net income from our South Korea joint venture, a decrease in net margin on ice cream due primarily to an increase in commodity costs and rolling over a gain in the prior year period related to the sale of real estate.

Net income and adjusted net income for the first quarter increased by approximately $6 million or 13.2% and approximately $7 million or 14.4%, respectively, compared to the prior year period primarily as a result of the decrease in income tax expense and the increases in operating income and adjusted operating income. The decrease in income tax expense was driven by a lower tax rate due to the enactment of tax reform as well as excess tax benefits from share-based compensation of $7.6 million compared to $6.1 million in the prior year period. The increase in net income and adjusted net income were offset by an increase in net interest expense, driven by our refinancing in the fourth quarter of our fiscal 2017. Our effective tax rate for the quarter was 14.5%, including approximately 13 percentage points of impact from the excess tax benefits.

Diluted earnings per share and diluted adjusted earnings per share for the first quarter increased by 18.8% to $0.57 and 21.6% to $0.62, respectively, compared to the prior year period as a result of the increases in net income and adjusted net income as well as a decrease in our shares outstanding. The decrease in shares outstanding from the prior year period was due primarily to the repurchase of shares since the first quarter of fiscal 2017, offset by the exercise of stock options. Excluding the impact of the recognized excess tax benefits, diluted earnings per share and diluted adjusted earnings per share for the first quarter of fiscal year 2018 and 2017 would have been lowered by $0.09 and $0.06, respectively.

At the end of the first quarter, we had debt-to-adjusted-EBITDA ratio of 5.4:1. During the quarter, we generated approximately $18 million of free cash flow and ended the quarter with $423 million in cash and restricted cash on the balance sheet. Of the $423 million, approximately $135 million represents cash associated with our gift card programs and our marketing fund balances. We used $29 million in cash during the quarter to pay our Q1 cash dividend to our shareholders.

In our press release this morning, we updated and reiterated certain targets regarding our 2018 performance. We now expect full year weighted average shares outstanding of approximately $85 million, which is inclusive of the $650 million share repurchase program entered into during the first quarter of fiscal 2018, and we now expect an effective tax rate for fiscal 2018 of approximately 25%. This updated tax rate includes the impact of the $7.6 million excess tax benefit recognized during the first quarter, which reduced the expected full year effective tax rate by approximately 300 basis points.

As a reminder, during the first quarter of fiscal 2017, we adopted a new accounting standard for share-based payment transactions, including excess tax benefits. Excess tax benefit will vary in our future periods as the amounts are dependent on the number of employee stock options exercised and fluctuations in our stock price. This guidance excludes any potential future impact from material excess tax benefits in subsequent quarters of fiscal 2018. As a result of these updates, we now expect diluted earnings per share of $2.49 to $2.58 and diluted adjusted earnings per share of $2.69 to $2.74, which reflects the impact of the revised share count and full year effective tax rate.

Lastly, along with our franchisees, we made important progress during the quarter regarding how we plan to deploy the $100 million investment in the Blueprint for Dunkin' Donuts U.S. to support the next-generation concept in our beverage-led positioning. However, there was no material impact to our P&L or to our cash flows during the quarter. When we do start to deploy the investment, we will provide updates to you accordingly.

And with that, I'll turn it over to the operator to open the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from David Palmer from RBC Capital Markets.

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David Sterling Palmer, RBC Capital Markets, LLC, Research Division - MD of Food and Restaurants and Consumer Analysts [2]

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A question on the returns. I just wanted to get this out of the way first. One of the short thesis that you hear out there on Dunkin' is that the returns are poor for franchisees outside of the Northeast. Could you perhaps touch on the return in investment that franchisees are seeing on units in growth markets, like the West? And then the second thing I just wanted to ask about was the new prototype and the implications for the pace of reimaging and the unit growth starting in '19. Basically, will you have this prototype ready for scalability, do you think, by '19 and a good-return format?

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman & CEO [3]

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Okay. So David, there's a lot there. So we're going to try and cut through that. I'm going to pass you straight over to Scott Murphy.

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Scott Murphy, Dunkin' Brands Group, Inc. - COO of Dunkin' Donuts U.S. [4]

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David, thanks for the question. In terms of cash-on-cash returns, we're actually very happy with what we've seen not only in our Western emerging markets but in those top 10 development states that Dave talked about in Investor Day as a focus for our growth moving forward. We actually have seen the results at the top end of all the ranges we gave at Investor Day in terms of a 20% to 25% target for those top 10 states, coming in well at the top end of that range.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [5]

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And, David, on the new prototype, we will have that ready for scale.

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Operator [6]

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Our next question is from John Glass from Morgan Stanley.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [7]

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On the Dunkin' comps, a couple of questions. One is, can you update us on the afternoon versus morning sort of split from a comp perspective and if you got any sort of improvement in the afternoon? I think you suggested you might have. What's been driving that? And then when you look at the impact from menu rationalization, how much of an impact was there in the first quarter? I know at the Investor Day you said there's a short period -- duration of time when it negatively impacts comps. As you rolled that out, have you seen that come in line with your expectations in terms of the duration of negative impacts, shorter, longer? Any sort of help on that would be help -- would be great.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [8]

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Yes, yes. Thanks for your question. And look, we feathered it in throughout the quarter. So when we at -- when we're at 100%, we're still on track with how we're talking about, it being a 100 basis point impact headwind for us. We've always known that -- we view this as a bit of short-term pain for long-term gain. But we felt like, over the long haul, the investment on a better work environment for our people, a faster and more accurate experience for our customers and, ultimately, better restaurant margins for our franchisees, it was certainly worth that. The -- if you recall, the rigorous testing and consumer feedback that we got in 2017 on the stores that we rolled out early, everything has been in line. That was very predictive, and it's been certainly in line with what we're seeing in Q1. So we will see -- as we go throughout the year and we start putting in more new menu innovation and other things, you will start seeing that dilute as we go throughout the year. To your question on PM, like others, we continue to see erosion in the PM. It's a different need state than the AM. It's a different occasion for the consumer. We still believe that we will absolutely win on the consumer that's looking for a pit stop, get in, get out, get on their way at Dunkin. That's what we're built on. Simplification, eliminate a lot of complexity, and a lot of that complexity came from the slow-moving PM food items, but it was still PM food items. However, going forward, we created room for growth with simplification. We'll test various iterations of the brand at Dunkin' Run that will be very specific to the afternoon PM Break, so you'll start seeing more of that as we go throughout the year. And the other thing from a deliberate sequencing standpoint, it's no accident or coincidence that after simplification was scaled, we feathered in our go-tos, our $2, $3, $5 value platform here in April. So more to come on that, but we're pleased with progress, but we have a lot more work to do.

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Operator [9]

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Our next question is from David Tarantino from Baird.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [10]

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Just a question on the comps outlook for 2018. You held the comps guidance despite a soft start to the year. And I'm just wondering what is giving you the confidence in that outlook at this point in the year, as it assumes some pretty good underlying trends, I guess, as the year unfolds. And I guess, secondarily, if you're willing to comment, are you starting to see momentum pick up in the business underneath some of the headwinds that you mentioned earlier?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [11]

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Yes. David, thanks for your question. And look, as I continue to say, the Blueprint was all about deliberate and intentional sequencing. And when we look at what we wanted to do around simplification, I'd mentioned a bit around Perks and how we're navigating Perks from not just a coupon machine but a true one-to-one engagement tool as well. These were all deliberate things that we put in place in Q1. Throw in the 60 basis point headwind from weather, et cetera, but we're pleased with our progress. Nobody is celebrating a negative 0.5% in comps certainly here. We're very vigilant, but we're still on track around our guidance for a 1% growth for the year. There's a lot of enthusiasm from the franchisees in all of the stuff that Tony was brought in to do. He's building a pipeline with his team, and you'll start seeing that play out as we go throughout the year. And again, we're not going to talk about our go-tos, but, again, this is all part of -- the go-tos, $2, $3, $5, this is all part of a deliberate plan and deliberate sequencing, and nothing knocks as off that 1% for the -- guidance for the full year.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman & CEO [12]

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So let me just add to that. I'm not involved day to day, as you know. Dave and his team run it. But I have to say, I think Q1 was actually excellent given all the headwinds. And what we didn't talk about is that Tony was changing team members, changing advertising agencies. There was a lot of turbulence in team 1 -- in Q1. And I think, given everything, the result we had in Q1 was really outstanding, particularly with the headwinds of just simplification in its own right, forgetting everything else. So, David, I know I've been accused of being overconfident in the past, so I'll take that on the chin. But I feel really good about the year on comps, and the foundation that Dave and his team are building for Dunkin' U.S. It's really good.

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Operator [13]

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Our next question is from Jeffrey Bernstein from Barclays.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [14]

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Two questions. One, just big picture, Nigel, Dave, on the Dunkin' U.S. comp growth. You talked about the tough backdrop with the intense competition. Obviously, we can exclude weather as more onetime. But just wondering if you could talk a little bit about that, whether there's been any change you've seen from the competition, whether that's intensified. And more importantly, what would it take to actually ever see you remove that sentence from the press release? I'm just wondering what would have to happen that you would anticipate competition easing. That's the broad question. And just specifically, Dave, around the DD Perks. The 8.5 million now, it's a nice increase, the 500,000 members. Just wondering if you can talk a little bit about the long-term opportunity. Maybe what's the -- as you say, it's not just a coupon machine. Now it's all about engagement. I'm just wondering if you could talk about potential benefits from -- presumably you're talking about one-to-one marketing, what that might mean for comps.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [15]

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Yes. Jeff, thank you. And a fair poke on the competition comment. And the way I would say is we're not going to change the competition; we're going to do what's right for the customer. Throughout 2017, we trialed -- under this header of Value Wars, we trialed a lot of work around the twofers program, which is really go-tos we came out of; a lot of work around what we call our afternoon PM Breaks, 2 to 6, et cetera; various other bundled offers. So we did a lot of that heavy lifting in 2017 testing. Now that we have the simplification scale, again, I'll say it's no coincidence that we introduced our $2, $3, $5 value campaign in April. And that's because simplification was all about creating room for growth, not just on some of these other initiatives like value but also for menu innovation and what we want to do around PM. As it relates to Perks and On-The-Go, I guess the way I framed that, Jeff, is it's easy for an app to turn into a coupon machine. And as Tony would say, we're in violent agreement on this, amidst the whole loyalty aspect of it, we share a similar view 4 years into the program. We decided to tap the brakes a bit on the couponing and start making a shift towards more engagement and one-to-one marketing. A lot more work needs to be done, but we plan to move towards more targeted offers versus open offers. And based on our frequency, we believe this is what our customers want more of. Speak to me as a Dunkin', customer is our intent.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman & CEO [16]

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Yes. Jeff, I've known you a long time, and that's a really difficult question about how's competition easing. So I think this is me trying to think about it. I think what I would say is if you look at the competition, there are some signs that some competitors are struggling. Without naming names, there was a big announcement -- well, a lot of press yesterday about one particular large fast-growing chain closing hundreds of stores. I'll remind you, even in the recession, we continued to hammer our way without closing masses of stores at one time, which was different from just about everyone else in the industry. So we are very focused on unit economics. I think what we continue to do is focus on why we're different. I mean, we are truly excited about the drive-thru. I talked about at Baskin earlier, but if you take Dunkin' Donuts, in the quarter, I think we opened -- 87% of our stores had a drive-thru. So we see that as a real differentiator as we are the #1 beverage-led On-The-Go brand. I mean, that's the way we look at it. So I'm not sure we'll ever get to the day where the competition eases up because you're always going to have a lot of competition. But we're tackling it aggressively. And I think -- Dave talked about Perks. I'll throw in value there. I think we believe that we've got some -- a good direction on value that we've linked up with our franchisees that is truly differentiating. Again, it's good, and we'll continue to build our business very strongly. So I look forward to the day though when that headline does appear.

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Operator [17]

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Our next question is from Nicole Miller from Piper Jaffray.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [18]

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I wanted to go back into the conversation around guest satisfaction scores. It sounds like, from a prior question, maybe the PM comps are more negative still. And I wanted to see if you could confirm that and then understand the guest satisfaction scores, how they're different in the afternoon, to understand what direction they're heading and also what that customer wants. Just thinking back on the Analyst Day. I think I remember seeing or reading that it was 2.2 guests, so they spend more and they want to linger for 5 to 50 minutes. So my real question is, don't they want a little bit more of an experience over convenience?

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman & CEO [19]

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We're going to give that challenging question to Scott Murphy.

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Scott Murphy, Dunkin' Brands Group, Inc. - COO of Dunkin' Donuts U.S. [20]

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Yes. I think -- so thank you for the question. When I think about the guest experience, especially in the afternoon, you're right, they probably want a little more experience. But I think the things they want most importantly first are accuracy, right? So there's a lot we're doing -- investing in the business with our franchisees around making sure through simplification, having a simpler menu; through technology innovation, having better accuracy for our products. And then the other piece is just a friendly crew. And so the experience that we're doing in the restaurants right now is really trying to drive that improvement.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [21]

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Yes. And the only other thing I was going to say on this, Tony's come in. We've done some really great segmentation work on the afternoon. Not all customers are created equal, as you know. So the customer that you've defined is looking for experience. And look, I think there's -- as we've talked about, there's different need states in PM than there is in the AM. We do incredibly well in the AM, and it's a different occasion that the consumer is looking for in the afternoon. But we have -- with our segmentation work, we have found the consumer that is looking for a pit stop. That thought process of take 5, not 50 at Dunkin' just plays right into our advantages. We're fast and we're getting faster with things like simplification, et cetera. But we believe there's a segment of the population that wants to get in, get out and get on their way, and we will be a transition in people's lives. And so that's what we're targeting when we talk about the Dunkin' Run and what we're doing around those food items and news in the afternoon. That's specifically what we're trying to target. We're not going to "out comfy couch" some of the other coffeehouse players. That's not our intent.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [22]

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And just, could you explain the numbers? So on guest satisfaction scores and/or comp, are these in -- they're lower than the AM but they are steady state? Or maybe they're already heading up for some reason or still heading down, which really just says it's an even bigger opportunity?

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman & CEO [23]

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Okay. So firstly, we don't ever reveal guest satisfaction numbers. All we ever talk about is when we constantly win the Brand Keys loyalty award, which I think demonstrates a strong satisfaction. What we always know, though, as Scott alluded to, there are opportunities to improve. We're very focused on that. And I want to echo what he said about accuracy, a lot of investment spend behind that. But I think, increasingly, there's a lot of research that our customers want speed. And I noted that the QSR magazine recently published statistics that we were the #1 on speed for the drive-thru. I think that was picked up by Bloomberg yesterday. So that's another major attribute. But we all agree that PM is an opportunity, and we'll continue to work on it. And the kind of products that we are providing, I think, everyone saw at our Analyst and Investor Day.

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Operator [24]

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Our next question is from Andrew Charles from Cowen and Company.

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - Director [25]

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I have 2 separate questions. One is for Dave. What was the net impact in the quarter to franchisees' gross margins as you got the benefit of the simplified menu rolling out? Obviously, a favorable coffee spot market price backdrop, but presumably, increased food sales and intensified value offerings somewhat offset these favorable elements. And then a question for Kate. You called out no impact in the quarter from the $100 million brand investment. But as you start to have better visibility into the pipeline of investments, do you have better sense of the magnitude of flow-through in CapEx versus offsets to revenue that you described at the Analyst Day?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [26]

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Yes. Thanks for the question. As it relates to simplification, we haven't been specific on the impact -- the positive impact on food costs and margins. But as I've called out in the past, that has clearly been one of our objectives, and we're pleased with what we're seeing out of that. Again, some of it's complexity, slow moving, and some of it was just higher -- more complicated products to make that we've eliminated. So it's a natural that, that would have improvement in food cost and gross margins. And the franchisees have been pleased with that. But more importantly, it's really about an investment in a better work environment for our people, and so that's been the primary driver of all of this so that we can deliver a faster, more accurate experience for our customers. And we think the residuals of better restaurant margins will flow from all of that. Kate?

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Katherine D. Jaspon, Dunkin' Brands Group, Inc. - CFO [27]

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Sure. And in regards to your question on the $100 million, as I said on the call, we made significant progress between working through what the investments would be with our franchisees. But we're still in the stages of testing, working with vendors, et cetera, so I don't have any updates to the guidance -- or the discussion that we had at Investor Day at this time. But we will update you as soon as we do.

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Operator [28]

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Our next question is from Matthew DiFrisco from Guggenheim.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [29]

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Dave, I wonder if you could -- the question I have continues to go back to sort of that comp where there's definitely an acceleration implied in the guidance, both on a 1- and a 2-year basis. I wonder if you could give us a little bit of greater comfort around what gives you the confidence for that 150 to 200 basis point or so acceleration as the year goes on. I look back, I see that you guys talked about removing LTOs, menu simplification. Is there less weight in the back half of the year as the year progresses from these drags and more comparability when you start lapping some of the -- what we see as higher comps? I wonder why there's not more caution in the guidance. Why still maintain the 1%? Just trying to get comfort around that acceleration happening.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [30]

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Yes. No, it's -- look, as I've mentioned, our biggest headwinds in Q1, delivered around simplification, delivered around tapping the brakes on Perks. And the other piece was what we talked about, which was unprecedented media weight flowing into Q1 from the competition. And I would say unprecedented that we haven't seen before, primarily directed at value. For us though, what's in our knitting, look, we've got a robust 3-year pipeline on menu innovation that Tony and team have been working on. We've got visibility into that testing, so we've got a clear view on how that is working. We like the progress that we were making throughout the quarter. We like the stronger value voice that we're collaborating on with our franchisees. It's strong value, but it's also profitable value. And we like just the overall aggressiveness of what our franchisees are committing to around investments in the Blueprint. So we're not prepared to unveil all of that, but, to Kate's point around the $100 million, you can assume -- it's safe to assume it's going to be investments that are things that are going to touch the NextGen restaurant and the various elements. But it's not about 50 units. It's about scale and how to get that across the system. So, look, you're going to hear more about this. But we're confident in the remainder of the year, and you're going to start seeing that as we move throughout the quarters.

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Operator [31]

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Our next question is from Matthew McGinley from Evercore ISI.

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Matthew Robert McGinley, Evercore ISI, Research Division - Restaurant Analyst [32]

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My first question is on the sequence against simplification and the transition to snacking. Given that the menu items that you are placing are going to be lower ticket versus the ones you took off, does that make it harder to fill that 100 basis point void that you have right now until the trial and repeat builds on the snacking items? Just trying to get a sense of the gating of when we would see a reacceleration from that hold that we have right now.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [33]

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Yes. No, fair question. And again, we're not betting the farm on just PM. We think there's other things that are going to be part of that. Again, our go-tos right now is all about creating baseline momentum that we've got in place. PM is something that we're looking at from a price point in the 2 -- at $2 price point. But what we're seeing in our test markets is we love the attachment, and so we have clear visibility into attachment and what that's delivering. And so that's how we get confidence, as when we look at something like the Dunkin' Run and what we're seeing around the attachment. So yes, average check is always something that we consider and dilution around that, but we also offset that against the testing work and the predictive nature of that testing and what it does around attachments. So that's what gives us the confidence on that.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman & CEO [34]

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So if I could just add to that. I think Dave said it, but I want to say it in a different way. I would actually challenge the assumption that going to a lower-priced item is bad. That actually, in our view, will bring in traffic. And then you build on top of that the attachment that Dave just talked about. So I think this is exactly the right way to go. And going back to the previous question from the other Matthew, I want to repeat. I, too, am fully confident in the guidance we've given, and I think the plans that Dave and Tony have put together are really strong for the year.

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Tony Weisman, Dunkin' Brands Group, Inc. - Senior VP & CMO of Dunkin' Donuts U.S. [35]

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Yes. I think the only thing I would add to that with respect to the PM, the way we're looking at it is with a broad variety of products, which we think will drive frequency of visit, a range of sweet and savory. They pair up well with a variety of our hot and iced beverages. So I think what we're going to see, to Nigel's point, is that, that $2 price point is going to do a lot for traffic and frequency.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [36]

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So that was Tony Weisman, our new CMO.

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Matthew Robert McGinley, Evercore ISI, Research Division - Restaurant Analyst [37]

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Great. And on -- for Kate, on the G&A, your guide for the full year is to have a 5% decline. You were a little bit lower than that in the front half of the year. Was there some expense that came in higher in the first quarter? Or is it just more of a back-half-weighted plan to cut the G&A?

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Katherine D. Jaspon, Dunkin' Brands Group, Inc. - CFO [38]

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Yes, it's both actually. So there were some non-personnel expenses that came in earlier this year. And the majority of those cuts, obviously, are coming in the back half of the year. So we're still comfortable with the guidance of down approximately 5% off of the $247 million adjusted from 2017.

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Operator [39]

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Our next question is from Greg Badishkanian from Citigroup.

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Gregory R Badishkanian, Citigroup Inc, Research Division - MD and Senior Analyst [40]

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Could you -- just in regards to the menu simplification, could you maybe differentiate what you're doing differently in your core markets versus your noncore markets, where you have a higher food mix, and maybe how you think those results have differed? And just over time, do they have sort of the same benefit? Or are you looking for different goals in each region?

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Scott Murphy, Dunkin' Brands Group, Inc. - COO of Dunkin' Donuts U.S. [41]

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Yes. This is Scott. I'd say it's probably 80% or 90% the same across the country. One of the objectives of simplification was to get a more standardized menu, so you have a consistent experience from Dunkin' to Dunkin' as you travel throughout the country. We do have room for some regional customization in different parts of the country. If you think about some of the sandwich mix in the South or some of the regional products in the Southwest or California, we're still keeping those open because consumers have told us those are important products that are important to the P&L.

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Operator [42]

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Our next question is from Will Slabaugh from Stephens Inc.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [43]

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Want to ask about national value in the platform you just recently rolled out. And I assume you considered, in some way, including coffee or an espresso beverage on the platform in the morning in particular. And I realize these full-margin sales are a big profit driver for core franchisees, in particular, in the Northeast, but I don't know if some sort of bundling made sense there, if it included some sort of ticket bump and/or strong traffic component as well and if that was considered.

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Tony Weisman, Dunkin' Brands Group, Inc. - Senior VP & CMO of Dunkin' Donuts U.S. [44]

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Yes. It's Tony. Thanks for the question. We're seeing levels of beverage attachment that we had expected, which are very high. So it's all -- it's essentially a natural pairing. And by featuring the $2, $3 and $5, as we've learned in testing that's rolling up to this moment, a, it's a great value; B, it's great variety, both at price point and on 3 different types of sandwiches with broad appeal. So it's very easy for us to execute and very easy for consumers to get. And they are naturally attaching hot and iced beverages at the rate -- at the very high rate that we expected. So it's netting out to that expected level of overall basket as we had hoped, and we're seeing high levels of consumer satisfaction as well as franchisee enthusiasm for it.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [45]

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And it won't be our only lever. We were pleased, during the first quarter with our PM Breaks and what we did with drinks from 2 to 6 at a $2 price point. And you're going to continue to see that as we drive traffic and awareness in the afternoon. So it's a big lever for us. It's not the only lever, and that's why we continue to do rigorous testing around different iterations of value going forward.

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Operator [46]

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Our next question is from Gregory Francfort from Bank of America.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [47]

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Two questions. Just one, maybe I missed it, but can you give the breakdown of check and traffic, if you didn't? And then, two, any early reads on the NextGen remodels just in terms of whether or not you see -- you plan to see a margin benefit from those stores from consolidating the back lines? And maybe any changes in customer behavior in those stores or how the customers are using the brand? Any thoughts would be really helpful.

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Katherine D. Jaspon, Dunkin' Brands Group, Inc. - CFO [48]

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Yes. So, we -- I'm sorry, we didn't give the specific breakdown on ticket versus traffic, and we haven't for a few quarters now.

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Scott Murphy, Dunkin' Brands Group, Inc. - COO of Dunkin' Donuts U.S. [49]

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Yes. And this is Scott. I'll just talk about the NextGen remodels. First of all, it's still relatively early. We've only done a handful of them. But I'll tell you a lot of excitement, not just from the guest who loves the task, the crew who loves the task and a lot of other positive feedback around -- when you think about the back line, we've cut out a few process steps, we've changed the sequencing of the equipment for some of the builds in the work circles. So we've started to see some improvement in labor and productivity. Overall, very positive, but I'd just say it's early with a couple done, so...

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Operator [50]

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Our next question is from Andy Barish from Jefferies.

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Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [51]

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Two quick ones, please. In the fourth quarter, you talked about breakfast traffic heading towards flattish. Can you give us some context on how that acted in the first quarter? Obviously, a lot of noise out there, and breakfast value being offered by some big competitors. And then, secondly, should we think about the back half as being more of a kind of shift to innovation? And how does premium fit in there? I know there was discussion the last couple of years about more espresso-based and kind of higher ticket. How should we think about that in the back half or into '19 on more premium products?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [52]

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Yes. No, thanks for the question. Look, AM was a deliberate focus in 2017. We felt like we needed to reclaim that. It continues to perform well at a slightly decelerated rate than Q4, it's safe to say. But again, we don't want to go through all the headwinds, but I think I called them out before. But again, AM continues to be the best performing part of our -- as a daypart, and drive-thru continues to be the best performing asset within our portfolio, as I also mentioned in Q4 as well. As it relates to the back half of the year, the menu pipeline that we've been building is tailored towards a beverage-led. That's why our value, leading with food, is what we believe is the right strategy for us to get the attachment going forward and sell those products at full margin. But you will start seeing that play more high-low as we start building baseline. And so we think that's the right strategy, whether you call it premium, but just this high-low strategy, barbell strategy of having a nice, strong value platform in the marketplace. And, look, as we launch next week with the smoked double sausage coming in, that's the type of thing and with more premium drinks as well as we start iterating on our drinks as well as part of the beverage-led On-The-Go brand. So that barbell, high-low strategy is going to play out very nicely, but first in that was making sure that we secure the value to get the energy in the baseline.

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Operator [53]

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Our next question is from Peter Saleh from BTIG.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division - MD and Senior Restaurant Analyst [54]

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I wanted to ask about mobile order and pay. Well, I recognize it's still a small piece of the overall mix. Do you have stores that are mixing well above the system average on mobile order and pay? And what are you seeing in the comps, the traffic in those stores and maybe some of the efficiencies that are coming through given the higher mix of mobile order and pay?

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Tony Weisman, Dunkin' Brands Group, Inc. - Senior VP & CMO of Dunkin' Donuts U.S. [55]

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Yes. It's Tony. Thanks for the question. You are absolutely right. We see a significantly higher mobile order and pay in markets and store locations that lend themselves to high-density urban locations, for example. And what we're seeing, as we mentioned before, is an incredibly high retrial rate among those who try it. It's an incredibly satisfactory experience. And what we're looking to do is make the awareness of that even greater. So as Dave mentioned, we ran some dedicated advertising during the Olympics. As you may have seen in some of the NextGen stores, we're making the mobile-order-and-pay pickup area clearer for consumers to see it so that those who are not aware are trying it because once they try, as we see, we see a higher level of usage, satisfaction and loyalty. And so that really is among the most successful components of our entire loyalty program. And as you would imagine, higher usage in certain locations. And as Dave said, as we're looking to segment, consumers are also thinking about segmenting store types as well for areas where it's just a more natural part of the consumer pattern.

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Scott Murphy, Dunkin' Brands Group, Inc. - COO of Dunkin' Donuts U.S. [56]

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And -- this is Scott. And it's a complete unlock for the stores in terms of order efficiency and how those are handled in the restaurant. And as you would have seen at Investor Day, we're really excited about the NextGen restaurant and the innovations we're bringing with On-The-Go to the drive-thru as well.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division - MD and Senior Restaurant Analyst [57]

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Great. And then just last for me, can you guys just provide the level of menu pricing that you expect -- the net menu pricing you expect for 2018?

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Katherine D. Jaspon, Dunkin' Brands Group, Inc. - CFO [58]

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I mean, we've never typically guided on where we expect the menu pricing. I think we said previously, we believe our franchisees aren't taking crazy price anywhere and understand where they can take price smart. And so you don't see any of the fluctuations we saw in previous years.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman & CEO [59]

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I think we're doing a really good job. I mean, Tony and his team is doing a good job getting out there, working with the franchisees. I probably have said 5 million times, it's the franchisees' decision, but our job is to influence them to make the right decision. And I think we're doing that.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [60]

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What should give you some confidence is we've built a proprietary pricing tool with APT. I think we've mentioned that in the past. They're a world-class organization. And we -- our team and part of Tony's team here goes out and works with our franchisees. So we're engaged in providing them the tools to be successful in the marketplace.

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Operator [61]

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Our next question is from John Ivankoe from JPMorgan.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [62]

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An average-ticket question for me. I understand that you're not giving the average ticket in the first quarter, but, obviously, it was positive, with traffic negative. But what do you expect the direction of that average ticket different than pricing for the remainder of '18? Obviously, simplification, less Perks couponing, national value, there's a lot of different kind of pushes and pulls, some could be positive, some could be negative. But relative to the first quarter, what direction do you think the average ticket goes?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. & Canada [63]

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Yes. John, it's -- look, traffic, as we've mentioned before, is a primary focus of our Blueprint. We are vigilant on this. As I said, we've been very deliberate in the AM. We're not going to give guidance on ticket and price, but you can assume that as we go throughout the year, whether you call it a barbell strategy, a high-low strategy, we've got those pieces in place. We are waiting to put in simplification to remove that complexity and create room for growth. But we believe in the barbell, high-low strategy, and we have visibility in the pipeline that gives us confidence that we're doing the right thing for our consumers, not only on the more cost-conscious, price-sensitive consumer but also on the high end, who's looking for more premium offerings. So it's all part of a holistic plan around the Blueprint to create a better experience and sell things at a compelling price, but also a lot of work being done on getting out there with menu innovation and great favorable products going forward.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman & CEO [64]

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So I would just like to conclude the call with just a few reflections. Obviously, when you bring in terrific talent like Dave and Tony, I have more time to reflect. And I think my reflections in closing is that we're doing things differently and better.

I think Dunkin' Blueprint for Growth is founded on strong consumer research, excellent feedback from our franchisees, and we are starting to execute it really well. I think our global focus on digital sets us apart. Our international focus on delivery, I think, is exciting for the future. That will be a game changer, I think, for the industry. And I think as a company, our total asset-light approach is one that others have copied, but we stand still in the leadership position there. So put that all together and I feel we're setting up our company to compete extremely well for the rest of the year and over the next few years.

So with that, I thank you for listening today. I know you've all got busy days, so good luck with the rest of your calls. And thank you for your listening.

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Operator [65]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.