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Edited Transcript of DNKN earnings conference call or presentation 2-May-19 12:00pm GMT

Q1 2019 Dunkin' Brands Group Inc Earnings Call

Canton May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Dunkin' Brands Group Inc earnings conference call or presentation Thursday, May 2, 2019 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. - CEO & Director

* Katherine D. Jaspon

Dunkin' Brands Group, Inc. - CFO

* Scott Murphy

Dunkin' Brands Group, Inc. - Senior VP & COO of Dunkin' 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 Strelzik

BMO Capital Markets Equity Research - Restaurants Analyst

* Andrew Michael Charles

Cowen and Company, LLC, Research Division - Director

* Brian John Bittner

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* David E. Tarantino

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

* Nicole Miller Regan

Piper Jaffray Companies, Research Division - MD & Senior Research 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 2019 Earnings Call. (Operator Instructions) And as a reminder, this conference may be recorded. I would now like to turn the call 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 will be Dunkin' Brands' Chief Executive Officer, 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 Dave, 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 this 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. Lastly, let me remind you of our tentative dates for the release of quarterly earnings in 2019. We plan to release Q2 on August 1 and Q3 on October 31.

Now I'll turn the call over to Dave.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [3]

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Thanks, Stacey. During the first quarter of 2019, we made strong progress against our plans to unlock healthy growth and modernize our brands for the next generation of consumers. The Blueprint for Growth, our long-term strategy for Dunkin' U.S., is producing meaningful results for customers and franchisees. In the first quarter, Dunkin' U.S. delivered 5.5% system-wide sales growth and 2.4% same-store sales growth. And by the way, this was our largest quarterly increase in 4 years.

Performance was enabled by the actions we put in place throughout 2018 such as menu simplification, re-branding, our first foray into national value, espresso, improvements to the app and all of this coupled with some intensive focus on training and better execution. These results demonstrate the $100 million investment we committed to the Dunkin' U.S. business last year is paying off.

As for our international business, we continue to focus on strategic markets including the Middle East and parts of Asia as well as long-term growth opportunities such as strengthening our delivery infrastructure. And Baskin-Robbins U.S. stepped up its restaurant base optimization efforts through strategic closures and restaurant transfers as part of its raising-the-bar plan.

From a financial standpoint, we achieved approximately 6% revenue growth, more than 11% adjusted operating income growth and $0.67 adjusted earnings per share, which is inclusive of $0.01 of excess tax benefits. We are still in the early innings of implementing our plans, and we're confident about the progress we made in Q1 to transform our brands globally. Key to our accomplishments is the strong collaboration we have with our franchisees and licensees. We are making smarter decisions together than ever before and creating a healthy business for the next generation of business owners and consumers alike.

All right. So now onto Dunkin' U.S. As I said earlier, Q1 system-wide sales grew 5.5% and comparable store sales grew 2.4%. This quarter was marked by terrific consumer reception to our new handcrafted espresso beverages, sustained momentum of our national value platform, the Go2s, and exciting on-trend menu innovation.

Menu innovation and consistent national value offers are the pillars for our 2019 plans. Q1 was led by the strongest sales increase in beverages in nearly 3 years. Growth was distributed across multiple product lines. Cold beverages, for example, grew by double digits, led by iced espresso, iced coffee, Cold Brew, frozen beverages and the return of a fan favorite, Girl Scouts flavors.

We are seeing our market leadership in hot and iced drip coffee translate into the incredible success of our espresso relaunch. We've grown the category by 30% and it brought new guests into our restaurants. Most importantly, we've also maintained our operational speed, critical to customers who come to us every day expecting great coffee fast.

High-quality espresso beverages sold at a fair price and served at the speed of Dunkin' is something only we can do. It's why we believe we are the brand that could democratize espresso, and why we're committed to the category for the long term.

We are doubling down on training with restaurant crews as we go into the summer season. We're also promoting new espresso innovation including the recently launched signature latte line. And pairing perfectly with espresso, of course, donuts. On Valentine's Day, we achieved new sales records with more than 15 million donuts and munchkins sold throughout the country. Donuts remain a fundamental part of who we are as a brand.

After the success of our first national value platform, Go2s, in Q2 of 2018, we brought it back with a revised menu that includes 3 of our most popular breakfast items, including 2 bagels for $4. The Go2s platform delivered strong incremental sales and traffic in the quarter. Approximately 75% of Go2s transactions contained a beverage and had an average ticket of greater than $8, supplementing national value were the new premium breakfast sandwiches, including the Power Breakfast Sandwich and the Chipotle Bacon Sandwich.

We're particularly proud with the success of the Power Breakfast Sandwich. It has around 350 calories, 24 grams of protein and had a higher-than-average trial and repurchase rate. And I would say to all of you on the call, if you haven't tried one, you should run and get one today. I think you'll love it. It's a terrific first step for us into the better-for-you category and proves customers are open to more menu options at Dunkin'. And right now, we're building off that success with the recent launch of the egg white power bowl, which has 14 grams of protein and only 250 calories.

From a daypart perspective, Q1 marked our fourth consecutive quarter of positive afternoon sales comps. The PM Break platform featuring $2 offers across our beverage lineup has driven momentum to our afternoon business and trial of our new espresso offerings as well.

All right, now on to our efforts to deliver super convenience to our guests. Last year, we secured a perpetual license to the code that runs our Dunkin' mobile app, enabling us to be faster to market and more flexible with our digital initiatives. It's the backbone to our digital ecosystem and powers initiatives like mobile ordering. On-the-Go ordering saw average weekly sales increase by 25% year-over-year. It made up 4% of total transactions in Q1 and at locations without a drive-thru, it represented more than 7% of transactions. And I believe, particularly interesting to where many of you on this call are located, mobile orders exceed 25% of transactions at high-volume sites in many urban areas.

On-the-Go Mobile ordering is a winning proposition for Dunkin', enabling our guests to get in, get out and get on their way. Nearly half of Perks members use it today, but there is still tremendous opportunity to grow and to own super convenience in a bigger way.

Last week, we launched the pilot test of multi-tender at more than 1,000 Dunkin' restaurants across the country, allowing guests to earn DD Perks points regardless of how they pay. We believe multi-tender is a true unlock to grow our Perks loyalty program beyond 12% of sales as it stands today.

As for our delivery initiative, our test with Grubhub is performing to our expectations, and we have expanded it to additional restaurants across a few U.S. markets. We expect to quickly scale it to a larger market test in the near future. Our efforts to make Dunkin' products accessible, extend beyond our restaurants and into other channels as well.

Retail sales of our consumer-packaged goods grew by more than 5% in the first quarter, and this was according to IRI. Our total portfolio of CPG products across both brands delivered more than $230 million in retail sales in Q1, including $34 million in ready-to-drink sales. When you combine the customer loyalty and beverage credibility of 2 strong brands like Dunkin' and The Coca-Cola Company, you have an unstoppable offering.

This quarter, we expanded distribution of our Shot in the Dark espresso beverage and added a 48-ounce multi-serve Dunkin' iced coffee product. Consumer reaction of these products has been extremely positive. We will continue to leverage this terrific partnership to bring more great quality Dunkin' beverages to the marketplace.

Also in early April, we teamed up with one of our sister brands here, Harpoon, again, to introduce a new limited edition coffee-inspired beer, the Summer Coffee Pale Ale. I know it's early, but it tastes amazing. The success of these Dunkin'-branded products proves that we can stretch the unique aspect of our brand beyond the four walls of our restaurants and even beyond our traditional coffee, bakery and breakfast products. We're proud of our terrific partnerships and how we're driving brand relevance through these alternative channels.

As you know, convenience also means expanding our restaurant footprint across the U.S. During the first quarter, our franchisees added 34 net new units. They've also opened up nearly 200 NextGen restaurants between new-builds and remodels, and we're encouraged by the returns they are generating. We expect that the vast majority of new restaurants built in 2019 will be in the NextGen image, other than a few that were already permitted and zoned in the previous design. We, along with our franchisees, are making solid progress on the NextGen remodel design and expect to release it this summer.

As we stated in this morning's press release, we continue to expect to be at the lower end of 200 to 250 net new units for Dunkin' U.S. in 2019. Our confidence that the Blueprint is working in newer markets is strengthened by the results of the 2017 cohort of new units in the top 10 developing markets. They achieved between 20% to 25% cash on cash returns. And as you've heard me say before, quality over quantity will continue to be a core theme for the foreseeable future.

All right, now on to Baskin. Baskin-Robbins U.S. is in the early stages of a brand transformation as we shift our stores to offer a premium experience to accompany our high-quality products. We are working hand-in-hand with our franchisees on our brand strategy as we position Baskin-Robbins for future growth. In the first quarter, we began to optimize our restaurant base through strategic closures and accelerated restaurant transfers as part of our raising-the-bar initiative. We remain laser-focused on driving brand relevance, the strongest portfolio of ice cream parlors in the market, and of course, franchisee profitability.

Now moving on to international. We continued to stabilize our international business in the first quarter with a focus on driving traffic through seasonal product innovation, value offerings, strategic partnerships and delivery. We held another Global Delivery Summit in April, bringing together our partners, licensees and thought leaders across the industry to share insights and best practices for expanding our delivery strategy. We are exploring opportunities to increase our brand relevance, whether it be through delivery, enhancing the in-store experience as well as growing nontraditional sales channels, all in an effort to meet consumer's growing needs.

In quarter 1, we continued to rollout Dunkin' international's new cafe design, and we've opened more than 250 locations to date between new-builds and remodels across our international markets. The new look is designed to increase beverage sales and enhance the customer experience. And to date, we are pleased with how our guests are responding.

Okay. Let me end it there, and so 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 [4]

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Thanks, Dave. Q1 revenues increased nearly $18 million or approximately 6% compared to the prior year period, due primarily to increases in royalty income and advertising fees as a result of systemized sales growth as well as an increase in rental income. The increase in rental income resulted from the adoption of a new lease accounting standard in the first quarter of 2019, which requires gross presentation of certain lease costs that we pass through to our franchisees.

Operating income and adjusted operating income for the first quarter increased $11.5 million or nearly 13% and $10.6 million or 11%, respectively, from the prior year period, primarily as a result of the increase in royalty income and the reduction of G&A expenses.

Net income and adjusted net income for the first quarter increased by $2.2 million or 4.3% and $1.5 million or 2.8%, respectively, compared to the prior year period, primarily as a result of the increases in operating income and adjusted operating income, respectively, offset by an increase in income tax expense.

The increase in income tax expense was primarily driven by the decrease in excess tax benefits from share-based compensation, which was $1.2 million in the first quarter of 2019 compared to $7.6 million in the first quarter of 2018 as well as the increase in income in the current period.

Diluted EPS and diluted adjusted EPS for the first quarter increased by 10.5% to $0.63 and 8.1% to $0.67 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 shares outstanding. The decrease in shares from the prior year period was due primarily to the repurchase of shares since the beginning of Q1 2018, offset by the exercise of stock options. Excluding the impact of recognized excess tax benefits, both diluted EPS and diluted adjusted EPS would have been lower by approximately $0.01 and $0.09 for the first quarter of 2019 and 2018, respectively.

At the end of the first quarter, we had a debt-to-adjusted-EBITDA ratio of 5.3:1.

During the quarter, we generated approximately $34.1 million in free cash flow. We ended the quarter with $538 million in cash and short-term restricted cash on our balance sheet. Of that $538 million, $158 million represents cash associated with our gift card and marketing fund balances. We used $31 million in cash during the quarter to pay our Q1 cash dividend to our shareholders.

Earlier this week, we completed a $1.7 billion placement of securitized debt, which replaced our 2015 note. Additionally, the placement of $150 million variable funding note facility replaced our existing facility. It was a highly successful deal that enabled us to take advantage of market conditions.

We are pleased to maintain our overall blended fixed interest rate of just under 4% for our $3.1 billion in total debt. This refinancing provides strong fixed rate for many years as well as a greater flexibility to navigate future market environment. For clarity, given the favorable rates that we were able to receive in the refinancing, it's not necessary for us to update our net interest expense guidance or our adjusted EPS target.

We will have a write-off of debt costs related to the 2015 note that remained capitalized on our balance sheet at quarter end. As the deal closed in April, the approximately $13 million of expense will come through our P&L as debt extinguishment in the second quarter. As a result of the debt extinguishment expense, we now expect GAAP diluted earnings per share of $2.63 to $2.72. We continue to expect diluted adjusted earnings per share of $2.94 to $2.99. In our press release this morning, we reiterated the remainder of our targets regarding our fiscal 2019 performance.

And with that, I'll hand 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 comes from the line of John Glass of Morgan Stanley.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [2]

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John, are you there? Operator, I don't -- we can't hear John. He may be speaking. You want to come back to him and go to Jeff?

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Operator [3]

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Absolutely. And our next question comes from the line of Jeffrey Bernstein of Barclays.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [4]

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Questions related to -- hello?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [5]

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Yes, go ahead. We can hear you, Jeff.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [6]

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Perfect. Two questions related to the franchise portion of the business. One, I'm just wondering if you can -- if there is an update on the current strategic pricing you mentioned? And how that compares to your estimate for your franchisees basket of labor and commodity inflation. I'm just wondering if franchisees are seeing growth in net profit year-on-year, which has been a popular topic in the industry of late. And then I had one follow-up.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [7]

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Yes, Jeff, so the franchisees have had -- we don't disclose, but they've had a good quarter from an EBITDA standpoint. In terms of pricing -- strategic pricing, we're above in line with other quarters, but the big -- transaction's still negative, but the big piece for us was solid attachment from Go2s and a really good mix from some of the premium products that we put into the marketplace. So things like the Power Breakfast Sandwich, the Chipotle Sandwich. We had really good attachment on that. But certainly, inflation and wage inflation is a concern for our franchisees, and we're monitoring that, but we're not trying to get the price weather out of whack here and we don't see it yet.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [8]

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Is there a blended basket of what you'd estimate labor inflation to be or food inflation to be for the franchisee?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [9]

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No, we don't have. We don't share that, yes.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [10]

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Okay. And my other question was just on the franchise relations. Dave, you mentioned collaboration with franchisees as your #1 asset. That would seem an anomaly in QSR lately with the outsized cost pressures and everyone talking about franchisee frustration. I was wondering if you could talk qualitatively about that relationship with the franchisees and maybe where we are today versus several years ago?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [11]

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Yes, Jeff, I'm going to kick it over to Scott here, Scott Murphy.

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Scott Murphy, Dunkin' Brands Group, Inc. - Senior VP & COO of Dunkin' U.S. [12]

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Yes. Thanks, Jeff. I'd say, it really is one of our #1 assets because you think about the collaboration we do with our franchisees, we're meeting with them on a regular basis and they actually help us get better at our business. And a good example of that is our NextGen concept, which we've been working very closely with them over the last 6 months and they've really helped us fine-tune the operational pieces behind the counter, the sequencing of the remodels, the location of the equipment, a lot of those different pieces because they're out in the restaurants every day, so the collaboration that I think we have with them is almost unprecedented in the industry, but I think it helps make us better.

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Operator [13]

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Our next question comes from the line of Will Slabaugh of Stephens.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [14]

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I had a question on Dunkin' U.S. and the acceleration in the first quarter, in particular. How heavily should we think about that being influenced by espresso versus cold or other beverages? And as it relates to espresso, it was obviously good to hear you speak about the improved adoption. I'm just trying to make sure we were clear on why you think that's occurring. Is it more about the messaging you began in 4Q just simply taking a few months to resonate? And now, it's inducing some trial? Or did you do something different to drive that trial in the first quarter?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [15]

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Yes, thanks, Will, for the question. Look, what you're going to continue to hear from us is we're in the early stages of the Blueprint, and we've got ways to go here, but we like what we're seeing, how the consumers responded. We think we're delivering a better experience here in Q1, and we are competing better than we have in the past. I think -- just taking a step back, I think we made some smart investments in 2018 that's responding with the consumer and espresso being one of the biggest of those. So in Q4, that was one of the biggest undertakings we have ever gone after was the espresso install, and we needed those new machines to get a better extraction out of the beans, so we needed to deliver better quality and also we needed to make sure that we had the culture and didn't sacrifice any speed. So the offer to the consumer has responded -- they've responded very well to it. We haven't done anything different than in Q4 in terms of a trial offer when we first came out of the box.

But what I would tell you is we had it in the afternoon 2-to-6 promotion, so it drove a lot of trial in the afternoon. And as you probably know, espresso skews younger and skews more as an afternoon occasion. And so we liked how that responded, but it also had really good balance across the morning as well as the afternoon. And now, when you couple that with the signature lattes, and we do really well with those customers that are flavor fanatics. So when you bring in things like Blueberry Crisp lattes, Caramel Mocha, again, it's just layers on top of that. So we're very pleased it's going to be a long-term build for us. I think it complements what we do extremely well, which is drip coffee and iced coffee, and we're seeing all those credentials in ice translate into great uptake on iced espresso as well. So that would be the overall narrative, Will, on that.

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Operator [16]

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And our next question is from the line of John Glass.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [17]

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Can you hear me this time?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [18]

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Yes, John. You're good.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [19]

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Great. First, just on the balance of -- and I know you don't disclose traffic, but just directionally, it sounded like afternoon was positive. Did I interpret that correctly? And if it was positive, what is going on in the morning? Is traffic trends are at least improving as you go through this process in the Blueprint? Or can you give any sort of sense of what's moving or directionally what's moving in those 2 dayparts, please?

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Tony Weisman, Dunkin' Brands Group, Inc. - Senior VP & CMO of Dunkin' Donuts U.S. [20]

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Yes, it's Tony. I would say that we're seeing a consistent lift across both dayparts. We're pleased directionally with where traffic is going. Again, in the morning, responding well to our Go2s offer, which we came back with, enhanced with the 2-for-$4 bagel. And then in the afternoon with the consistent 2-to-6 $2 offer for the first 2/3 of the quarter, that was on espresso. And so I think both of those working together are consistently driving the kind of traffic trend that we're very, very pleased about. As we've said, the goal is consistent messaging. We know value is important to consumers, so look for that going forward and we feel optimistic about where the trends are heading.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [21]

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Yes. And John, it's less of a, we think the morning as a negative, it's more that when you have a compelling value offer in the afternoon, the 2-to-6 $2 deal and you pair that with a new lineup like espresso, we feel really good about how that competed in the marketplace. So yes to your question. Do we feel good about the afternoon? Absolutely. Do we have ways to go? Certainly. Traffic remains our #1 focused area for the Blueprint, and it will continue to be so this year and going forward.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [22]

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And Kate, just a follow-up, you didn't change your operating profit growth targets for the year, but you exceeded them handily in the first quarter. Is there any -- other than conservatism, is there any reason we should think about the first quarter differently from a -- I don't know, something that drove that performance that you don't expect to repeat?

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Katherine D. Jaspon, Dunkin' Brands Group, Inc. - CFO [23]

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No, I mean, as you know, our G&A is sort of bumpy, so I wouldn't read too much into that. And then just from a revenue performance expectation, this was obviously our easiest quarter to roll prior year comp. So none of our expectations have changed for the year, and there is no reason to read into this quarter any differently.

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Operator [24]

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Our next question comes from the line of John Ivankoe of JPMorgan.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [25]

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First, a follow-up on the traffic question. Obviously, listening to a lot of your qualitative comments around the dayparts and also best beverage sales in a number of years and still benefiting year-over-year from national value. I mean one would almost assume hearing those comments that traffic would be positive in this quarter, but I think it still remains negative. So I just wanted to understand a little bit more as to from your perspective, why that's happening? And specifically talk about drive-thru times and drive-thru execution as an opportunity. And if you've gotten that in a place just from an overall throughput capability perspective you have to execute on the additional customers when they come back.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [26]

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Yes. So John, I mean, this is an obvious, but the consumer has more choices in the marketplace than they ever had before. It's highly competitive. It's still a fight for share in the marketplace. Again, I think we're competing better than we ever have before. I think some of the investments we made last year resonate with the consumer, and we're seeing momentum there. And look, on the -- in terms of what we saw around traffic is better than what we've had in several years. So it's a good story, but nobody is waving the victory flag on it until we get that back to positive.

And so we like how we're good getting good attachment with the value offers, and we like the uptake on some of the premium products. So Power Breakfast Sandwich and the better-for-you lineup has really resonated with that consumer, who is looking for healthy options on a budget. And so we like how we're positioning ourselves in the marketplace today, but we know this is a long-term plan for us, and we're going to stay on it. But it's tremendous progress on traffic, but certainly, we've got ways to go.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [27]

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And could you comment on drive-thru throughput, drive-thru execution? I mean, is that from your perspective one of the gating factors as to why that traffic hasn't picked up and what opportunities that you have to improve?

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Scott Murphy, Dunkin' Brands Group, Inc. - Senior VP & COO of Dunkin' U.S. [28]

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Yes, John, it's Scott. It's a huge focus for us, the drive-thru execution in the restaurants. I'm happy to report, we haven't seen any material impact as the espresso category has grown so significantly. We've been able to maintain our drive-thru speeds, which we're happy with, but we know there is still more opportunity. So the things we're doing like menu simplification last year, the installation of the label printer, the enhancement of the app and the On-the-Go is all about that efficiency and throughput in the restaurant. And we've got plans to see, hopefully, some even bigger improvements throughout the next year.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [29]

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Okay. And the next question, if I can have one. In terms of the NextGen prototype, which, I think, you're going to have available for a remodel package this summer. Specifically, what are you guys looking for? I mean, I guess it's -- what are the final pieces of that puzzle that you're trying to get in the place? Is it a functionality perspective? Is it the esthetics? Is it the cost? I mean, what, at this point, I mean, I guess, is the piece that you're trying to get figured out before it's shown to the franchisees?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [30]

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Yes. So the first thing I'd say is we -- as my earlier comment, we're collaborating with the franchisees. So it's not a big unveil to them later in the summer when we release. We're working with them and they've really helped us on the aesthetics, on the layout, on the cost and the value engineering, the operational flexibility. The last piece that we're working and working with them on is the actual sequencing of the remodels because we've got a lot of remodels to do. And in order to sort of plan them out strategically, prioritize them within franchisee networks, schedule the contractors, we're really working on that last component to make sure we roll this thing out seamlessly and thoughtfully, so we don't impact the business.

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Operator [31]

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The next question comes from the line of Andrew Charles of Cowen.

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - Director [32]

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One clarification and then my real question. Last quarter, you caught up with the espresso mix of sales increase from 6% to 8% of sales. What did you guys see in the first quarter? And then my other question was just, Dave, given the increased focus on the drive-thru in recent years and how this really inspires more portable menu innovation, can you reconcile this with the breakfast bowls that perhaps focuses on a different need state for the consumer? And in test markets, is this a factor?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [33]

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Yes. Thanks, Andrew. To your first question, we still stayed with the basic offering on espresso of a cappuccino, a latte, a macchiato and americano. And so I said in my script here, my opening remarks, we've continued to see a 30% increase on that espresso lineup. So we're very pleased with that. Now as we've gotten into Q2, we like what we're seeing when you layer in what we do so well with that consumer that we call the flavor fanatics, who loves -- comes to Dunkin' and we own that segment of the business. So the Blueberry Crisp, the caramel, the mocha, all of that we think is just another added layer on to that. So we like how that's performing and how that's accelerated out of the quarter in Q1.

In terms of the bowls and really, Andrew, it's under that header of better-for-you. We think we've tapped into a consumer who is looking for healthier alternatives on a budget. And we think we're the place to deliver that because those items pair well with our great beverages. And so our first foray into that was the Power Breakfast Sandwich, about 350 calories, north of 20 grams on protein and whole grains. And it surpassed our expectations in how it performed in the test market, so we like that. And now, Tony and the team have introduced bowls. We think this is a platform that we want to continue to build on. It's affordable. The egg white bowl is 250 calories with a nice healthy chunk of protein in there as well. So we think we've tapped into a certain type of consumer. But for us, it's all about giving that great choice, and we're going to continue to be a fun brand with our donuts and nobody does Valentine's Day and these events better than us. And the customers responded to our great Go2s offering, but we think this better-for-you lineup is a place where we can play as well.

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Operator [34]

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Our next question is from the line of Nicole Miller of Piper Jaffray.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [35]

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I was wondering if you could share us any commentary you have around guest satisfaction scores, anything that would be notable in terms of changes? Also maybe a.m. versus p.m., if there is anything to say on dayparts? And then, which metric is the best leading indicator for sales performance?

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Scott Murphy, Dunkin' Brands Group, Inc. - Senior VP & COO of Dunkin' U.S. [36]

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Yes, this is Scott. I'll take that. So we do track a lot of data from the guest experience because it's one of the key things we obviously focus out there in the field. Some of the improvements we've seen over the last 6 months have been around accuracy and speed based on the guests. And I think that's a direct result of our singular focus on espresso, our installation of the label printers and our enhancement on the mobile app. So I think we're getting faster and we're getting more accurate, which -- those are the 2 biggest drivers on guest satisfaction.

And then the other thing we look at is the Net Promoter Score, which the way we think about it is the top 2 box minus the bottom 2 box. And we've actually seen a nice uptick over the last 2.5 months in that -- on that metric. So I think all these things are moving in the right direction for us. They're small movements, but they're movements in the right direction, and we're going to keep pushing on it through simplification and other things with training in the restaurants.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [37]

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And...

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [38]

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Any commentary on value?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [39]

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On value?

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [40]

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Yes, in terms of guest satisfaction scores. I would think that might a leading indicator.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [41]

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Yes, go ahead, Tony.

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Tony Weisman, Dunkin' Brands Group, Inc. - Senior VP & CMO of Dunkin' Donuts U.S. [42]

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No, I would say that we're seeing very high marks on our guest satisfaction surveys as well as our regular intercepts and talking to consumers and asking crew. I think consumers are responding very well to value because it's persistent, it's consistent. There is variety depending on the type of products you like, the size of the sandwich, the size of your appetite. And so what we're hearing consistently is they're delighted with the offering and the variety and they're delighted with the consistency and the fact that it's -- they know it's going to be there every day.

So those are some of the indicators that we're watching. I would also add that we pay very careful attention to social media where overall conversations are increasing substantially and considerably more positive, particularly around the espresso lineup. A lot of delight among consumers around what we've offered and the fact that we are in that game, so we track that as well.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [43]

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And Nicole, your -- our overall thesis on and theme for Dunkin' is going to be -- look, we don't have to be the lowest price in the market, you just have to be a fair competitive price in the market. And when you match that with our great Dunkin' quality like we have with espresso lineup now or even something that maybe you didn't pick up on when you introduced Chocolate Cherry Cold Brew at a $2 price point in the afternoon. When you have those types of quality products that the general fast-food industry and C-stores can't deliver at the speed of Dunkin', and that's always going to be critical, is "at the speed of Dunkin'". When you do that, we think we're a pretty tough act to beat, but make no mistake, we are laser-focused on traffic and turning that around.

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Operator [44]

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Our next question is from the line of David Tarantino of Baird.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst [45]

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Just a couple questions on the comp trends and a few of those drivers. So I guess, the first part of the question is, if you were to sort of rank order the reasons why comps got better in Q1 versus what you saw in Q4 with respect to some of the things you called out, Go2s, espresso, et cetera, how would you sort of rank order the importance of those drivers in Q1 relative to what you saw in Q4?

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [46]

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Yes. Thanks, David. Yes. The way I would say it and very consistent with what I -- my prepared remarks were, it was espresso and value and coupling that with better execution in the marketplace at the restaurant level, so a lot of what Scott talked about. So when you bring the innovation that Tony and his team have been working on, and look, we've quietly made some -- I think some smart investments behind the scenes on speed and the restaurants with some new technology with the label printers, et cetera. We've been very vigilant on training. And look, I know Q4 coming out of that, I'll say the first half of my sentence, we didn't look as bad. We weren't as bad as what you guys thought we were in Q4.

We saw what we were doing, which was very smart, very methodical, delivered sequencing. We intentionally paused on the marketing calendar and some of the activities to make sure that we have to train in the installs. We worked with our franchisees. So going forward, what you're going to get out of this team is we're going to drive the business in a responsible way, but we're not going to manage to a quarter. And -- but clearly in this quarter, it was espresso, it was great reception of value. Power Breakfast Sandwich, sort of a silent hero that we were interested about. But when you do all of that with great execution, I think we're just delivering a better customer experience in the marketplace today.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst [47]

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Great. That makes sense. And then my follow-up is on the Go2s platform specifically. It seems that was a big part of the story in Q1. And I was wondering your thoughts on whether there is sort of a newness element to that, that drives maybe a honeymoon period that fades? Or I guess, maybe a question for Tony, how do you keep the excitement around that platform as you move further into the year over the next few quarters?

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Tony Weisman, Dunkin' Brands Group, Inc. - Senior VP & CMO of Dunkin' Donuts U.S. [48]

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Thanks, David. I think there's a couple ways we've done it. Number one, we did change the lineup, as you know, in Q1, swapping out the 2-for-$3 English muffin with the 2-for-$4 bagel, which we saw a terrific consumer response to. We have a great bagel product. 2-for-$4 with cream cheese spread is a great value. As Dave mentioned earlier, seeing 75% attachment to that drives good basket, but also customers feel like this is a really good value, a very hearty breakfast and the variety across the line really does satisfy a broad swath of customers. In order to keep it fresh, so one thing is we made a tweak to the middle of the lineup.

The second is we did introduce a new advertising campaign in Q1 with our retro look of the '70s. The icons of the Buddy Cops and the variety show. And we saw a nice spike in consumer awareness and purchase intent around that and look for us to continue to refresh the messaging around it. When you have something that's in the market as long as this has been, we look for ways to spike the messaging to keep the overall awareness and purchase intent high. So that will be our plan going forward.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [49]

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Yes, and David, value is going to -- with the franchisees, it's going to be a key pillar for us in 2019 and going forward. But while we feel great about this, you know our industry is a series of punches and counterpunches by competitors, we'll make sure that we stay nimble and adjust to market conditions, but we like how the consumer has responded. As Tony often says, sometimes we get bored of things internally more before our customers do. And so we like how the customers responded to some of the tweaks and specifically the bagels, which we really haven't talked about in a while. So there is a -- there is ways that we can bring core products and make them feel fresh and new again. And so that's what we've done with this lineup. And the creative coming up is terrific, so look for that.

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Operator [50]

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

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [51]

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Do you think weather was a positive or negative in the quarter? And then just a bigger picture question, Dave, I think you talked about in response to someone else's question, competition currently being as tough as it's ever been, but I know you've slowed store growth, Starbucks has slowed store growth, McDonald's is shrinking units. How much of the improvements in comps that you're seeing is due to lower capacity growth in the category? And how do you measure cannibalization from new stores? And has that changed over the past 18 to 24 months?

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Katherine D. Jaspon, Dunkin' Brands Group, Inc. - CFO [52]

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Greg, this is Kate. On your weather question, weather was favorable for us this quarter, but it was slightly favorable for us, so not a large factor in the comps for the quarter.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [53]

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Yes. And on the development question, yes, we've slowed and you've heard my lineup -- line of quality over quantity, it's going to continue to be that. But we're still -- we're probably 1, 2 or 3 top developers in this space. 90% of that is going to be outside the core, so that's a big nod to that quality over quantity. And look, the core is going to be a remodel strategy. And that's why Scott is so vigilant on making sure we get that right. I wouldn't say that's a big piece of this. What we're looking for is just good balance, and I think you see the brilliance of the model that when we have balance across same-store sales, across development, across channel, the model generates a healthy return and good earnings.

And so that's really what we're looking for is that nice balance. And so we feel good. We just had a key developer form with some of our very top developers in our space. And we're keeping a -- they're confident about where we're headed. And so we're seeing nice growth in comp store sales, not only in the core but outside the core. So it's a long-term build outside the core. Clearly, we're known and brand awareness is much higher, but we like how we're performing in some of those other top 10 developing markets. And again, that's showing up in that cash-on-cash return number because the numerator is looking good.

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Operator [54]

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Our next question comes from the line of Brian Bittner of Oppenheimer & Co.

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Brian John Bittner, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [55]

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Digital and loyalty appear to be 2 big long-term opportunities for you guys to improve as a mix of your business. And the question is just more fundamentally as it relates to your loyalty program. How much better do your sales trend from loyalty customer group versus nonloyalty customer group? And where do you think loyalty can climb to from a mix perspective over the couple years?

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Tony Weisman, Dunkin' Brands Group, Inc. - Senior VP & CMO of Dunkin' Donuts U.S. [56]

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Great question. Thank you. I mean I think it was, you would -- as you would expect, loyalty consumers are -- do spend more and are more frequent visitors. But in general, what we're pleased to see is that our overall Perks program continues to make important growth. We -- as we mentioned to you, we celebrated our 10 millionth member of the program in January on our fifth anniversary. We're now over 10.5 million members. So we consistently see that number grow as more and more consumers become aware of the benefits of joining the program. And we're doing all kinds of things to give them reasons to be in the program. Of course, we've got the On-the-Go Mobile ordering, which a significant majority of Perks customers use and which has got a very high stickiness. Once customers begin to use On-the-Go Mobile order, they recognize how it helps them get in, get out and get on their way. That's up to 4% of our transactions right now. And we're continuing to look for ways to let customers participate in the Perks program as well as different ways to pay.

As we've mentioned, we have a multi-tender program in test right now, which allows our Perks members to pay any way they want. We think that will continue to be a driver for and unlock for more and more people to come into the program because choosing the way you pay is an important variable for members who may have wanted to join the program, but previously couldn't. In addition, as you would expect, a significant way that we are unlocking the whole program is just making the app experience consistently easier, lighter and more frictionless.

So we've made a number of improvements to the app experience in the first quarter, making it even faster to get in, to order and get out. And even easier to track where you are with your Perks points, even easier to deploy them for redemption if you want and look for us to continue to make those kinds of improvements. So in general, we feel good about how Perks members respond. We feel good about the ways in which we're letting more people become Perks members and we feel good about the ease in with which we're letting them participate in On-the-Go.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [57]

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Yes. And Brian, if I was to hook on to that, just from where I sit, again, going back to a little bit of the theme that, I think, we made some good investments last year that don't always show up on the radar, but one was what we talked about in terms of bringing the license in-house, good stuff by Tony and Jack, our CIO; and Stephanie, our new Head of Digital giving us more flexibility and more nimbleness. I see the consumer and see the -- how they're responding to the better skins that we have on the app, making it easier. And then as Tony said, we've significantly reduced the number of steps on ordering on On-the-Go and Mobile order and pay and the one click enrollment has been great as well.

So all of that, when you take that, coupled with -- we're not just shooting in the dark here, but when we look at the espresso customer versus the drip coffee customer, espresso customer skews younger and has a higher adoption to digital than the drip coffee user does. And so again, this is one that we're monitoring very closely, but we think we've tapped into a much more savvy digital consumer than what we had before and that was all part of getting into that espresso lineup, skewing younger, skewing more digital and then all the qualitative aspects that Tony talked about. So more to come on this.

We think this is a great long-term play. We always felt like we had one of the very best apps in the marketplace, but the name of the game is one-to-one marketing and being able to speak to that consumer and giving them value on what they really want as opposed to just a blanketed open offering, so we're getting smarter in that area.

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Operator [58]

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Our next question is coming from the line of Andrew Strelzik of BMO Capital Markets.

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Andrew Strelzik, BMO Capital Markets Equity Research - Restaurants Analyst [59]

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My question is on simplification and what that might look like incrementally going forward. Specifically, you mentioned innovation being a big focus this year. So I'm wondering as you move forward, does another round of menu simplification makes sense at some point, presumably preference will migrate towards those newer items. So does that represent an opportunity at some point to help out the margins again and maybe keep the execution tight?

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Katherine D. Jaspon, Dunkin' Brands Group, Inc. - CFO [60]

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Great question. This is Kate. I'll take the first part and then I'll turn it over to Scott on the latter half of your question. So from this quarter's impact from menu simplification, we've actually now completely rolled over menu simplification, so there was a very, very small impact in the quarter, but we've rolled over that. And then as far as whether we would do menu simplification again, I'm going to turn that over to Scott Murphy.

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Scott Murphy, Dunkin' Brands Group, Inc. - Senior VP & COO of Dunkin' U.S. [61]

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Yes, actually I -- so simplification is sort of a way of life for us and it's not necessarily just menu simplification. What we're working on now is also restaurant simplification. So we're looking at all the procedures and processes that happen back of house and trying to take seconds and minutes out of every day and every week to try to improve the labor piece and try and make it a better place for employees to work as well. So it'll continue a mantra for us. We've got a new Vice President of Restaurant Experience that's laser-focused on improving that piece of the restaurant.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [62]

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Yes. And Andrew, just one other nugget on there that I give Scott and Tony and our new head of op systems is they've got a complexity score that we've come up with internally that they're taking the marketing calendar through. So not just looking at the marketing calendar horizontally, but making sure they look at it vertically because we don't want to -- shame on me, if I get us in a situation where we have to do another big culling like we did in Q1 of last year. So…

Okay, operator, I think we're tapped out. I don't see anybody else in the queue.

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Operator [63]

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The Q&A has concluded.

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David L. Hoffmann, Dunkin' Brands Group, Inc. - CEO & Director [64]

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All right. Look, for those of you on the call, thank you very much. We really appreciate you being on and covering us and the questions, very thoughtful. And again, I know it's early seasons and you got a lot of things, a lot of demands on your time, but we appreciate you being on. We're pleased -- as you heard from us, we are pleased with the progress we've made in Q1 and are even more excited about our future here.

Last year, we took some big but carefully calculated risks to set our business up for success, you've heard me say this before, menu simplification, new advertising agencies, re-branding, national value, again, securing the code to our app, espresso, et cetera. And while we are still very much in the early innings and early stages, we are seeing the progress and more importantly, we are seeing the results of the Blueprint for Growth.

Our messages are resonating with consumers, our investments are working for our franchisees. Our system is aligned and growing together. We are laser-focused on the long term and not distracted by the shiny objects along the way. With this team and our world-class franchisees and great suppliers, we believe we have what it takes to succeed. We're proud with how we started this year, but we're not losing sight of creating sustainable value for our customers, franchisees and shareholders in the years ahead. So again, thanks for the time everyone, and we'll see you in the market. Take care.

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Operator [65]

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Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.