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Executives

Nigel Travis - Chief Executive Officer and Director

Paul C. Carbone - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Dunkin' Brands (DNKN) J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Access Forum March 8, 2013 10:30 AM ET

John W. Ivankoe - JP Morgan Chase & Co, Research Division

John Ivankoe from JPMorgan, the restaurant analyst here, and I'm very happy to have Dunkin' Brands, which is one of my favorite corporations, especially as they chose us to lead their IPO about 2 years ago, which has been a very successful transaction, I mean, really, for all investors and constituents involved.

The company has sent Nigel Travis, who is their Chief Executive Officer, who's done an absolutely terrific job of focusing on franchise unit level returns in growing the business, I mean, really beyond anyone's expectations in the relatively short time he's been here; and Paul Carbone, he was the company's Chief Financial Officer; Stacey Caravella who heads IR is also here and I do look forward to an update from Nigel and Paul. Thank you.

Nigel Travis

John -- thanks, John, for that nice introduction. And we're here in Vegas with -- you did predict a fairly empty room at this time in the morning, but we've got hundreds on the webcast. So good morning, everyone. And just a few words of introduction. I won't make it too long. The first thing I'll say is, the IPO, amazingly, is less than 2 years ago. It seems a long time. We're obviously pleased that our stock price has more than doubled in that time. So that's good news. We think our model -- and you've touched on this as being demonstrated to be very strong. We love the asset-like, franchise-friendly focus on franchise economics. We will continue that. I'm absolutely obsessed with that. We are also pleased with the way the business is progressing.

Last year, we opened over 660 net new stores globally. The U.S. numbers, I think, were very good. We're very focused on comps. In fact, for those who don't really know it, my nickname is comps, comps, comps because I'm so obsessed with it. And we feel good about hitting our goals for this year, which we outlined as being 3% to 4% for Dunkin', and I'll focus on that because that's what most people are really interested in, Dunkin' U.S. And the way I described -- just giving a quick update, we feel really good about our business. We're making progress. We are going against the quarter last year, where we had exceptionally good weather for our business. So we always said this quarter was going to be a challenge. As I sit here in Vegas, where the weather is very nice, I'm told back in Boston, we got yet another storm, with 10 inches of snow. It's no secret that's not good for our business, and we will continue to fight. But when I look at yesterday's numbers, everywhere where we had bad weather, we struggled. And everywhere we had normal weather, we did better than expected. So that, I think, sums up our position that there's a lot of factors around, but the biggest factor is weather. I think all the things like the payroll tax holiday, which we lobbied to keep but didn't happen. The fact that the income tax refunds didn't happen on time, et cetera, all the factors that people talk about, I think, is something that -- it's probably a small issue, but not a big issue for us because we're about value. And as we've demonstrated during '08 and '09, people still come to Dunkin' Donuts, even when times are tough, because of our value positioning.

To conclude my introduction, and I'm showing now here you got some very detailed questions, we feel very good about the rest of the year. There's someone on CNBC yesterday morning and talked about our second half being abnormally strong. I actually -- perhaps not quite that far on the bullish that I feel good about the second half. I think about this morning's employment numbers is an indication that things are going in the right direction. I'm very encouraged that the President is reaching out to Republicans, which, I think, is at last a good move in Washington. So I think the second half could be better than we all expect. I'll stop there.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

From your lips to God's ears, as they say. So we will hope to -- hope for that. I guess, and obviously, there's a lot of interesting comments in there, so I just want to follow up directly. Winter -- you mentioned weather, winter 2011 versus 2013. I think there is 150 basis points of benefit in last year's number. Like, where do you think this winter's shaping out, I mean, in terms of where we know right now?

Nigel Travis

Well, we have lots of people who do detailed weather forecast, because it's important. And by the way, it's particularly important to the Baskin business because I've yet to find a way of selling an ice cream when it's snowing. But I think I would say that this is probably -- we haven't had the huge depths of snow that we had 2 years ago in the Northeast, but we've had more regular storms. It seems that we've have a storm every week. So I'd say it's probably similar to 2011 and I've never worked it out but I'd say that 150 basis points probably goes back the other way. Paul?

Paul C. Carbone

Yes, I think you're right. So in 2011, if you remember, it was a snowy first quarter for 6 weeks. So a lot of storms through Feb week 2. Last year, there were no storms, and then this year, we're not seeing the big storms. But we got -- as Nigel mentioned, we got a storm this weekend right now in Boston. So smaller storms more often.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

I mean, you -- where -- at least, do you kind of sozzle [ph] the impact of the payroll taxes, the shock that the consumer may have felt. I mean, did you at least see volatility in the business around payroll tax? I mean, we saw the casual dining numbers, much of the QSR numbers. I mean, for many operators, there's at least 3 weeks there were well below trend.

Nigel Travis

The answer is no, we didn't. And we looked for it because everyone was talking about this cliff that suddenly happened on the 15th of January. We didn't see it, and the only thing that's affected this quarter is weather. I mean, and then someone wrote somewhere this morning that weather is -- that's right, it was Seeking Alpha talking about McDonald's, and they said it's kind of a miserable excuse, but it's probably true. And none of us like talking about weather, but that's the only thing that really does affect our business.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

But you're obviously, I mean listen to me, it's -- there are going to be good years and bad years regarding that. So taking a step back, I mean, you've obviously talked about what is a good underlying trend to x weather, so let's talk about those factors are that are allowing you to outperform the industry at this point. I mean, the first quarter of 2000 -- late 2012 as you proceed 2013, let's talk about the drivers of your business you had...

Nigel Travis

Yes. I think there's several. One is we've got a product pipeline that is exceptional. Last year, we tested 40 new products. We rolled out 30 new products. The best test is you let a group of franchisees into the test kitchen and ask them what they think, and they come back with words like spectacular. And we were talking to some of the meetings yesterday that it's not just breakfast, but it's right through the day, and we've got some holes in our menu that we need to fill. We will fill them. We've got products that are coming through. We've got absolutely robust, brutal testing routine. And lots of products don't make it, and that's good news. But equally good news is we've got lots of products that work well that we need to bring back, and they're fighting for spots on the roster. So I feel good about that. I feel very good about -- and it's probably not talked about enough, and it was interesting listening to the McDonald's presentation yesterday because they talked about it. Operational standards. And when I go back and think about all the challenges that people talked about with McCafé and everything else that happened and people doing free coffee and promotions like that. I think the reason we withstood it is that our operational standards got higher and higher. We measure ours against industry standards. Back in 2010, we were 14 points behind the industry average. We're now, as of the last month 2 points ahead, and based on the last couple of weeks, 4 points ahead. So Paul Twohig and his team has done a spectacular job getting operations right, and by the way, the same thing applies for Baskin U.S. So when I talk about us being an operations-driven company, that's what I mean by that. You add on top of that, John, spectacular marketing and John Costello, in one survey, was voted #6 CMO in America last year out of several thousand. I mean, he's a man of great experience, and that's incredibly helpful. We then talk about our move into digital, and I know Starbucks talk about it a lot and apparently Taco Bell talked about it yesterday. We feel we're very well-positioned, and I'm sure you'll probably talk about that later. So we feel that we've got everything going for us, and probably the biggest thing is we love what we do. I look at the business as getting up and playing a new game every day. It starts 5:30 every morning. By 6:00, we've done those things, we've finished the day. But it's the intensity that we have of looking at the numbers and trying to improve the business every single day.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

So in your 3% to 4% comp, I mean, how do you internally think about price mix traffic? I mean, a lot of the new food attachment presumably has mix, a total employment to your point earlier, and some operational issues that arguably drive traffic, pricing. So, I mean, like how -- what do you think the right composition is in your 3% to 4% comp guidance?

Paul C. Carbone

Yes. So the way we think about that, and the 3% to 4% is the long-term, call it 3.5%, about 50 basis point of that being price, right? So that's ex-any commodity shocks, but just normalized prices, about 50 basis points. That leaves about 300. We split that almost evenly between traffic, right, so just generating more traffic. In our core markets, it's probably more in the afternoon. In our newer markets, it's both morning and afternoon. And then the other 150 basis points is mix, made up of both true or ticket -- I'm sorry, made up of both mix, so a shift to as we build the iced coffee ritual and things of that nature, premium breakfast sandwiches. And then also units per transaction. So all our combos are 2-unit combos. You move them to 3-unit combos with the addition of a hash brown or a banana or something like that, and you're driving ticket that way. So it's kind of how we think of the metrics behind the comps.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

I mean, you mentioned that, Nigel -- so we'll stay with this subject for a second. Operational initiatives that can influence '13 and '14, speed of service consistency, whatever you think are the most important drivers of your business, what's upcoming that we can look forward to?

Nigel Travis

Well, we touched on this, I think, like 3 earnings calls. Again, I think, speed of service is important. And I had a strange thing happen last Friday. I was in Dallas, and my driver said he'd never been in Dunkin' Donuts in 20 years, so I said, "Well, come in." So he went in with me, and at the end I said, "So what do you think?" He said, "Wow. Where did all these sandwiches come from?" So we talked about that and I think one of the things that people don't recognize is that a lot of our success comes down to the Breakfast Sandwiches in particular, though I would also add the Bakery Sandwiches, which is more of an afternoon-driven piece. But the Breakfast Sandwiches have been spectacularly successful. They have nearly the same margins as Beverages, which a lot of people forget. They're getting a bigger and bigger share. So by definition, their comps are better. And one of our franchisees, when I was in Atlanta yesterday morning, I had done some calculations. So this is not an official calculation; this is a franchisee number, that we've got 1,200 different variations of Breakfast Sandwiches, or to use my old company in vain, we're probably more "have it your way" than Burger King is. But I think that is one of the reasons for our success, and I think that will continue to grow. The issue is that we've got to make sure that the sandwich station doesn't become a blockage, because they are so successful. And as we said on our earnings call a few times ago, and we've speeded up the TurboChef oven. They did a nice job on that, with -- brought in lean principles to improve the methodologies behind the sandwiches. We've got a whole series of drive-through initiatives that we're working on. And I think when you use the phone and the mobile app, that's designed to speed up transactions and is. So we're very focused on speed of service, but I think, just going back over the last few years, I remember that when I -- even up to the time of the IPO, people used to say to me, "Dunkin' Donuts is so inconsistent." I don't seem to hear that anymore. On the last time, I personally had a really bad experience was several months ago, which is good. And I think it's the service, it's the interaction which wasn't particularly good with the customer that's been helpful. But just to sum it up, I think we are world class at speed.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And in terms of like your best stores versus your average store versus your lower stores. I mean, you kind of do the racking and stacking and see how much more the average store can improve its speed of service?

Nigel Travis

Well, we rack and stack all those, we do it by quartiles, and it's fascinating how -- if you look at the quartiles, and this is service all together, not just speed of service, they've all gone up, and we've demonstrated that that improves comps as you progress. But I think the big thing is we've got the franchisees interested in it, and they really are working much harder on this than perhaps I thought they would do.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Let's talk about digital loyalty, what have you. I think there's 1 million iPhone apps or, I guess --

Nigel Travis

Downloads.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

-- you were announcing that were downloaded. What percentage of your transactions does it currently encompass?

Nigel Travis

I'm not sure. I know it or even...

Paul C. Carbone

Yes. It's -- I mean, relative to the number of stores and the number of transactions we do, it's a relatively small number right now. Obviously growing very fast since we launched this, but it's still a small number.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And the loyalty aspects really become when?

Nigel Travis

Okay. So this is the way I look at it. So let me just lay out the game plan. We launched the app, which I'd encourage everyone, either on the webcast or in the room to do. We think it's a very good app. We think it stands up with everyone. It's been very well-regarded. It's now even more accessible as of last week because it's in the Passbook of Apple, and we saw, as a result of that in week 1, a 50% increase on the number of downloads over pre-Passbook. So I mean, that's good. We will continue to evolve that. We are, obviously, looking at a loyalty program, and we're refining that, and that will launch sometime later this year. So that is very important because, as I've said many times before, that is the gateway to one-on-one marketing. And just to be clear, what I mean about that is when I worked in Blockbuster, when I worked in Papa John's, we had great opportunities to do one-on-one marketing, because in both businesses we knew everything about our customers: name, address, and that meant that we could do either direct mail or online activities. And the returns on that kind of marketing aren't in the hundreds. They can be in the thousands, as we saw at Papa John's, and I think it's very well-documented there. So one-to-one marketing is very important. I think we're also actively looking at -- going back to your point about service, that we're very interested in the whole area of online ordering, and Baskin-Robbins will have online ordering for cakes this year. And I have this theory that cakes are very similar to pizza, and we all know how successful online ordering was for the pizza industry. And again, that will take you into one-to-one marketing. I think ordering for Dunkin', or mobile ordering for Dunkin' is something we're actively looking at it. I was interested to hear McDonald's is doing the same yesterday. I think this is an area that is great for customers, and you've got several people who have done what seems to be nice jobs in this area. I think Chipotle's a good example. So we're very, very interested in that. I think the whole area of mobile payments is something that we like, and obviously, you can do it on our app today, and that works extremely well. So we're attacking it from all avenues, but what I think's also important is, as an American citizen, we sometimes forget that the rest of the world is ahead of us or most of us, so we're trying to migrate very quickly a lot of these practices through our international business. So it's a global approach on digital, and it's one that, I think, is going to really strengthen our business in the years to come.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Other -- if we look at where other QSR operators have been successful or things like happy hour, for the lack of the better word, between 2:00 and 5:00 to drive the afternoon business, which could be done in just certain markets, it doesn't need to be national. And also, things like 24 hours, extended hours...

Nigel Travis

Yes.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Even if it's on a weekend. Can you talk about how far long you are with discussing some of these? I mean, what have been, in every case, top line driving initiatives for franchisees?

Nigel Travis

Yes. I mean, John Costello, as I said is an outstanding marketeer, and he and Paul Twowig, both of whom were promoted last week, are exceptionally good executives and very considered people with realms of experience. The happy hour is an interesting concept, and we've actually put in, I think, all the coffee break that works for several hours. It started in Chicago, it's going to other markets. And it's actually sort of discounted iced coffee is the way it started, but it obviously has the opportunity to be more than that. And we've used that to bolster our PM traffic, which you don't have to be a genius to realize isn't the strongest part of the Dunkin' Donuts business. So we're very excited about that. What was the other point?

John W. Ivankoe - JP Morgan Chase & Co, Research Division

24 hours.

Nigel Travis

24 hours. It's interesting listening to McDonald's yesterday and their thoughts about that. We have nearly 2,000 stores that are 24-hour. I'd like to have more. I'm obsessed with having more. And I think it's not just 24 hours, I think one of the things that McDonald's did at Christmas time that we also did, we had -- was it 30% more stores out in this Christmas than we had last year?

Paul C. Carbone

Yes.

Nigel Travis

People do want restaurants to be opened, and I always remember, when I first moved to the U.S. back in '89, I was absolutely shocked to find all these restaurants closed on Thanksgiving. It may be antisocial to some people, but I think restaurants have a duty to be opened when customers want them to be. And I remember on Christmas Day this year, touring the Detroit market where I was, and when we were open, we did well, when McDonald's were open, they did well. And I was also impressed that IHOP, and I know they're presenting shortly, probably had the biggest stacked parking lots I saw. So people do want products on those dates.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

A lot of people had even never learned how to cook, and it is important to get out of the house sometimes.

Nigel Travis

Not like you.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

I mean. No, well, we're on a webcast. We'll have [indiscernible] later on. I love cooking, and more so eating, probably. So just -- so looking at your pace of development, I mean, it's been -- you're kind of -- it's been a measured increase year to year to year, but it does seem like a lot of things are coming together in terms of your site design, your hours of operation, your types of products that you're selling, the awareness of the brand. And I mean, it's something that I'm pushed on a lot is why the right number isn't 500 or 600 a year, for example, in the U.S. In other words, are you going slow to go slow to say that you're doing it measured? Or, I mean, are you truly at the right or the maximum, if you will, the optimum pace of your store development for the part of U.S.?

Paul C. Carbone

Yes, it's a good question, so a couple of things. First, at the IPO, we said our long-term guidance was 3% to 5% net development. So we're 18 months into this, and the high-end of our guidance for this year is at 5%. So we got there faster than we expected to all of those factors that you talked about, John, and demand for the brand. There's really a couple of gating items that will stop us from 9% growth. I think you'll see the 5 inch up, right? And at the end of this year, when we have to put out new long-term guidance if we're at 5% net development, probably. So I think you'll see the 5 inch up. But what the gating item is of long-term, 9% growth or 10% growth is really 2: The first is, the management team of having lived through over development, right? So Nigel at Blockbuster, Paul Twohig at Starbucks, I lived through it at Limited Brands, and the movie never ends well. So we all have scars on our back of this overdevelopment. And then secondly is, one of the things -- the first thing that we talk about is what's made us successful today in the West that we weren't in 2008? And it's real estate site selection and franchisee selection. So getting the right real estate is very important, and if you want to open up 800 restaurants, because we've opened up that number before, we believe we would have to relax our criteria for real estate. And again, that's another movie that just doesn't end well. So it's more us, more wanting to do it disciplined, more wanting it to be successful. With that said, do I think we will inch up above 5%? Yes. I don't think we'll be at 8%. I don't think we're an 8% or 9% net unit development company.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And in terms of your Western expansion, I mean, are you taking, I mean, a higher cost real estate strategy that's dependent on the drive-through, for example? In other words, when you do think 3 and 5 years out, are those new stores going to be higher volumes than even your core markets that are much more penetrated and don't have drive-thrus in all cases, for example?

Nigel Travis

No. Never really thought about it in that context, but I would say pretty clearly I would expect that, answering that question. And I think your point about drive-thrus is spot on. It's interesting, though, if you're going to California, I think CKE have said something like they won't be building any more drive-thrus in California because of the difficulty in that state. So whether that's the case in California or not, we're very early into looking at that, as you know. But I think, ideally, we would like to have end cap drive-thrus. We've continued to drive down the cost of doing that. We've continued to see improvement in our economics as a result of both driving down the cost and better performance in the box. But drive-thru's important. 70% of the new stores that we opened last year were drive-thrus, and I would expect a similar number this year. And drive-thru's very important. And one of the things I'd also like to say -- and I said that we had this international conference, a very successful one here in Las Vegas last week. And one of the things I said to the whole group of several hundred people was, "I'd like to see more drive-thrus in international." I remember from my days at Burger King, it started slow. We had like 35% going through the drive-thru and very quickly moved up to 60%, 70%. So I think drive-thrus are very important, and I think the other thing I would say, not just drive-thrus, I'd like to see the PM stronger and I think we're making great strides there.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Yes, a couple of things. How have you encouraged your franchisees, or did you encourage your franchisees to reinvest or commodity windfall or lower commodities in '13 versus '12, specifically relating to coffee? And secondly, when you -- I mean, you have a -- you have some big operators, you have some smaller operators, how are you helping the franchisees deal with health expenses, the ACA Act?

Nigel Travis

Sorry, your first -- I got the second question. Your first question...

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Lower commodities -- excuse me, lower commodities year-over-year.

Nigel Travis

Yes.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

I mean, so have you encouraged the franchisees to do anything specific with that money? It's the first point. And secondly, how, in a fragmented franchise community, how are you dealing with ACA?

Nigel Travis

Yes. Okay. So on the first one, this is really a philosophy. Our philosophy is we need great franchise relationships, which really comes down to a bottom line of great franchise economics. I think we work very hard at that. The whole business is about westward expansion and improving the economics out of our distribution center, it's called it flat pricing. We're put in back office technology. The franchisees are very enthusiastic about that, and we've demonstrated that franchise economics have improved dramatically. We've improved franchise bottom line by 30% since 2008. 50% of every incremental dollar goes to the bottom line. They understand that. So they're very seduced by comps, they're very seduced by the profitable businesses they have. We haven't specifically gone out and say -- said that commodities are going down. But we've continued the same philosophy and encouraging them to invest in the business. Probably the biggest and most successful investment that we ever made was agreeing with our franchisees that we should have 1 POS system, 1 surveillance system. I know it sounds a bit Big Brother, but it's important, and 1 back office, and that's given us the platform where we can move on to this digital things that we talked about previously. I think our franchisees now are very excited about digital menu boards. We're rolling those out. And we've basically said to them that we require digital menu boards in every new store, in every remodeled store. What is amazing is the pickup of people who don't have to do it, and as of yesterday, we'd already had 1,000 people sign up to remodel their stores -- sorry, to remodel their menu boards. I think that shows the whole philosophy is working. If you explain things, you work with your franchisees and listen, they get it, they -- and we've also talked about competition endlessly, and they are very focused on the competition. They understand the business. And one of the things I'm really delighted about is when I came to the business, we used our comps once a week. Our franchisees then saw when we got all our numbers, what we did with it. They're now doing the same thing. So that partnership, I think, has got stronger, and that's why they're investing.

On the Affordable Healthcare Act, I just want to make sure everyone's clear, because the Financial Times quoted me, and then it got edited down, and it was as though I was against the act. Well, the act is here; it's not going to go away. And I think anyone who's fighting it is in a fool's paradise. So the President's made his mind up, the administration's made its mind up, and you could say the people have made their mind up. All we're trying to do is to improve some elements of it. And we're particularly focused on the 30 hours cut off. So we're continuing on -- in Washington 2 weeks time to talk about that. What I would say is our franchisees and us have brought -- got together our model that basically shows that the cost do go up because of the Affordable Health Care Act. But it comes down to some key things like the pickup, who actually signs up for health care, and young people tend to stay on their parents' health care, we found. And we've had to experience, obviously, a lot of stores in Massachusetts that the costs we feel are not as high as some people have said. But because we've got so much work going on in terms of unit economics and the supply chain, we feel that without increasing prices, we can mitigate those costs, well, very easily. Where I think we may have an advantage is other competitors don't have the same opportunity that we do with the supply chain, with improving unit economics. They will increase their prices. Net result, Dunkin' Donuts will have its unit positioning reinforced even more.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Let me ask you something in terms of that competitive environment. A large part of your IPO was, I mean, looking at you, looking at Starbucks, looking at McDonald's, saying, they -- you can't all grow traffic, you can't all grow share. I mean, it has to be coming from somewhere and somebody. Are you sort of like -- are you surprised that you've all been able to do as well as you'd done and I mean, in relatively similar day parts?

Nigel Travis

Well, I'm not surprised because McDonald's and Starbucks are great companies. And I think we're building a great company, so I think...

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Right, right. Is that a long -- is it long-term? I mean, like you're sufficiently differentiated from it. It's not a share battle between the 3 of you, you can all grow? I mean, like how do you think about it in terms of kind of being in the sandbox? I mean, does the sandbox actually expand?

Nigel Travis

Yes, I think it does. I think Starbucks have bought in some new products that, clearly, they believe, and probably rightly, is going to grow the sandbox. I think we've got some new products. And a lot of people write articles comparing us directly with Starbucks. We're very different. And I mean, and I think they would say they're different from us. I mean, if you look at their drip coffee mix, it's completely different from ours. If you look at our espresso mix, it's completely different from theirs. If you look at out breakfast sandwiches, we're very different from them. If you look at the products -- the food products they have in the afternoon, different from us. The fact we both sell coffee is probably the only common thing. But I'm attracted by growing the business in terms of tea, new beverages. And by the way, tea isn't just hot tea, which, as a Brit, I tend to think of, it's also iced tea. And we obviously have a very good resonance with iced products going back to start of our iced coffee. So I think we can all grow, but one point everyone misses when they ask that question is a bit like the pizza category. The pizza category, I always said, was the most -- was the biggest grouping within the food category of having unbranded stores, independents.

Paul C. Carbone

Independents [indiscernible].

Nigel Travis

Amazingly, the coffee and bakery segments' even bigger. So I think that's where we can take share from. We can grow the sandbox, and more and more people seem to be getting into coffee. We all spent a lot of time talking about what's good for you and not good for you. I think most of the research recently is that coffee is okay for you, which is encouraging. So, I think if you've got great companies focused on building, we can all build share.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

At K-Cups, it's -- it may be not as important as a theme as it was a year ago, 2 years ago. But can you talk about what the longer-term strategy is of that, and whether that's a segment that can continue to grow? And secondly, discuss why not sell K-Cups in grocery stores? In west of the Mississippi, for example, where it's not about taking sales outside of existing stores? I certainly understand in the Northeast, New England, but west of the Mississippi, where there is demand for your brand, but not access to the brand.

Nigel Travis

Okay. So, when I look back, K-Cups was an incredibly successful venture for us. It was successful for several reasons: One is we sold a lot of them. And a lot of people were saying a year ago, "You'll never comp against the previous year's comps of 2011," but we did. And the fourth quarter was 30% comps. And I'm expecting comps on top of comps this year as well. So that the first point. The second point is the unexpected consequence of K-Cups was that it boosted our store economics, particularly in our newer markets. So we've got markets that are very under-penetrated, like, let's just take Mississippi, right? I think we have in Mississippi, about 2, 3 stores?

Paul C. Carbone

Yes.

Nigel Travis

So that way I think about it, John, is we sell more K-Cups in the Northeast than anywhere else. But in Mississippi, there's only 3 places you can get Dunkin' Donuts K-Cups. And the mix in some of those stores of K-Cups is very high. Very high, indeed. And that is, as one franchisee described it to me, free money. So we believe we made the correct choice in not going into grocery stores. We've continued to believe that it's unit economics. We've got our reward with more development, as Paul described. We don't think this is the time to change our winning formula. And I think if we did, it would cause a lot of disruption in the system. And so, we're going to stay with it. But the biggest reason is the unit economics because of the scarcity of getting them into those areas. And I think that will be seen as we go further west. What I would like to see, though, is another, to use a young [ph] phrase, another sales layer that we can bring in like K-Cups. And we've got several meetings coming up with our franchisees where we're looking at some interesting ideas, none of which, before you ask the question, I'm willing to talk about. But the franchisees are excited. We have all agreed to keep it kind of quiet, but I think there are some opportunities on the back of K-Cups, because we've demonstrated that we could sell retail products that we could bring in to our stores.

Paul C. Carbone

And John, I would just add, when we've looked at this, it's not commercially feasible to align with the national grocer to say, "You can sell K-Cups in California, right, for the next 2 years. And then once we enter California, you have to take them out of your store." Because we get that question a lot, where you're not, why don't you put them in grocery? And it just -- the distribution chain of national grocery just doesn't make that feasible.

Nigel Travis

I think one more thing I'd add, just to pile on, is if you actually look at the value chain, you've got too many people involved. You've got Green Mountain, you've got Smucker's, you've got the retailer, you've got us, and you'd potentially have to involve the franchisee somehow. I'm not sure it cuts 5 ways.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And speaking of that value chain, I mean, many people have argued that K-Cups, that it moves more towards the manufacturing margin than a licensing margin. And there's a very -- there's a big difference between the 2, obviously, if the -- and for -- to your supplier. I mean, are you at the point, whether just through your volume or the contract or your opportunities, to get these made elsewhere that there could be a substantive margin change in K-Cups sold for the franchisees?

Nigel Travis

I don't think so. I think we can improve it. To say it's substantive may be an overstatement.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Okay.

Nigel Travis

I think what I would say is that we've had an excellent relationship with Green Mountain. I think Larry did a spectacular job there. I think his successor, who's coming, I think, is going to make the company even more consumer-oriented. We feel very good about the change. And I see Green Mountain being an ongoing partner of ours. And we're excited about some of the innovation they have in their pipeline we think that can help us. So I think this is a partnership that knows one of the things that we feel most pleased about.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

In just the couple of minutes that we have left, there's been some discussion, and it was actually -- Burger King is the one probably that's doing it most explicitly now, of being a capital-light company and yet having direct ownership in certain international franchisee groups or joint venture partnerships. I mean, do you have that opportunity? When you think about Dunkin' and Baskin over time, I mean, do you have an opportunity to restructure your international business in some way to make more money from that, especially like we talked about at Jubilant before, just a -- this is a poor example in terms of Dunkin' potentially being very big in that market, and probably working for Baskin as well at some point. But do you have that opportunity to get more money out of the international operations?

Nigel Travis

Yes. No, no, we do. We've had just -- so everyone's level's set, we've had, for a very long time, very successful joint ventures in Korea with both brands, with SBC [ph]. We have a public company that we own a major part of in Japan -- Baskin Japan. I'm on the board of that. Giorgio Minardi, who's coming as our Head of International, is shaking things up quite a lot. He believes in the joint venture concept. A lot of investors, and we do listen to what people say, have said to us, "Why leave money on the table when you can have a share of this?" So in Spain, we saw the opportunity, given the lulls of the Spanish market. But this is a country that has more bars and restaurants than anywhere else in the world. And I, for one, having operated in Spain a lot, they're optimistic that they'll get out of their problems, so we did a joint venture there, as you know. We announced early yesterday morning a new joint venture in Australia. Just to give you the quick history of that, 2 years ago, we took over Australia when our then-master franchisee had financial problems. We took it over. We've done a lot of sorting out. And at the same time, our most successful licensee in the Middle East to manage 6 countries, were looking for new markets. The 2 things came together. Giorgio did a very attractive deal from our point of view. We're very pleased with that. We're going to invest some marketing dollars in the market. We've agreed to open 200 stores in the next 10 years, roughly 50% of which will be company stores. We think that's going to simulate the Australian ice cream market, which happens to be the third best biggest ice cream market in the world after New Zealand and the U.S. So you're obviously -- you're right. I think joint ventures are the way forward. We're talking to some other markets about it, I think it's a way of stimulating more stores. I think it's about us getting involved and helping better economics for our franchisees. And now, I've gone on the record several times, International hasn't been perfect. It's still not perfect, but it's making great strides, particularly on the supply chain.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And does that change your CapEx trajectory over time? And does that change your leverage targets over time? That is the last question.

Paul C. Carbone

Yes. It -- yes, not really. I mean, even in Australia, 100 stores of company-owned over 10 years at $300,000 a piece is $30 million, and we're 20% owner. So that's $6 million from us. Most of that will be out of retained earnings. So, not really. I mean, I don't think we'll do enough to drastically change our CapEx needs. We've said CapEx will be less than 10% of EBITDA, kind of our guide. So none of these will need a ton of CapEx.

Nigel Travis

And actually, we're well be below that 10%.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And I think you're running this year, I think, at 3.9x -- my number is 3.9x debt to next year's EBITDA. I mean, the target is what? I mean...

Paul C. Carbone

So we've said 4.5x to 5x. We ended '12 at, from a credit agreement standpoint, 5.2x, right? When we re-levered back in August, we were at about 4.2x, 4.3x, so we re-levered back up almost a whole turn. So we like that 4.5x to 5.5x range. And we'll delever 0.75 point a year just through growth of EBITDA and some small mandatory debt repayment.

Nigel Travis

And I think I'll just add to that, we're very committed. When we get the opportunity, big or small, to buy back shares and keep working on the substantial dividend we already have.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Excellent. Thank you.

Nigel Travis

Thank you very much.

Paul C. Carbone

Good. Thank you.

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