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Edited Transcript of DNKN earnings conference call or presentation 27-Jul-17 12:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Dunkin' Brands Group Inc Earnings Call

Canton Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Dunkin' Brands Group Inc earnings conference call or presentation Thursday, July 27, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Fuqua

Dunkin' Brands Group, Inc. - SVP - Mktg for Global Consumer Insights & Product Innovation for Dunkin' Donuts & Mktg Professional

* David L. Hoffmann

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

* Katherine D. Jaspon

Dunkin' Brands Group, Inc. - CFO

* Nigel Travis

Dunkin' Brands Group, Inc. - Chairman and CEO

* Sherrill Kaplan

Dunkin' Brands Group, Inc. - VP of Digital Marketing & Innovation for Dunkin' Donuts U.S.

* Stacey Caravella

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

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Conference Call Participants

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* Andrew Marc Barish

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

* 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

* Dennis Geiger

UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants

* Gregory Ryan Francfort

BofA Merrill Lynch, Research Division - Associate

* Jason Taylor West

Crédit Suisse AG, Research Division - Senior Analyst

* Jeffrey Andrew Bernstein

Barclays PLC, Research Division - Director and Senior Research Analyst

* John Stephenson Glass

Morgan Stanley, Research Division - MD

* John William Ivankoe

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

* Karen Holthouse

Goldman Sachs Group Inc., Research Division - VP

* Mark David Kalinowski

Nomura Securities Co. Ltd., Research Division - MD

* Matthew James DiFrisco

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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Dunkin' Brands Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded. I would now like to turn today's conference over to Stacey Caravella. 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 would be Dunkin' Brands Chairman and Chief Executive Officer, Nigel Travis; President of Dunkin' Donuts U.S. and Canada, 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'll turn the call over to Nigel.

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

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Stacey, thank you, and thanks to everyone for joining today's call to discuss our second quarter 2017 results. With nearly 9,000 Dunkin' Donuts restaurants in the U.S, greater than $8 billion in systemwide Dunkin' Donuts U.S. sales in 2016, and a position as the # 1 seller of hot and iced coffee, donuts and bagels, we are a brand that can win and is winning. In fact, last year Dunkin' Donuts U.S. systemwide sales grew by greater than $600 million, a number only exceeded by 2 other brands. This is according to Nation’s Restaurant News top 100 chain result survey. For the consumer's needs and expectations are shifting and that is why we invested significantly in consumer research last year, so that we can position ourselves to address the change in marketplace.

We are very excited about the progress that we've made on our multiyear plan to transform Dunkin' Donuts U.S. into a beverage-led On-The-Go brand. Together with our franchisees, we are laser-focused on delivering what matters most to consumers, including, menu innovation, unparalleled convenience driven by digital leadership, restaurant excellence and simplification and broad accessibility to our products through strategic restaurant development and the sale of our products in other channels. As evidence of our progress, we will be expanding our menu simplification test to 1,000 locations by October of this year and Dave will cover that later.

Before I go through our portfolio results, I would like to address some recent management changes. Firstly, I would like to congratulate Kate on being named our CFO. She seamlessly stepped into the role on an interim basis and we were delighted to officially offer her the position at the end of May. Kate, congratulations. We've also made some changes in our marketing department. Chris Fuqua, who many of you know is our newly named Senior Vice President of Operation Strategy and Supply Chain for Dunkin' Donuts U.S, we brought in today. Chris played an instrumental role in the resetting the Dunkin' Donuts brand and now he's moving on to a new role to gain more general management experience. Scott Hudler, our former Chief Digital Officer left the company at the end of June and as a result of his departure and Chris' transition, we are recruiting for a new Chief Marketing Officer. In the interim, Chris continues to oversee marketing and is available today to answer your questions.

I am also pleased to announce that Sherrill Kaplan, Vice President of Digital Marketing and Innovation will oversee all aspects of our digital initiatives for Dunkin. Sherrill is also available to answer your questions.

We're also happy to announce the promotion of Jason Maceda as the new Senior Vice President of the Baskin-Robbins U.S. and Canada. He is a 19 year Dunkin' Brands veteran and most recently served as our Vice President of U.S. Financial Planning and Corporate Real Estate. He succeeds Weldon Spangler who left the company in June to become a CEO at another company. Now Jason isn't a traditional finance executive. Anyone who knows him will tell you that. For many years, in addition to his financial role, he's been actively involved in the day-to-day operations of the restaurants for both Dunkin and Baskin. He's well suited for his new position and will help us capitalize on the solid growth opportunities for Baskin-Robbins in the U.S. and Canada. These changes represent our commitment to people by developing talent within Dunkin' Brands to build for the future. I believe we have a nice balance of established leaders and people who've been internally groomed through our succession process and leaders like Dave, will come from outside of the company. I'm proud of and energized by how the organization has handled our recent leadership changes.

Now back to our second quarter results. I will let Dave cover Dunkin' U.S. comps, but our 0.8% comps for the quarter was an encouraging improvement over the first quarter. I'd like now to revisit a topic that I addressed on the first quarter earnings call and that's our franchisees commitment to Dunkin' Donuts brand. Over the past 2 years, our Dunkin' Donuts U.S. franchisees have invested more than $1 billion in their restaurants and they continue to open more net new stores than almost any other brand in the QSR space, which has led to top tier systemwide sales increases year by year. Additionally, as you know, from time to time, we offer our franchisees the opportunity to renew the term remaining on their franchise agreements to get them back to 20 years. That's of course assuming, they are up-to-date with their remodel schedule. We offered this opportunity earlier this year and our franchisees have responded so positive -- positively to that, that they have well exceeded our expectations year-to-date for renewals of their agreements. As a matter of fact, at the end of Q2, nearly 75% of all Dunkin' Donuts restaurants had greater than 10 years of remaining on their franchise agreements. This constancy in our franchise base is a major contributor to the consistent results that our 100% franchised business model delivers. Obviously this level of term renewal was great news financially but more importantly, it's a sign of our franchisees long-term commitment to the brand. They continue to demonstrate that they want to put their money back into Dunkin' Donuts and indeed, are pushing to extend their contracts on a concerted basis, which brings me to our updated development guidance that we provided in our press release earlier today. We now are expecting Dunkin' Donuts U.S. franchisees to open between 330 and 350 net new restaurants this year. Previously, we expected them to open up approximately 385.

So let me discuss why we're doing this. Firstly, we're underway on the design of our next Dunkin' Donuts restaurant image and we plan to have beta locations in market later this year and have it ready to begin a national launch in the second half of 2018. We believe this new design will be transformational from a design, equipment and technology perspective and we want our franchisees to have the capital to build the greatest number of restaurants in the new image over the next few years. Secondly, our franchisees have significant numbers of renewals coming due in the next couple of years and we want them to be able to convert as many of these as possible to the new look. With these factors in mind, we recently sat down with a group of leadership franchisees to walk them through all the work that's been done to evolve the Dunkin' Donuts brand and the planned timing of the new image. We discussed the most effective use of their capital over the next few years so that we can strike the right balance between driving smart growth and ensuring that current store base reflects our new image, which we believe will bring even stronger returns to our franchisees and to Dunkin brands.

As a result of this, we are revising our expected net openings for 2017. I truly believe this is a testament to our ongoing focus on franchisees relationships and franchisees profitability that we are having this strategic conversation with our franchisees and that we are aligned as a system to ensure continued quality growth across the U.S. and a long-term relevance since the sustainability of the Dunkin' Donuts brand. I want to be clear, this does not mean that all new restaurants and remodels that our franchisees complete in 2018 will be in the new design. We're also working through plans on how and when to make it available to franchisees, particularly for remodels and once we release the new design, franchisees will begin incorporating it into their development plans. But we are laying the groundwork now to ensure that they can build and convert the greatest number of restaurants to the new image over the next few years. I also want to emphasize very clearly that we are not changing 2017 guidance for revenue, operating income or earnings per share.

A couple of all things I would like to share in regards to Dunkin' Donuts U.S. restaurant growth. First, our franchisees have opened more than 1,800 net new stores from 2012 to 2016 and have added nearly $2 billion in new first year sales to our Dunkin' Donuts U.S. system. Going forward, systemwide sales growth is a number we will likely focus on in our discussions with you, as this metric really demonstrates organic growth of our business and the quality of our net new restaurant developments. And additionally, we are pleased to announce that the 2015 cohort of traditional new stores in the west and the emerging reasons finished at approximately 20% cash on cash returns. This is truly great news. And as a reminder, the west for us means everything west of the Mississippi, not just California. I agree, it's a slightly strange region. Obviously, in an area that contains widely diverse as California, Utah and Louisiana, cash on cash returns will vary widely. However, this is a point that I think you'll be waiting to here, however, and our most important high opportunity states like California, our franchisees are enjoying higher returns than the average. In closing, we expect that Dunkin' Donuts U.S. will finish the year yet again as well as the fastest growing restaurant concepts in the country by both unit count and by increases in systemwide sales.

With that, I'm going to hand it over to my friend Dave, who will cover the Dunkin' Donuts U.S. performance. Dave?

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

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Thanks, Nigel, and hello to everyone on today's call. In the next few minutes, I plan to touch on results and also tease out how we are operationalizing elements of our plan. Let me begin with the results. In the second quarter, our systemwide sales grew nearly 6% in the U.S, driven by new store growth and comparable store sales. Comparable store sales were 0.8%, as ticket growth was offset by traffic declines. Ticket and traffic remain largely the same as Q1, apart from a slight easing and traffic declines. From the daypart perspective, we are encouraged by our morning comp growth as it outpaced our reported full-day comp growth. Price held steady, while weather was a slight headwind in the quarter, particularly in the month of May, which was unseasonably cool and wet in our core markets.

Now from a category standpoint, breakfast sandwiches sales were strong, driven by Wake-up Wraps and core sandwiches as well as through innovative offerings like our Pretzel Croissant Breakfast Sandwich. And on the beverage side, iced coffee sales were -- continued to grow as a result of our Cold Brew platform. The iced tea category was also up, driven by the launch of fruited iced tea and while we had a very successful launch of Frozen Dunkin' Coffee, which is a strong addition to our beverage lineup, you'll continue to see us build that out in that platform out through the addition of flavors such as the recently introduced S'mores. Going forward, we continue to expect low single-digit comparable store sales growth for Dunkin U.S. for the remainder of 2017.

We've talked extensively in the past about our 6-part strategic plan to transform Dunkin into a beverage-led On-The-Go brand. Now we are bringing that plan to life at the other restaurant level. As the operationalize this plan, let me take you through the progress to date and the sequencing going forward. It's worth noting that we built this plan with the franchisee leadership and it speaks to our alignment and laser-focused to drive our future together. Looking first at menu, for the balance of 2017, we will have a maniacal focus on our core strengths. First and foremost, extending our coffee leadership in the category through products like our newly launched Frozen Coffee platform to the highly successful ready-to-drink coffee lined with Coca-Cola as well as advertising that speaks to our unmatched quality. The recent campaign This is Coffee highlights why we are the number 1 in the hot drip coffee market. Second, we'll continue to focus on donuts. This is a category in which we have significant equity as the number 1 retailer nationally. And given our scale, we have the ability to offer fun and innovative products at a great value as compared to the boutique players in the space. The recent cake batter donut and current S'mores donuts are great examples of this. And you will continue to see us double down on our donut mojo in the back half of 2017.

And finally, we'll focus on delivering a compelling national value message such as 2 for $2 Wake-up wrap offer that's underway now. And it's important to note that while we have had a regional value offerings in the past, the focus on national value is relatively new to us and underscores the alignment and unity that we have with our franchisees behind the plan.

Now I'd like to provide an update on our menu simplification efforts. And while it may sound counterintuitive,a key underpinning of menu innovation, again a key underpinning of menu innovation is menu simplification, which enables us to take complexities that have crept into the restaurants over the last several years, out of the system. Menu simplification is all about creating room for growth for the next wave of innovation as a beverage-led On-The-Go brand. As you know, we introduced a simplified menu into 300 restaurants earlier this year and are very pleased with the results. And as Nigel mentioned up front, we will be expanding this streamlined menu through an additional 700 restaurants by October for a total of a 1,000 locations. We will roll it out in 2 phases. The first, by the end of August and the second, by October. Providence, Rhode Island, a major market for us will be included in the first wave in August.

I know that there is significant interest in the number of SKUs being eliminated and the percentage of the menu that has been removed. At this point, it's still premature for us to share specifics but we can assure you that classics like the bacon, egg and cheese and croissant are staying on the menu. Some examples of things that have been removed are afternoon sandwiches, a few muffin and bagel varieties and some bakery items like danishes and cookies. We will continue to tweak the simplified menu using feedback from customers, franchisees and employees, as we move into the next phase going forward. However, we still believe that benefits of simplified menu in the long run will help drive top line and bottom-line from improved customer throughput, happier crew and managers and ultimately, increased restaurant level margins. As we've said before, simplification will continue to be a cultural mindset for our system. We want to make our restaurants simpler and easier to operate. In addition to this, we are also working on updated POS systems designed to make life easier at the store level as well.

Besides menu, the next strategic aspect of the plan is to offer our customers unparalleled convenience that sets us apart from any other concept in the category. We know from our research that guests use us as an On-The-Go brand. So making ourselves increasingly more convenient for consumers is an essential part of who we are and who we want to be. Our goal is to be agnostic as to how our guests use Dunkin. Essentially, allowing them to order how they want, pay, how they want and get the beverages and food the way they want.

Taste and quality are still king for us. But we also want to offer a frictionless experience for our guests. Bringing about this transformation demands that we look at every expect of our restaurant operations and our store design, including the drive-thru. In fact, going forward, we expect to see an even greater percentage of Dunkin restaurants opening with drive-thru's. In 2017, we anticipate that approximately 85% of our traditional store openings will have a drive-thru compared to only 70%, 5 years ago. This increased emphasis on drive-thrus is a big part of our strategy to be an On-The-Go brand and we want to make the Dunkin drive-thru experience the best in the industry.

In addition to unparalleled convenience, this also relies very heavily on new uses of technology. Key to this is our perks loyalty program and today we sit at nearly 7 million members. DD Perks makes our members feel valued and appreciated the offers, rewards and access to On-The-Go mobile ordering. And in return, we received rich customer data that we can leverage to drive one-to-one marketing and incremental sales. Quality of the user experience is a constant focus for us and as we approach the 5-star ratings in both the App Store and Google Play, we believe that this today's guest want to interact with their favorite brands.

Additionally, under the headline of differentiating ourselves through unparalleled convenience, we are pleased to announce that we are now making curbside delivery an option for all of our franchisees. Curbside will provide DD Perks' guest the option of having their orders brought right to their cars and gives us one more avenue to build on with our super convenient strategy. Worth noting, we're also expanding our delivery program to the Miami market this month via our partnership with Door Dash. And coming later this year, we will be piloting a catering tests on our newly designed website, dunkindonuts.com. Catering is not new to us as many franchisees have been providing this service for years. However, what will be new is the online catering feature and a more unified approach across the system.

Part 3 of our strategic plan is to give consumers increased accessibility to our brand. And that's going to be through the addition of new restaurants, through partnerships like our agreement with Amtrak to serve our hot coffee on the Acela Express, high-speed trains and also through branded consumer products offered outside our restaurants, such as what I was recently mentioning, the new ready-to-drink iced coffees in partnership with Coca-Cola. And in fact, we are very pleased with the early progress of this product as we just hit double digits on market share. As for new year growth in Q2, Dunkin U.S. franchisees opened 64 net new restaurants versus 73 net new units last year. Our franchisees have also completed 140 new remodels during the quarter.

Okay. Finally, the fourth element of our plan is restaurant excellence. Our franchisees take a lot of pride in running great restaurants. But we all know that you're only good as your last visit. That said, we believe structural initiatives such as the simplified menu will help our franchisees reduce labor turnover, a major concern in this tight labor market obviously and allow them to focus on the basics of fast, accurate and friendly service. As you can hear, we are well underway with our multiyear plan to transform Dunkin into a beverage-led On-The-Go brand. We've a lot of heavy lifting still to do, but I am confident in our U.S. blueprint for growth, focused on menu innovation, unparalleled convenience, broad accessibility and restaurant excellence. When you wrap up all of this with more modern and relevant brand expression, including new restaurant designs that Nigel talked about and we're confident that this plan will put our systems on the next wave of long-term sustainable growth.

In closing, I am energized by the alignment of our great franchisees and brand employees alike. Together, we are committed to growing Dunkin in a smart responsible way to ensure the continued relevancy of the brand. And I look forward to sharing and most importantly, showing you more about our brand evolution at our Investor and Analyst Day, which we'll be hosting in Boston this February, 2018. So stay tuned for more details on that. So with that, I'll now turn the call back over to Nigel to go through our Baskin-Robbins U.S. and international results. Nigel?

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

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Thanks, Dave. Baskin-Robbins U.S. restaurant stores sales were negative during the second quarter, driven by a decline in traffic offset by increased average ticket. We were excited to announce the launch of home delivery following on the trend that Dave talked about. Our home delivery through our partner Door Dash, which rolled out on June 30. Now more than 600 Baskin-Robbins locations in 22 cities will be supported by Jordache delivery, including Atlanta, Chicago, Dallas, Los Angeles, New York City and San Francisco. Given that we're experiencing comparable store sales declines 2 quarters into the year, we are revising our full year 2017 target for Baskin-Robbins U.S. to slightly negative comparable store sales.

Now to international. Baskin-Robbins International had a strong quarter from a comparable store sales point of view. The focus on value and trade-up programs were particularly impactful in the key markets of Japan and Korea. Restaurant growth was driven by the Middle East and Korea. Dunkin Donuts international continues to be in stabilization mode, with Dunkin Korea being responsible for the majority of store closings in the second quarter for the segment. They're conducting a review of their restaurant portfolio and closing older unprofitable locations. As a result, they informed us that they will be closing more locations than they previously expected. Therefore, we now expect international franchisees and licensees to open between 50 and 100 net new restaurants outside the U.S. in 2017. And I'm passing on now to Kate Jaspon.

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

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Thank you, Nigel. Revenues for the second quarter increased approximately $2 million or 1% compared to the prior-year period, due primarily to increased royalty income as well as an increase in rental income. The increase was offset by a decrease of sales in company-operated restaurants. As a reminder, we sold all of our company-owned restaurants in fiscal 2016. Also offsetting the increase in revenue was a decrease in sales of ice cream, primarily through our licensees in the Middle East as well as a decrease in other revenues.

Operating income and adjusted operating income for the second quarter increased $7.4 million or 7% and $7.6 million or nearly 7%, respectively, from the prior year. These increases were primarily the result of increase in royalty income and increase in rental margins and a decrease in our general and administrative expenses. The second quarter decrease in G&A reflects our ongoing focus on being diligent around our spend. The increases in operating income and adjusted operating income were offset by a $2.1 million gain recognized in connection with the sale of our company-operated restaurants in the second quarter of the prior year as well as a decrease in other revenues.

Net income and adjusted net income for the second quarter each increased by proximately $6 million or 12% compared to the prior-year period, primarily as a result of the increases in operating income and adjusted operating income, offset by an increase in income tax expense. Diluted earnings per share and diluted adjusted earnings per share for the second quarter increased by approximately 11% to $0.60 per share and 12% to $0.64 per share, respectively, compared to the prior-year period, as a result of the increases in net income and adjusted net income, respectively, offset by an increase in shares outstanding. The increase in shares outstanding from the prior-year period was primarily due to the exercise of stock options and the new accounting standard adopted in the first quarter of 2017, offset by the repurchase of shares since our second quarter of fiscal 2016.

Excluding the impact of excess tax benefits recognized, diluted earnings per share and diluted adjusted earnings per share would have been approximately $0.01 lower for the quarter. At the end of the second quarter, we had a debt to adjusted EBITDA ratio of 4.6:1. Our effective tax rate for the quarter was 37.5%. During the quarter, we generated approximately $78 million in free cash flow and ended the quarter with $340 million of cash and short-term restricted cash on the balance sheet. Of that $340 million, $124 million represented cash associated with our gift card programs and our marketing fund balances. We used approximately $29 million of cash during the quarter to pay our Q2 cash dividend to our shareholders.

During the second quarter, we repurchased approximately 1.8 million shares of common stock at a weighted average cost per share of $56.90, under the $100 million accelerated share repurchase agreement that we entered into in May. This accelerated share repurchase essentially offset any dilution that we expect for 2017 from the exercise of options and therefore was contemplated in our original 2017 EPS guidance.

In closing, I think it's important to once again highlight that despite revising certain store development expectations for the year, we are maintaining our revenue growth, operating income growth and earnings per share targets for fiscal 2017.

With that, I'll turn it over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of John Glass with Morgan Stanley.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [2]

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First, just on the reduction of the store growth for this year. Nigel, do you think this is the right run rate to think of the Dunkin growth in future years or is this a half step as you think about more investment needs in the core business or the existing stores, so that it may slow further as that process unfolds?

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

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Okay. So, John, thank you for the question. What I'll say is that, we always regard ourselves as a truly strong development company. I outlined some of the statistics. This was a guide for this year only. We only ever give guidance for the year. We never go beyond the one year. I think our franchisees are excited about our returns. So I think they're excited about the new image, they're excited about the transformational plan that Dave has led over the last several months. So we'll keep our foot to the ground, the accelerator will go right down and I think 2018, '19, '20 and so on will be as high as we can possibly achieve.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [4]

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And do you think getting that incremental growth can combine with the amount of remodels and some of the technology investments, et cetera, that franchisees are willing to fund that themselves? Or do you contemplate at some point, as other brands have, maybe co-investing on some of these initiatives to make sure that they get done and the franchisees are pleased with the investments they need to make?

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

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Very good question. And I think, it's something that historical, certainly in my time, the franchisees have funded it themselves and they've done a great job. There's someone who -- they're are group who really do like investing in their restaurants. It's always intrigued me that franchisees truly like spending capital. Having said that, I think the transformation is going to be so significant, that is something that we'll certainly consider. We made no decisions. It's something we've actually talked about. We have noted, as you pointed out, what others brands have done. Cash is not a problem for us. Cash is something that could be helpful. So it's something that we will consider, but I want to be absolutely clear, we have made no decisions on investing with our franchisees. So I don't want anyone to go away thinking that I've said that we will.

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Operator [6]

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Our next question into will come from the line of John Ivankoe the JP Morgan.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [7]

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Two questions if I may. First, just looking at the menu simplification. Just wondering what the learnings were in wave 1 on those first 300 stores? How wave 2 might change just in terms of the overall focus, more units, less units, how it's priced, what have you? Any type of operational organization? And even going from 1,000 units and 9,000 units, it's obviously or approximately 9,000 units, is a pretty big leap. So what are you looking for in the completion of that 1,000 unit test to get it in all 9,000 units? And if you wanted to do that, how quickly could that happen?

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [8]

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I'll pass onto Dave.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. and Canada [9]

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Yes. Thanks, John. Look, Chris is leading this effort for us. So I'm going to have him jump in here as well on this. But we are very pleased with the first 300. Some of those markets don't represent all of our core markets. And so, it was important that we would be responsible and scale this to the next level. So that's why the next 700 are in place. But again, we are excited about what we see in terms of -- especially the velocity that we are seeing on the P&L in the food cost and then also the feedback that we are getting in terms of crew and management satisfaction. They're doing handstands over this. And then also one of the biggest things first and foremost is customer throughput. And so, across those 3 dimensions, we are very excited. But we felt like we needed to drop in another wave to make sure that we could validate everything. But I will let Chris touch on anything else here.

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Christopher Fuqua, Dunkin' Brands Group, Inc. - SVP - Mktg for Global Consumer Insights & Product Innovation for Dunkin' Donuts & Mktg Professional [10]

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Great question John. I think the reality of the operational benefits is being felt by people within our restaurants and you're seeing improvements in food cost, you are seeing an easier labor model to execute and that's probably the biggest challenge that we face with our franchisees together on a regular basis. As we look forward to expanding this, we really want to make sure that the consumer benefits from it as well. So all of the different things that you have to do within a restaurant to make sure that consumers understand which products they might switch to if their favorite product is no longer available. We want to make sure that we're clearing room for growth so that the innovation pipeline can really take in as we clear that room for growth and we have products that are easy to execute along the model of what will be remaining -- will be part of the blueprint for the future. So this is a very deliberate process. We went out and did consumer research. We tested it in small modules. We expanded to a small set of stores. Now we are going to 1,000 stores and then we go to the whole system and our franchisees are 100% behind us.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [11]

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It is worth emphasizing that this is very complicated, very data driven, as you just suggested. But we will probably end up, as we always have had, with different solutions for different parts of the country. So there is not 1 size fits all.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. and Canada [12]

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Absolutely. We're trying to become a much more simple brand, but obviously there will be things that you can do in the different parts of the country on a one-off basis. I think the reality is this is all about signification of the menu, simplification of everything else that we do in the restaurants as well will be part of the next wave.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [13]

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And maybe related to that, Nigel, in your prepared remarks, you talk about kind of like what the next modern wave of Dunkin stores have a completely different design, equipment and technology. Could you focus on the equipment and technology piece? Even if you are just seeing in prototypes or in a warehouse somewhere, how significant equipment and technology could be to transform both the throughput and the labor model at the Dunkin as it currently exists today?

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [14]

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So we have a very open mind on technology. There's a lot of different formats that are being developed in the restaurant business. We are looking actively at all those and if we see something that works for Dunkin, we will integrate it. I think we've already transformed our business significantly and we feel really proud of the fact that we're this On-The-Go brand. Look at our drive-thru numbers as Dave referenced, look at the success of On-The-Go and that is, as I've said probably 500 times, the architecture for the future, be it curbside, be it delivery. So there's a lot of technology that's going to come in. The opportunity for you guys to see it will happen, I think fairly quickly. I'm not going to promise anything yet, but it will happen fairly quickly. And Chris, will -- can you add to what I said.

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Christopher Fuqua, Dunkin' Brands Group, Inc. - SVP - Mktg for Global Consumer Insights & Product Innovation for Dunkin' Donuts & Mktg Professional [15]

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Absolutely. If you think about menu simplification at the unlock for menu innovation and really making sure that we're delivering the modern relevant menu for our guest of the future, I think equipment and technology help us with the unparalleled convenience aspect that Dave mentioned in his remarks. So if you think about the smart technology in some of our piece of equipment, if you think about really expanding our ability to talk about grinding fresh and brewing fresh and the fact that we put in a new cup of coffee out every 18 minutes to our guests, unlike everybody else in the industry, if you look at what we did with the sandwich station over the last couple of years to make it easier to deliver throughput, things around the drive-thru and then On-The-Go, this is all about advancing technology across the entire enterprise so that we can make our guests happy when they come to restaurants.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. and Canada [16]

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And John, it's important that under that pillar of unparalleled convenience, when we talk about being agnostic, technology is going to play a critical role so that the customer can order the way they want, pay the way they want and get the food the way want. That type of fiction-less experience is what's going to be underpinned by all of the technology that Nigel and Chris just mentioned.

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Operator [17]

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Our next question will come from the line of Jeffrey Bernstein with Barclays.

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Jeffrey Andrew Bernstein, Barclays PLC, Research Division - Director and Senior Research Analyst [18]

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2 questions as well. First one just on the 2Q U.S. Dunkin comp. I think you mentioned in your prepared remarks and in the press release, the traffic was negative. Seems like it's similar to the past couple of quarters. But directionally Nigel, I thought you mentioned you were pleased with the improvement in the comp. I'm just wondering if you can provide some color on the comps? I thought there was a comment that the traffic was actually slipped versus the first quarter, yet the comp was stronger. Any color in terms of the components of the comp, maybe the regions of the comp, where it was better or worse which dayparts would be helpful? And then I have 1 follow-up.

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

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Okay. Jeff on that -- just the opposite, traffic has improved. So it wasn't worse. Traffic was improved and in terms of check relative, about the same in terms of the increase there. So less negative on the traffic side and about on par with Q1 on the check side.

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Mark David Kalinowski, Nomura Securities Co. Ltd., Research Division - MD [20]

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And in terms of region or daypart, is there any area that's more challenged or?

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [21]

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No. We don't break down by region or what I say on daypart and I think I've already commented on this on the national TV. So we're really, really pleased with the morning. I mean we're excited about what's happening in the morning and Dave and I, every day talk about how we can improve the P.M.. So if I have to choose where I'd be really pleased, I'd be pleased that the morning was doing well. When you're an On-The-Go brand like ours and led by beverages, you want to be strong in the morning. We are strong in the morning. Breakfast continues to grow. We do have some questions to ask about how we can stimulate the afternoon, which are in innovation, we're using perks offers, we're using some selected discounting. It's not just national discounting, it's regional. So we really are tackling the afternoon, but I'm delighted with the trends both in traffic and comps in the morning.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. and Canada [22]

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And Jeff, as you know there is an industry issue with traffic declines and we're not immune to that. But every quarter, we will continue to make progress in this area and it's a laser-focus for us in terms of driving traffic into business.

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Mark David Kalinowski, Nomura Securities Co. Ltd., Research Division - MD [23]

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Understood. And then just a follow-up on Dunkin U.S. unit commentary, Nigel. I know you don't give 2018 guidance so on. But more qualitatively, essentially there's a balance in their CapEx needs and I think you mentioned the new stores model is really not going to be national until the second half of '18 and they're all doing remodels and equipment, technology. It'd seem like it's fair to assume that at least as we start '18, that this type of reduction is appropriate and likely to persist. Is there any reason why those investments would have abate so quickly that '18 could see a reacceleration? Or are these investments presumably a little bit longer lasting and it's the right thing to do in the short term?

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [24]

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So, Jeff, that was a very sophisticated way to get me to comment on to 2018, which I am not going to do. What I will do though is say that our franchisees had stores already in the pipeline for next year, they have stores in the pipeline for 2019, that's the same every year. We had in-year stores, a lot of those are (inaudible) but sometimes in areas like New York, Philadelphia, you can add in-year stores, but the franchisees are making their decisions, the franchisees sometime decide they want to put stores, ignoring the new image to block out a competitor or to add to their portfolio. There's all kinds of reasons they do it. But I'm not going to make any more commentary about what may happen in 2018.

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Operator [25]

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Our next question will come from the line of Andy Barish with Jefferies.

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Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [26]

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Just on the unit development is -- have you seen an increased level of cannibalization in core markets? Is that factoring in or is it more just a strategic brand changes that you highlighted obviously this morning?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. and Canada [27]

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Okay. So and you and I talked about this before, cannibalization happens every single store you open, that's a reality. If you are a brand-new brand, and you open a second store, you are cannibalizing the first. So cannibalization happens all the time. We've decided a long time ago, not to call out cannibalization. If we did, we could probably added to our comps but we decided because we are developing company, we're never going to call it out. So it happens in certain markets. Sometimes it deliberate, franchisees, sometimes have stores that deliberately cannibalize their own stores to keep out competition or they hear a competition coming in. So that happens all the time, but we're not going to break it down by region, which is consistent with what we do with the rest of our results.

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Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [28]

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Okay. And then 1 modeling question for -- to get Kate involved here. Obviously, the unit development stuff is negative to the broader guide, but you've kept the numbers intact. I guess just trying to see what the offset is that's coming in a little bit more positive relative to the slower unit count numbers?

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Katherine D. Jaspon, Dunkin' Brands Group, Inc. - CFO [29]

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Sure. Good question. From time to time, we offer our franchisees the option to renew their term on their remaining agreement as we mentioned in the script, to allow them to get back to 20 years of term and assuming they're up-to-date with the remodel schedule. So this year, franchisees have exceeded our expectations year-to-date for renewals. So that's driving it and then we have a line of sight into the additional renewals that we expect will come in, in the back half of the year. So that's primarily the offset.

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Operator [30]

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Our next question will come from Gregory Frankford with Bank of America.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [31]

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Can you talk about the ready-to-drink market, sort of what you are seeing there? And do you think you are expanding that category or taking share from other major competitors? If so, maybe who do you think you're taking share from? Sort of from the higher end guys or who else?

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [32]

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Yes. We are really delighted with the partnership that we have with Coca-Cola to get into this space. It's -- we think it's incredible whitespace for us. And we did our launch early this year and very pleased, you heard me talk about we just broke through double digits on national share from that reporting that we're getting back and Coke is excited about that partnership, along with the bottlers as well, as we move forward. In terms of what we are seeing, we are expanding the category of course, I'm sure there's going to be -- we're going to be taking shares as well, but more broadly, we are expanding the category rate now. But we're excited about our initial launch and we're excited about the innovation that we're going to be putting behind that as well going forward.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [33]

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And then maybe just one other. Just on the changes to the assets and the potential reimage that you guys are doing, can you talk about that drive thru and how that fits into it? With mobile order and pay, do you think that there is any need to change the layout or setup of the drive-thru going forward?

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

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That's one we're continuing to tackle. Look, we've got a strong drive-thru presence. I think you've heard us say this before that 55% our fleet of restaurants have drive-thrus. Curbside is another for avenue for us to get into that super convenient market. But in that space, when we talk about a frictionless experience inside, we also mean that for the drive-thru as well. And so On-The-Go ordering, we are looking at available ways that we might be able to make that even more advantageous for our On-The-Go customers. So that is all in play and you'll see that, iterations of that as we start testing that and looking at things on how we can make that throughput even better and that proposition for the customer even better.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [35]

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Greg, I'll add one more thing that's slightly broader. We are so excited about how our drive-thru performance in the U.S. I'm really pushing hard to see how we can take drive-thru into international. We do have some international stores, particularly in Saudi Arabia. We drive-thru, I think we could do more. And am also intrigued by Baskin-Robbins where I think, I'll have to check the numbers, but I think it’s about 89 stores have drive-thru's and some of them have a very high percentage going through the drive-thru. I think Jason with his leadership will understand how strong drive-thru's been in Dunkin's and migrate that to Baskins. I think there's unparalleled convenience that Dave talked about is a trend that we can apply elsewhere.

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Operator [36]

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Our next question comes from Jason West with Crédit Suisse.

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Jason Taylor West, Crédit Suisse AG, Research Division - Senior Analyst [37]

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Sorry to go back to the unit outlook again. But obviously it's pretty critical for the growth model here. So can you talk a bit more about the decision to lower the guidance? You talked about the new prototype or design that you want to focus on for remodels and new units. But it seems like there must be more to it that that in terms of why you would lower the numbers, midyear here. And is this decision coming from more from the corporate office saying we think the system should slowdown or is this just adding up sort of the franchisee commitment and the numbers coming in a little bit lower than expected? And any other pressures out there that are driving this, whether it's competition or real estate, pickup in closures, any more color there would be helpful?

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [38]

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Okay. Good question. So most of the things you put out there I will say no to. The first thing is, someone wrote this morning about is it unit economics? No. We're actually delighted with our unit economics. And we've done some internal comparisons, which I won't go into in explicit details today, but we believe that we are right at the lead table of unit economics when you look at it in several ways, particularly when you look at the things like food paper labor, which we call FPL here. We're way up there compared with all kinds of other chains. Secondly, it's not corporate office mandating it. Our corporate office works with a franchisees. Most franchisees, as I said earlier, plan well over a year in advance. So you don't just suddenly knee jerk it. I think every year we have in-store deals, some of them are APODs and some of those stores we're not opening, to be brutally honest, are probably $1,500 average weekly sales. It's a mix there. So I am far less concerned about it than you. I think I've given you the reasons, which, just to reiterate, is about the new image coming along, the franchisees, where they're going to invest their money in the future. And I think, probably the thing you said, was that we looked at it, we decided that we're always transparent with the Street, that we'd just be transparent and say our guidance is coming down. You never know right until the end of the year what the number's going to be. Some stores can be opening on the 28th of December and move into next year or stay in this year. So with all that, we decided to bring down guidance, but none of the things like unit economics were a driver behind this.

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Jason Taylor West, Crédit Suisse AG, Research Division - Senior Analyst [39]

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Okay. And any color on the regional change that's occurred? I know you guys aren't giving the regional breakdown until year end now. But in terms of the pull back on some of the units, is it in more of the core and established, I would assume or maybe not?

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [40]

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I think that there's some pull back there but I think 1 number that, I always get this number wrong, so I'll get Dave to do it. If I take California, we are expecting this year to have over 60% growth in California, is that right?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. and Canada [41]

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Yes, 60% on the base will be new store growth. Any boutique outfit, if you look at this, you'd say that's unbelievable but on our size and how we are evaluated, it doesn't show up yet as something that's significant. But again, we are pursuing greater exposure out west. We've talked to you about that extensively and I'd say as Nigel pointed out and said in the earlier, during his talking points, there is normal ebb and flows and I saw it in my previous role as well. And we're focused on quality and quality openings. And again, you've heard Nigel talk about first year sales and look, there's a lot of excitement. And I'm spending a lot of time out on the road with our franchisees and there's a lot of alignment and unity behind not only this plan, but what we're doing around new growth and remodels going forward.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [42]

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And I took a look for a (inaudible) meeting at some of our competitors and their openings. And every time I look at it, 1 chain that got a lot of fanfare early in the week, closed 15 stores in the quarter. Yes. Look at our numbers, look at our years numbers, the only chain that's beating us in the U.S. is Starbucks. We are way up there. So we feel actually very good about what we continue to do and the great thing is that franchisees feel good about their openings, the stores they're opening.

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Operator [43]

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Our next question will come from David Palmer with RBC Capital Markets.

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David Sterling Palmer, RBC Capital Markets, LLC, Research Division - MD of Food and Restaurants and Consumer Analysts [44]

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First, follow-up there on the unit growth. And particularly about the format and the regions, I have a feeling that there is differences in the returns that you're getting between California versus other and drive-thru versus in-line? So for instance, drive-thru's in California may be the answer, but those don't get built overnight with the zoning that must be out there, the pipeline may take time to build for something like that. And therefore, the ramp. Could you talk a little bit more about these differences and how the development -- this would affect the development -- the rate of development?

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [45]

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Yes. David. As you pointed out, look, we are late to California. We have to be a little bit more ingenious on how we get after sites and get into sites but that's the brilliance of our model. Drive-thru, what is going to be a core asset for us. So that's 1 piece of this but we also think curbside also with our in-line restaurants is also going to be an element of this that mirrors and very much resembles the returns that we are seeing with drive-thru's. So look on the returns, the returns out in California as Nigel said up front, are great. The operators are bullish. And so we're still very much forging ahead, but we are trying to give the franchisees more options and more avenues and more tools in their toolbox to be able to penetrate a market that is heavily penetrated and where we're coming in from behind to make sure that we can get the great sites that are needed out there for long-term success.

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David Sterling Palmer, RBC Capital Markets, LLC, Research Division - MD of Food and Restaurants and Consumer Analysts [46]

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And then also, you had talked previously about doing more with advertise value perhaps nationally, advertise value. What have you done so far there? It's hard to tease out what's local versus national. And is there more of that to come than what we have seen so far?

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Christopher Fuqua, Dunkin' Brands Group, Inc. - SVP - Mktg for Global Consumer Insights & Product Innovation for Dunkin' Donuts & Mktg Professional [47]

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Dave, this is Chris. So we have an alignment with our franchisees on nationally advertised value every month for the rest of the year. 2 for $2 wake up wraps is a great example. Every restaurant in our system is offering that as a national promotion currently and you'll see more of that to come in the months ahead.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. and Canada [48]

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David, the other thing is, you know when I came into the business in January, franchisees are aggressive, had great regional programs but when you move as 1 voice nationally, it just has -- it puts you in a stronger position. And so, as I mentioned earlier, the 2 for $2 wake-up wrap are the things, the types of promotions that you're going see the back half of the year and into next year. And we are very pleased with this and the attachment that we're getting with these type of offers. So we are very encouraged by the momentum, but it's a competitive marketplace out there.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [49]

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So David, I know value very closely in the past since you and I debated it many times, but Dave has done fantastic things in his, what is it, 9 months now?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. and Canada [50]

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6 months since taking over the business.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [51]

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Six months since taking over the business. 2 of them are the focus on drive-thru's. He's really added value, he's our drive-thru expert. And secondly, he's really made us think hard about national values. So 2 great things he's brought to the company and I think you should take that as a trend for the future.

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Operator [52]

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Our next question will come from Matt DiFrisco with Guggenheim Securities.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [53]

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I guess moving over to digital a little bit and changing the topic. Did you guys -- can you give us some detail on some metrics on what you're seeing as far as DD Perks and the loyalty, how much as a percent of sales stems from that? Some of your peers have really only seen growth based off of their most loyal customers where there seems to be this stagnant business in -- from the guys who are non-loyalty based. So if you could tell us maybe comparing year-over-year what you've progressed as far as your DDE Perks participation as a percent of overall sales in the quarter?

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Sherrill Kaplan, Dunkin' Brands Group, Inc. - VP of Digital Marketing & Innovation for Dunkin' Donuts U.S. [54]

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This is Sherrill Kaplan. We are pleased with the sequential growth. However, we're not going to chat about it on this call today.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [55]

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Can you tell us -- any sort of metrics on it, how many members you have versus last year, how much -- did they out-comp your normal -- your non-perks customer?

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Sherrill Kaplan, Dunkin' Brands Group, Inc. - VP of Digital Marketing & Innovation for Dunkin' Donuts U.S. [56]

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So last quarter we added 500,000 members and we are pleased with that progress.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [57]

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Yes, what we've now got is just about 7 million perks members. Obviously we feel good about it. The reason we don't comment on it is we would comment every single quarter, we tend to do once a year in detail but perks continues to grow. The comps continue to be -- actually, we have a debate internally, the comps are very good. We then look at outside data, which tells us they're actually even better than we think. So the bottom line is that we are very pleased with our perks numbers.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. and Canada [58]

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And as Sherrill mentioned, the 500,000 new acquisitions that we add, we are really pleased with those numbers. We continue to see us growing on that base. This is going to be a great lever for us going forward. Of course, they're our most loyal guests. As you mentioned about the performance of the non-perks members is 1 that we want to continue to expand this and bring people in. When we bring people into royalty and especially when we also bring them into the On-The-Go ordering process, the velocity and the rate of how they use our brand continues to accelerate. So this is going to be a critical lever for us as it is for many players in the industry and we think we have some of the very best consumer facing technology out in the marketplace and it's just making sure that we get awareness and trial. And so, we will continue to push on our recruiting efforts going forward because it's critical to our long-term success.

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Sherrill Kaplan, Dunkin' Brands Group, Inc. - VP of Digital Marketing & Innovation for Dunkin' Donuts U.S. [59]

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One thing I would just add to that is On-The-Go did see sequential growth and as we have talked about before, once people try On-The-Go, we've seen over a 70% retrial rate. So once they try On-The-Go mobile ordering, they really stick. So it's -- we're thrilled about that and as Dave mentioned, we're going to double down on awareness and acquisition into that platform.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [60]

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So for the record, for those who heard me talk about it, I finally got my wife onto On-The-Go and she can't stop using it now. So once you get people to try it, that's a big break through.

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Matthew James DiFrisco, Guggenheim Securities, LLC, Research Division - Director and Senior Equity Analyst [61]

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What was On-The-Go in this quarter versus -- you said it sequentially improved from 1Q?

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Sherrill Kaplan, Dunkin' Brands Group, Inc. - VP of Digital Marketing & Innovation for Dunkin' Donuts U.S. [62]

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Yes. We've decided to just really say it when we hit some significant milestone. So today we chose not to share the numbers. But we're pleased about the growth.

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Operator [63]

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We have a question from the line of David Tarantino with R. W. Baird.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [64]

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I have question about the new image and design of the restaurant you're rolling out. And I just wonder, if you could talk about philosophically, how you're thinking about the investment cost? And whether this is an opportunity to streamline the design in a way that lowers the investment cost and increases the ROIC profile?

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [65]

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Yes, it's a great question. We're excited to have you see all of this at our Investor Day in February as well. Look, our go to market strategy on cost is front and center, not just in the designs but also in the equipment package and the size of the facility as well. So this is all part of our return model. It's something that we work very closely with our franchise leadership to make sure that we get this right. So I think that there's a great opportunity for us to continue to streamline this. And balance that with new technologies as well that come into this. So there's a lot of crosscurrents there. But making sure what we have the right affordable model that we can scale is what we partner with our franchisees on, so that we can deliver the best and something that we can get out in the marketplace as quickly as possible.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. and Canada [66]

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I think it's worth saying that the focus we've had in this quarter on drive-thru is something that will continue into our development of the new store because our guests are telling us, they like to go through the drive-thru. We've got 1 store that has both drive-thru and front counter. 96% of the revenue goes through the drive-thru. Now that is an exception and I don't want anyone to write that, that is a trend. But it does demonstrate that people want convenience and if you can get the convenience like that, that does mean that we should be able to develop a smaller box.

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Dennis Geiger, UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants [67]

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Great. That's helpful. And Nigel, can you just clarify the comment you made about focusing the conversation on sales growth, rather than product development? That would be helpful.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [68]

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Okay. So David, this is -- I'm pulling open the Nation's Restaurant News which you'll all probably go look up, it's the June 19th edition. And it has the top 100 and it's kind of interesting when you read through it. And we took our board through it in our last meeting and we come out number 3 in terms of system growth, some brands there. It was an interesting exercise of asking people who the number 1. It won't surprise you, but it was Starbucks. We are number 3. You can find out who number 2 were, but system wide growth, really shows the quality that we are opening. I'll go back to my earlier comment, will you as analysts and investors, rather us open a store doing $20,000 a week or store doing $2,000 a week. The answer is $20,000 a week because you want to get that royalty. So we are very focused on that in the future. I think, we can put more through our boxes as we just said. So we're very focused on that. I want to repeat, as I've said many times, we are development machine despite the fact we took down guidance and we put development together with comps. That is a model that hardly anyone else has that's what makes us different. It is comps and development and most other businesses can talk about comps, they can't talk about development in the U.S. the way we do.

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Stacey Caravella, Dunkin' Brands Group, Inc. - Senior Director of IR & Competitive Intelligence [69]

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Operator, we are probably have a time for one more question.

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Operator [70]

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Our final question will come from the line of Will Slabaugh with Stephens Inc.

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Karen Holthouse, Goldman Sachs Group Inc., Research Division - VP [71]

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Had a question of this simplification initiative, as it relates to menu innovation. It seems like menu innovation and new product introductions have been a primary reason that your comps have remained mostly positive here in the past couple of years. So I'm curious how this strategy, as it evolves, might impact your thoughts around future menu innovation? And should we think about that just going maybe deeper into current platform or is there still the potential to add platforms going forward?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - President of Donuts U.S. and Canada [72]

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Yes, we definitely see a potential to add platforms. And as Chris rightly pointed out and I said in my opening, look, simplification we think is the unlock for innovation that gets us to lean into that position of being a beverage lead On-The-Go brand. We aren't -- we are certainly going to be very focused on food, like we have been in the past and donuts as well but we like the idea of going after multiple platforms under beverages and be in that beverage lead On-The-Go brand. But the sequencing of this has to be right. And the first thing is we have to, as we go through this simplification effort, cull some of the things and the complexities that have gotten into our restaurants. And we feel like this is the responsible way to go after that. But we've brought in some new culinary talents and his organization as well. I'm in the marketplace for a CMO candidate in addition to that. And so we're excited about the folks that we're bringing in here to compliment the great team that we have and to fill the pipeline on innovation going forward.

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Operator [73]

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That will conclude our time for questions. I'd like to turn the program back to Nigel for any additional or closing remarks.

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Nigel Travis, Dunkin' Brands Group, Inc. - Chairman and CEO [74]

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Okay. Thank you very much. So in closing, I think it's worth saying, we have give a beautiful business model. Looking at various numbers around the room, not many brands can sit up here and talk about continuing to grow their margins over 50%, that's our adjusted operating income margin. We've got a model that's enabled us to deliver consistent results through the years as we've talked about and I think key to this is the engagement of our franchisees. That's very important. Our Dunkin franchisees are fully committed to the brand and to Dave's vision for the future. He's been true added value to our company. I'm confident also that Jason will bring a similar leadership and passion to Baskin-Robbins. I think we're doing all the right things for our future and we are truly focused on the future of our company. And the key to that is making the customer central to everything we do, in digital leadership, convenience. Obviously, cost control is also something that's important to the company, we didn't talk about that, but I think we exhibited great cost control in the quarter. And then, talking about costs and profitability, franchisee profitability is absolutely critical in every part of our business and we are really focused on that. So I think when you put all those ingredients together, that will enable us to continue to deliver strong growth into the next decade. So with that, thank you for listening and I'll speak to you again soon.

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Operator [75]

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Thank you, presenters. And ladies and gentlemen, this will conclude today's conference. Thank you for your participation and have a wonderful day.