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Executives

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

Analysts

David Palmer - UBS Investment Bank, Research Division

Dunkin' Brands (DNKN) UBS Global Consumer Conference March 14, 2013 10:30 AM ET

David Palmer - UBS Investment Bank, Research Division

Well, good morning, everybody. I'm David Palmer, UBS Restaurant and Package Food Analyst. We're honored to have a Dunkin' Brands with us here today.

Joining us from the company are Paul Carbone, Chief Financial Officer; and Stacey Caravella, VP of Investor Relations. Thank you to Dunkin' for joining us today.

Paul joined Dunkin' Brands in August 2008 as VP of Financial Planning and Analysis. In June 2012, Paul was named Chief Financial Officer for Dunkin' Brands. In this role, Paul is responsible for the company's finance, investor relations strategy, loss prevention and information technology functions. Prior to joining Dunkin' Brands, Paul served as Senior VP and CFO for Twin Brands. Most importantly, Paul enjoys drinking large black Dunkin' coffee and occasionally a scoop of Baskin-Robbins Jamocha Almond Fudge ice cream.

Welcome, Paul, and thanks for joining us.

Paul C. Carbone

Thanks, David.

David Palmer - UBS Investment Bank, Research Division

Why don't we start with a bit of a state of the union for Dunkin', what opportunities you see, what you're -- what goals there are, and then we'll go from there.

Paul C. Carbone

Yes, so thank you. So we feel really good about the Dunkin' business. And as we look at this year, it's continued to grow Dunkin' U.S. both through comps and net unit developments.

If you look at our guidance, net unit development is close to 5% on the high end, so that was our long-term goal when we went public. So the Dunkin' business is very, very healthy, the Baskin U.S. returning to slow growth. And then international, it's really a tale of a couple of different stories there in the Baskin International business, which is our second largest segment. Very healthy, continuing to grow. And then on Dunkin' International, is really where we're refocusing to kind of turn this business around. We're putting some investments into it, looking at how do we change the supply chain to make it more efficient and optimize it to allow growth into the future.

So we feel good about the business. At some point today, it's going to come up about the weather and in Q1, so certainly the storms in the -- our core markets here in the northeast haven't helped us. But what I'm happy to say is where we don't have weather, both Florida, states like that, or in our core markets when we have no weather, business is very, very good. But certainly, these storms, last Thursday and Friday, getting a couple of feet of snow, certainly doesn't help us as it breaks up people's rhythms in going to the restaurants.

David Palmer - UBS Investment Bank, Research Division

I want to launch right into the digital stuff because I'm fired up about this topic. And I see Starbucks and what they're doing and what they've done. And I also see the background of your management and having dealt with digital strategies in the past, web-based targeted marketing and then the technology enablers that you have going into place. Could you -- I'll turn it over to you on that, tell us about what you're working on and we'll go from there.

Paul C. Carbone

Yes, so if you think about it, this really started back in 2009 when we launched the unified POS. So we have a unified POS in about 100% of our restaurants. I think, we're one of the few franchise models that have that. That's enabled many things in the restaurant from scanners that drive speed of service to back-office, to loss prevention systems.

Then that allowed us to launch the app this past August, so over a million downloads at the end of the year, very successful. And what the app is doing is it's allowing us to use our DD card to pay. It's also allowing us to do location-based offers. So if you're in Boston, you're getting one set of offers. If you're in Miami, you're getting a different set. And if you're in Las Vegas, for instance, you're getting a third set. So that's the app and it has been very successful.

As we look into '13, is when we start thinking about loyalty. Right? So think about loyalty, we're going to launch something probably in the back half of the year. And loyalty, to start with, is going to be focused on 2 parallel paths. The first is payment migration, right? So moving consumers from MasterCard Visa to our Dunkin' card, right? And that does 2 things. One is, it drives franchisee profitability because they're going to reload the Dunkin' card, about $50 each time, and then use the Dunkin' card for those $5 transactions. Right? So you're taking what you're swapping out 5 transaction fees for one. Right? So it's going to drive franchisee profitability. And then, more importantly, we have all the data now. Right? So we know when David is coming in and buying 2 Breakfast Sandwiches and a small coffee, we can get him to now move to a large coffee, and vice versa. If I'm coming in just buying the coffee, we can start sending offers to me on Breakfast Sandwiches. So truly one-to-one marketing. So that's the second piece of loyalty this year, and it's behavior migration. Right? So true one-on-one marketing. How do we have that information, what everyone's doing and try to now change that behavior? So you're right. With Nigel's background in Blockbuster and the pizza business, we had all that data. And certainly, in retail, we're used to having a lot of data on the consumer. In a franchise model or in a QSR, it's a $5 transaction, you've never have that data.

So a lot of opportunity to do this one-on-one marketing. But you know, on -- and in addition to that, one of the things as we work through this model -- and we look at customer acquisition. Right? So certainly the idea, customer acquisition, you pay upfront and then you get an ROI over the lifetime of that customer. And one of the things that we're looking at is how does that work in a franchise model? Right? So my days, when I was at Limited Brands, we would do this all day long and as long as you have a customer acquisition cost in-line, you get the lifetime value of that customer. If you look at a company like Starbucks, it's just $5 if you join their loyalty program. Right? So they could do that because they're company-owned.

If we were to do that, how do we do that? Right? So that $5 on our franchise model of that sale, I'm going to make $0.30. Right? Now if you have to look over the lifetime, but it takes a long time to make back that ROI. So we haven't -- we're working on that now. We will figure this out. We'll figure this out in many different things. And we'll figure out how to get unified POS in a franchise system. So we'll figure out, but it's just those nuances of owning a franchise system versus a company-owned system of different things we have to figure out.

David Palmer - UBS Investment Bank, Research Division

One of -- the Starbucks towards -- as an analog for you is compelling. It feels like even in the latest period where we've seen all of retail, certainly fast food, that slowdown that's happened year-to-date, particularly in February, has been well documented. And it doesn't feel like, perhaps, they are coming off of a year -- of a quarter, the December quarter, it's a huge rewards load period. I can't help but think that they're smoothing out these periods with that help. Do you see that this is something that will cause even less cyclicality or near-term volatility in your results if you get this going?

Paul C. Carbone

I think so. Yes, I think this loyalty piece is important and I think that does help that -- what you do is you're capturing that customer and you're basically increasing the switching cost for it. I mean, that's what loyalty does. It just -- it increases the switching cost. And once you can do that for the consumer, then you certainly peak, you can shave out those troughs.

David Palmer - UBS Investment Bank, Research Division

Putting -- going to the negative side or the worry side, is the fact that coffee price is coming down. It's wonderful for your margins, your franchisees and probably, ultimately, is going to help your expansion opportunities and we can talk about that positive. The negative side is, I worry about the indirect competition from at home coffee particularly with K-Cups getting cheaper. Do you think that -- does that interaction worry you about your own business, particularly your retail side?

Paul C. Carbone

Yes, it doesn't worry us that much because of the way we have approached this. So in the grocery store, and our coffee is a perfect example, with Smucker's, they're raising the price as green coffee costs go up, so they pass through. Right? And what we saw last year is actually volume go down. Right? As we make a royalty offer, that's -- so our revenue was actually flat from Smucker's, but volume went down. As green coffee is coming back down, volume is going back up. So I think that's what you're alluding to. One, we're just getting back to where we were, maybe 1.5 years ago. But more importantly, when green coffee increased, we never took price in our stores. Right? So in 2010, when green coffee spiked, at the beginning of 2011, we took about 2% pricing in our stores, but never on coffee. Right? So this is where we, as a franchisor work with the franchisees and what we talk to them about is the easiest thing to compare is a cup of black coffee against us, McDonald's, Starbucks, Tim Hortons. And we said, let's go to the menu and go to our differentiated breakfast products. Right? So Breakfast Sandwiches, some of our Coolattas, some of our iced coffee, right, but not hot coffee, and let's take pricing there. So you can't compare those. If you want a Big n'Toasted Breakfast Sandwich, you can only get it at Dunkin'. And that's where we took pricing. So the good thing is now, we're not seeing that price compression, now that coffee prices are lower. So we see that and we really see breakfast as this ritualistic -- even back in '08 and '09, the breakfast segment grew. Didn't grow a lot, but it grew. Our worst comps were negative 1.3%. So I think it talks to that ritual of people going to get their cup of coffee.

So it doesn't concern me on the switching of people going at home versus in-store.

David Palmer - UBS Investment Bank, Research Division

Your innovation, can we talk about that a little bit. I know your -- your Breakfast Sandwiches have been a platform that you're increasingly working on. And then you also the LTOs with regard to beverages, can you just talk about what you're doing? What success you're having in terms of your sales layers?

Paul C. Carbone

So couple things, people ask us, "Why do you focus so much on Breakfast Sandwiches if you want to turn to a beverage company?" And for a couple of reasons: One, the Breakfast Sandwich is the differentiated item and it's the stickiness that keeps people coming back, that you can't get in other places. The second is, while beverage is the holy grail for margin, right, Breakfast Sandwiches, and the premium Breakfast Sandwiches that we've launched are right below them. Right, so significantly, above bakery, which is donuts and bagels. So we're actually looking at high-margin products, which are both beverages and bakery sandwiches, our Breakfast Sandwiches. So what I'll say is, the pipeline, I have never seen it deeper. We have a great stable of products, both new. So in January, you saw the Turkey Sausage Breakfast Sandwich, so all new, absolute home run. And then also when you're winning, winning begets winning. So what we do is we take winners and we tweak them a little bit. So 3 years ago, we launched the Waffle Breakfast Sandwich in March of 2010. At the time, it was the best LTO in our history. Today, it doesn't even rank in the top 5 for LTOs. Right? So we have this great winner in March of 2010, we came back in 2011 and we made the waffle blueberry and we made the sausage, maple sausage, and it was a winner. And then we came back the following year, and we took the waffle and we made it maple syrup infused. And it was a winner. So when you're winning, what we're doing is we're taking these products and we're innovating on successful products and bringing them back. So the pipeline is deep, both food and beverage. You saw us put innovation against K-Cups this past fourth quarter. You'll see us do more beverages. We'll come back with a frozen hot chocolate Coolatta in the summertime, that we had 2 years ago. So you'll see us innovate across both food and beverage. And it's really what drives the brand, is this innovation.

David Palmer - UBS Investment Bank, Research Division

You touched on weather before. The fast food industry slowed by 3 or 4 points, January to February. Is that the sort of magnitude, is it really a February weather hit? And that's being nation for the industry, and as you pointed out, you have some regional bias. That sort -- do you think that, that was largely a weather in that sort of magnitude is what happened out there?

Paul C. Carbone

Yes. Here's what I'll tell you on our business and I won't go into the numbers, but, certainly, over -- so last year was a warm first quarter with no storms and what we're seeing this year is storms, roughly almost every week post-January week 2. Right? Mainly in our core markets, New York and Massachusetts and New England.

So again, weather is certainly impacting us. But when we don't have weather -- and this is what we look at. We were on the phone 6:30 this morning, looking at yesterday's results and where we don't have weather, such as a day like yesterday, where it was absolutely gorgeous, business is very strong. So we we're happy with the business.

David Palmer - UBS Investment Bank, Research Division

And recently, your -- that Turkey Sausage Breakfast Sandwich, I think that your comments that I see are -- that was a hit?

Paul C. Carbone

Yes, it was -- and that's one of those great things because it was a great tasting product and it was under 400 calories. Right? So it's hitting both -- hitting a couple of different messages.

David Palmer - UBS Investment Bank, Research Division

What is your comment about the K-Cup market from where you sit? And how is that going?

Paul C. Carbone

Yes. So I think there was some concern as we rolled over the launch. So we launched in September of 2011. We rolled over in '12. Fourth quarter, we posted plus 30 comps in K-Cups. We expect K-Cups to continue to grow. We're not going to post plus 30 comps on the K-Cups, but they will be positive. And K-Cups are like everything in our restaurant. It's about innovation. So we launched -- at the end of the third quarter of last year, Pumpkin. We launched Hot Chocolate and Mocha Peppermint in the fourth quarter. We came out with Caramel in the first quarter. So you'll see LTOs against K-Cups. It's a growing business. We really like it from a few areas. One, we look at it as an incremental occasion so it's not cannibalizing our drip coffee or our wet coffee. Secondly, it's absolute pure profit for the franchisees. So this is a -- it's a $12 sale, 50% margin, no labor, no shrink. I mean, it's just -- it's really gravy for these guys. And then it's driving new store unit economics.

So if you think about it, I have 100 -- I have a 1,000 restaurants here in Massachusetts. Right? I probably sell the most boxes of K-Cups in the state of Massachusetts than any other state, but the least per door. Right? Because we have 1,000 doors. In a place like Alabama, I have 3 stores. I'm not selling a lot of K-Cups in the state of Alabama, but in those 3 doors, I'm selling the most per door. And that's driving unit economics, franchisee profitability. Right? Which is the secret to success of continued development, which is what drives the equity valuation of Dunkin' Brands, because this is a development story. And then that leads to the question that you'll ask me at some point of, "Well, are you ever going to go into channel with K-Cups?" The answer is, not in the short-term, for that exact reason I gave you. It's driving new unit economics. If I could find a way to put K-Cups in grocery stores in states that I am not in, and then once I went into that state, those grocery stores would agree to take them out of their stores, that would be great. It's just not feasible and Kroger is certainly not signing up for a deal like that.

David Palmer - UBS Investment Bank, Research Division

You touched on -- and by the way, as a reminder, we have index cards here in the room. Please do let us know and we'll collect those, be happy to work your questions in. Paul, that's one of the things you talked about was those K-Cups and how that has an asymmetric or outside benefit for some of the frontier markets, and you're doing some other things that are having an outside benefit to the frontier markets and national advertising and the flat supply chain. Could you perhaps talk about those things that are going ultimately drive returns, and hopefully, accelerate your unit growth across the country?

Paul C. Carbone

Yes, so to dimensionalize this, the 2011 cohort in Western emerging markets is probably -- is north of 25% on leveraged cash and cash return. In 2008, it was 5%. Right? So we get the, "Why can you be successful now, when you could not be successful years ago going west?" And there's really 5 things that have led to going from 5% to north of 25%. And I can't tell you what basis points each of these gave us because we did them all in parallel and they were all delivered. But the 5 things are: real estate site selection; national media -- and national media is important. So we're going to open our first restaurant in California in 2015. We've had national media on TV talking about Dunkin' Donuts since 2010. So 5 years before there's an asset in the ground, we've had national media. If you look at that, and you compare that against Las Vegas, we went into last Vegas in 2005 and the first national media was in 2010, all right? So they had it the other way. Right? So they have 5 years of assets in the ground and no national media. And it begs -- it's not a stretch of why the returns were a 5% cash and cash. So the second is national media. The third is a focus on beverage. Right? So we are a beverage company. People ask us, "Are you ever going to bring back Fred the Baker, time to make the donuts?" We like Fred, and we tell them, no, because we're not a donut company, we're a beverage company. So what are you drinking? America runs on Dunkin. You see our advertising focused on beverages.

The third is an operations focus. So we are, obviously, nearly 100% franchise model. And in the past, we were a company that opened restaurants. We have this new management team, as we are a company that acts like we run restaurants. So this morning, in -- at 6:30, Nigel, myself, Paul Twohig and John Costello were on the phone, talking about yesterday's comps by market. Right? And that was a good conversation because comps were pretty good yesterday and I think I can say that. But at that level -- we have 20 company-owned stores. So this isn't 1 day of comps is really not impacting my P&L per se, but that's our mindset of running this business. We run this business like we are operating the stores. And then the fifth thing in that is franchisee selection. Right? So back in 2005, if you showed up with a bag of money, we would sell you a store development agreement to open restaurants. Today, you still need that bag of money, but you need operations background. Right? So you have to have participated in the QSR or retail industry. And we are rigorous against who we're letting into the system. Common, 90% of our development is through existing franchisees. Right? A huge vote of confidence in our systems. These guys are the ones developing because of the cash flow generation of this business.

David Palmer - UBS Investment Bank, Research Division

There's 2 things that fascinate me about the model when I see -- if you look at Dunkin. One is the fact that your incremental margin on new sales is 74% or 73% all the time and you're under -- and your overall margin 47%, say. So you're getting consistent high leverage. And the other thing is your free cash flow conversion of your earnings is near 100%. Right?

When I think about the free cash flow side and it makes we wonder about what you're going to do with that cash and how you're thinking about that or if there's any evolution that you're thinking about using that cash.

Paul C. Carbone

Yes. So when you think about free cash flow, so from a uses of cash, right, we're going to spend less than 10% of EBITDA on CapEx. We spent $22 million last year and our EBITDA was probably in the $335 million range. So de minimis use of capital per se. We're not really out there doing M&A deals. It's just not in our blood. It's not what we do. So what do we do with our free cash flow? We return it to shareholders. And we're going to return it in a couple of ways. We're going to return it through our regular dividend. Right? So we initiated that right after going public last year. We're at a 50% payout ratio. There is a world-renowned restaurant analyst that theorizes we could get to 100%, sitting to my right here. I'm not sure I'm at 100%, but I'm probably -- do see the model going a little bit north of 50%. Right? But we initiated 50%. We actually stated 50% this year for 2013, but we were able to increase the dividend 27% based on our second use of our free cash flow of share buybacks. Right? So we took back a significant amount of shares this past August. And those -- so those are the 2 uses of our cash flow. And then, obviously, the third is minimum debt payments that range in the neighborhood of $20 million to $40 million based on where our leverage is. And then on the leverage side, we're comfortable 4.5 to 5.5 range. And as we get down to 4.5, we'll re-lever the balance sheet. And then we think about taking that money and returning it to shareholders, generally through share buybacks. And I think of those as more of -- like an accelerated share repurchase where I can take out a whole chunk of stock back immediately and get that accretive effect. So that's kind of how we think of uses of cash.

David Palmer - UBS Investment Bank, Research Division

One of the things that we've talked about in the past is what is Dunkin more like? McDonald's and the convenience store in terms of the macros and the trends that tend to affect it or like a Starbucks or something else? That also begets the question of competition and to the competitors of those -- who affects you and who do you see your interaction with? Can you talk about that?

Paul C. Carbone

Yes, so our #1 competitor is McDonald's. Our #2 competitor is gas and convenience stores. Right? So the Wawa, Sheetz, QT. Our #3 is Tim Hortons, where they exist. Right? So Buffalo, Syracuse, Detroit, Columbus, Ohio. And fourth is Starbucks. So we see ourselves pretty different from Starbucks. We ran into Troy a few weeks ago and him and I were talking, and we both think we can win. Right? We don't think we're mutually exclusive. 2% of his business is drip coffee. The majority of my business is drip coffee. Right? So I think we play in 2 different ballparks. But McDonald's is my #1 competitor. And I fight those guys everyday. And people say, "Well, McDonald's is getting more value-oriented, how do you fight that? Do you feel it?" Right? From an outsiders perspective looking in, I see that value, that increase in value more at lunchtime than I do at breakfast. And then I look back and in November of 2008, McDonald's announced in our core markets, right, so our heaviest markets, for 30 days, they were going to sell any size coffee for $1. It's nearly 5 years later, and they're still running that promotion. So while they could always go to free, which I wouldn't want them to do, I've been fighting them on deep value for 5 years in my core markets. I've never lowered the price of my coffee because I just -- it's the bread-and-butter of my franchisees. And we fight them on -- we think we have the best tasting cup of coffee in America. Breakfast Sandwiches, so differentiated products. Speed, so we're world-class at speed. And I think we have a great value. So it is McDonald's as our #1. Gas and convenience are good. Right? So QT, Sheetz, Wawa, even Cumberland Farms. I grew up around here and Cumberland Farms were always dirty convenience stores and they do a nice job now. I never thought growing up that as a Dunkin' consumer, I would be competing against Cumberland Farms. So they do a nice job. So they're our #2 competitor.

David Palmer - UBS Investment Bank, Research Division

And we touched on innovation already. But as you're thinking about this year, is there anything different aside from digital, which is you said is back half of the year, that's going to be different about your innovation strategy this year? Or is it more of that LTOs and beverage Breakfast Sandwiches and sort of seasonal news?

Paul C. Carbone

Yes, I think it's a lot of the same because its working. And generally, what you see from us is from September through March, April, the LTO is going to be food, Breakfast Sandwich-related. In the warmer month, it's going to be beverage, so you'll see some Coolatta flavor innovation. You'll see coffee flavor innovation. Right now, we have Irish Creme, so we have Irish Creme Coffee, Irish Creme Donuts. We're a -- so we're a brand 65 years old. And we had this past Valentine's Day, our biggest day on an average store basis of donut sales in the history of our company. So 65 years, and still -- and how we did it, is we sold a heart-shaped donut, with brownie batter filling. Right? So just pure innovation, shaped and flavor innovation on donuts. After 65 years, we can still have record-breaking days. And again, it's the lifeblood of this business.

David Palmer - UBS Investment Bank, Research Division

And when you're thinking about the -- aside from weather, when you're thinking about the other things that are going drive the -- beyond your control factors, the macro factors, what are the things that you track that we should also track that would drive your comps?

Paul C. Carbone

We look at -- a few things. So we look at competition. Right? So that's a big factor. Certainly, weather you mentioned it. We haven't seen a lot correlation with gas prices, with unemployment. Interestingly, on gas prices, the times that we see it affect us and we've seen it about 3x in the last 2 weeks only, is when gas goes over $4 a gallon. Right? And I think what we theorize is it's because of the media hype when it goes over $4. So if gas was to go from $3.25 to $3.75, we don't see an impact. If goes from $3.95 to $4.05, we see an impact because of the media. Household income is important to us. Right? And that's continued to decrease. So that's an important factor. Those are probably -- so household income, competition, are probably the 2 biggest factors that we look at. We keep an eye -- we keep our eye on gas prices and unemployment, but we haven't seen a direct correlation.

David Palmer - UBS Investment Bank, Research Division

Leverage, you touched on it. You're thinking that you would bounce off of 4 and come back up? Is that what you're saying before?

Paul C. Carbone

Yes. So we're 4.5 to 5.5, so we will de-lever 1/2 to 3/4 of turn a year through EBITDA growth and minimal debt repayment. So we're 5.2 so call it this time next year we're 4.5. If the credit markets are still favorable, you could see as put another 3/4 to a turn of leverage back on the balance sheet and then push that money back out to shareholders.

David Palmer - UBS Investment Bank, Research Division

We didn't really dig into that supply chain and improvement, the prospective improvement on basis points of improvement that you think might be there for particularly there's up -- front [ph] up markets. Could you talk about that a little bit?

Paul C. Carbone

Yes, so prior to last year, our distributor was -- it's run by our franchisees, so they do the distribution and the procurement. And they had 5 distribution centers all autonomously operated. The lowest price cost of goods was in Boston, obviously, because there's 1,000 restaurants and they have the scale. And the highest price was in Phoenix. Right? And the delta between those 2 on a -- take aside any mix in -- so if we took a Boston store with that mix and put it in Phoenix, the delta was between 700 and 900 basis points of cost of goods. Right? So that's all just delivery to the backdoor. We signed a landmark agreement with the franchisees to have flat national pricing across the system by 2015. The great news is here is the cost in Boston does not go up and the cost in Phoenix goes down by that 700 to 900 basis points. And the way they've done this is through just cost take out of the system. They have taken the 5 distribution centers. They now manage them as one. So they've centralized purchasing, distribution. They've taken out G&A, route optimization. It's why it's over 3 years, right? So -- because we want them to get the savings as they implement this flat cost. We don't want the cost in New England to go up to our Boston guys because those guys are important to us. So their cost, after 3 years, will go down about 20 basis points. In the West, it's about 700 to 900 basis points. We're 1/3 of the way in. The franchisees have delivered 300 basis points of pricing good news to the Western markets. It's about 10 basis points ahead of where they needed to be. So they're ahead of their plan. And the next step down is in June of this year. So it's every 6 months they step down the pricing. So it's a huge benefit to franchisee profitability and it's a huge benefit mentally to us selling, for instance, California, right? Because now that new franchisee knows their cost of the backdoor is the same as the guy in Boston where there's a 1,000 restaurants, and he's going to open up restaurant #2, for instance, in Southern California.

David Palmer - UBS Investment Bank, Research Division

It does feel like that things happened slowly in the franchise system just by the very nature that you get all your ducks in a row. You talked about that loyalty stuff. But a lot of people were surprised -- you put out an announcement you're going to California, and in -- the first one is in 2015. So the fact that your unit growth is accelerating but in the near-term, that's not -- it doesn't even really have to do with the west. It's really more about filling in the east.

Paul C. Carbone

Yes, it's a combination. Right. So California will be 2015, but we'll open Denver in 2014. Right? So to me Denver is a western market. You'll see stores in Salt Lake. You'll see store in El Paso, Texas. But then you will see plenty east of the Mississippi, as well, as we fill out Atlanta, Alabama, or I talked about earlier, Tennessee. Yes, so there's plenty of growth still east of the Mississippi.

David Palmer - UBS Investment Bank, Research Division

Which makes you wonder, is 5% the speed limit for you on -- you guys on unit growth? It feels like maybe not, if those international -- as those -- I won't say international -- western markets start to fill in rapidly?

Paul C. Carbone

Yes, so it's a good question. I would say that when we went public and we said we're going to accelerate to 5%, we never thought that our 2013 guidance on the high end would be at the 5%. So we fast forward to this time next year, is there a possibility of bumping that 5% long-term range up? Yes, there's probably a pretty good chance of that. It will probably be 6-ish, it won't be 8% or 9%. So your question is, "Geez, Paul, if demand if so good or returns are so good, why isn't it 8% or 9%?" And it's really 2 reasons. The first is -- the first governor is the management team. Right? So Nigel at Blockbuster, Paul Twohig who runs DD U.S. at Starbucks and my time at Limited Brands, we've all seen the overdevelopment story and all of you in the room know that story ends. It never ends well. And we cleaned it up when we got to Dunkin Brands. Right? So we opened up 800 restaurants in 2004 or '05. And we cleaned up a lot of bad sites. So management is one of the governors and the second is go back to -- when you asked me, "What's changed in the returns?" The first thing I mentioned, real estate site selection. Right? And If you want to accelerate to 8%, what you do is you start -- you know what a great site looks like and you start making compromises slowly and then all of a sudden, if the line is here of great sites, all of a sudden, 18 months later, you're over here and you look back, and you're like, "How did I end up with all these bad sites?" So those are the 2 governors that are going to keep us this year if we hit the top end of the guidance at 5%, maybe it moves to 6-ish, But we're not -- I don't see us doing 8%, 9% net unit growth. We have the white space and we have the demand, we're just not going to do it.

David Palmer - UBS Investment Bank, Research Division

One of the -- I wonder if it's ever occurred to you that you're going into McDonald's backyard when you're going into this Breakfast Sandwiches the way you are. It's interesting that they tried to soften you up with a lot of $1 coffee, but here you are going into their backyard. Do you ever worry about stirring up the bees nest a little bit there?

Paul C. Carbone

Yes, so I would -- I may disagree with you on whose backyard. They may be playing in my backyard. So I'm the #2 retailer of Breakfast Sandwiches in the United States and I have but a handful of stores West of the Mississippi. So I would say -- and I don't have the data, but I would say east of the Mississippi, if you go toe to toe, I'm the #1 seller of Breakfast Sandwiches. So do I -- am I concerned about waking the bees? Who knows, I think, our Breakfast Sandwiches are top-notch. It's what our innovation is against and I think again, it's the glue that keeps the consumer coming back.

David Palmer - UBS Investment Bank, Research Division

Well, we're winding down here and we're getting towards the end when you can leave us with a message. Is there any message that we haven't hit on today that you think -- that would help us get your story and what you're working on and the opportunities and risks that we don't see?

Paul C. Carbone

Yes. So I'd say a couple of things in wrapping up is -- it's funny we've spent this whole time and we haven't talked about BR or International, which is okay. DD's the story but as we look at Dunkin' U.S., our visibility into our comp drivers is very solid. Right? So from a product pipeline, in the testing and as we see what is out there, so I feel very confident in our ability to say we are a 3 to 4 comping business long-term. Our insight into developments, so our development pipeline, right, so we have a higher percent as we enter the year on a percent basis, of our pipeline filled for '13 than we did '12 and obviously the absolute number is higher, so the absolute number of what I see is very good. So the pipeline in development is very strong. So I see very good visibility and very confident sitting here saying, "The business very healthy." It's 100% franchise business. I think, the market understands comps are very important to us from a health of the business, but not on my EPS. It is a development driven P&L, is really what drives the P&L. And this is a story about high cash flow generation, returning it to shareholders. We don't need the cash. It's not a capital intensive business. And we absolutely love this model and I think you have a management team that, sans the 6:30 call this morning, we love what we do. And Nigel and I and Paul and John Costello and then on the international side as well, we really love running a retail company. So we're having fun and we think it's a great business.

David Palmer - UBS Investment Bank, Research Division

Well, thank you very much Paul.

Paul C. Carbone

All right.

David Palmer - UBS Investment Bank, Research Division

Stacey, thanks, okay.[ph]

Paul C. Carbone

All right, thank you.

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