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Executives

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

Weldon Spangler - Vice President of Dunkin' Donuts Operations for U.S. and Canada

Analysts

John S. Glass - Morgan Stanley, Research Division

Dunkin' Brands (DNKN) Morgan Stanley Retail & Restaurant Conference April 5, 2013 9:20 AM ET

John S. Glass - Morgan Stanley, Research Division

Good morning, everyone. I'm John Glass. I'm Morgan Stanley's restaurant analyst. It's my pleasure to introduce our next fireside chat, Dunkin' Brands.

Directly to my right, to your left, is Weldon Spangler. Weldon is, I think one of the first times in front -- from an investor standpoint, he runs the U.S. operations or Vice President of Operations for the Dunkin' U.S., the whole of the country. So it's a pleasure to have you here. And directly to his right is Paul Carbone. Paul is the company's Chief Financial Officer. Many of you have know him through the road show processes that we've gone through in the last 18 months, 24 months for Dunkin' Brands.

Question-and-Answer Session

John S. Glass - Morgan Stanley, Research Division

And I wanted to open up to both of you, as a general question, start with the big picture, Dunkin' has a unique opportunity. It's a well-known brand for most Americans and yet it is not a national presence in terms of store footprint yet. Can you just walk us through the milestones over the last 2 years you've achieved, that you've moved from a regional, progressively, toward a national brand? You've made some important new entries into markets recently, as well as some announcements in the future. Can -- so maybe, Paul, can you first start with where the milestones are? And then, Weldon, I want to talk a little bit about the operational challenges and opportunities you have as you start to explore that further expansion.

Paul C. Carbone

Yes. So I think -- if you think back to 2008, 2009, as the new management team came in and really changed the focus from a business that just opened restaurants to a business that focuses on the operations, which Weldon will touch on, and really think about this as a retail company, so in 2008, the cash and cash returns of restaurants in the west and emerging markets were 5%. And today, they're north of 25%, all right? So we've done a lot of things to move that. And it is the focus on franchisee profitability, really driving operations through the store. So the 5 things that have moved that from 5% to 25% is real estate site selection, national media. So now we do national media. Perfect example in 2010, we went to national media. When we open our first store in California in 2015, we'll have been on the air for 5 years in California talking about Dunkin'. We opened Vegas in 2005, and it was 5 years before the first advertising on TV. So they had access in the ground in Vegas for 5 years before national media. California will have no access in the ground, 5 years of national media. The third is a focus on beverages. The fourth is a focus on upgrading the franchisees or picking the right franchisee, and the fifth is the operations and really driving an operational mindset throughout the business and how we run the business.

John S. Glass - Morgan Stanley, Research Division

That's helpful. And then can you maybe talk a little bit about -- Weldon, maybe you could talk a little bit about the Florida market as an example, right? So Dunkin' is well known in the northeast. We're talking -- the investors focus a lot on the western half of the U.S. because it's just a large untapped population base. But I think we forget about the markets that are sort of in the middle. You've been there for a while. You've established the brand. You compare them in terms of overall sales volume to the extent that you want to talk about that, beverage mix. Where are you in a market like Florida, which is attractive and you've already had a chance to implement some of the strategies Paul is talking about?

Weldon Spangler

So Florida is doing great. We're thrilled about the performance there. We have been working over the last few years -- if I can step outside of Florida for a second to Paul's point about operations, we've been focused on operations heavy-duty for 3.5 years now. And we have -- we've taken our team, the operations team, and helped -- instead of them being consultants with clipboards, we've made them really part of the owning the business, and they work with the franchisees, the restaurant managers to help push the business. In Florida, in particular, we have -- we've had a lot of growth, both in new restaurants. We've also done a lot of optimization work, which is where we help align franchisees to be in the right locations so that they can grow more rapidly. If you have a franchisee here and a franchisee here, it's difficult to get the space in between them to build stores. If it's the same franchisee in both places, the seam development is much more likely and much easier. So we do a lot with optimization. We've had -- we have some great franchisees in the Florida market. And as we have opportunities to help them expand and look for ways that they can grow, we do that.

John S. Glass - Morgan Stanley, Research Division

One of the key questions that have -- has come up over time is beverage mix, right? In New England, we drink -- what, 70% to 80% of the volume is coffee if I think my ballpark is right. In newer markets, it's much lower. Where would the market like Florida stand in that spectrum in terms of beverage as a percentage of mix?

Weldon Spangler

As you described the 2 at 2 extremes, you put Florida right in the middle of those 2 extremes. It's growing. We continue to work out. Part of it's the natural progression of how people use the brand, and part of it is extra effort we've put for making sure people understand that we have a wide variety of beverages and how good they are.

John S. Glass - Morgan Stanley, Research Division

I didn't mention earlier, but early in your career, you worked -- Weldon worked at Starbucks. Starbucks has dominated the premium coffee market and really has no second competitor. And I think there -- that established a view that there is a strong first-mover advantage in that category, and it really dissuaded others from coming in. Do you feel the same is the true -- is true in yours, it's kind of a winner-take-all strategy? If you get in the market first, you'll end up owning the market and others, whether it's Tim's or other regional quick-service coffee brand, can't enter the market? Does that drive your real estate strategy at all?

Weldon Spangler

Well, in a -- that's a great question. In a lot of cases, as you look out west, we're certainly not there first. Everybody has been there before we are. McDonald's is there. Starbucks is there. What we think differentiates us is great value, great speed of service and fantastic breakfast sandwiches. So we own those categories, and that's where we focus our strength. We compete heavily with everybody in every market: gas and convenience, Starbucks, McDonald's. So what we have to do, especially on the operational side, is we have to deliver better than everybody else does.

John S. Glass - Morgan Stanley, Research Division

One of the things -- I'm a regular and loyal Dunkin' customer. One of the things I've noticed over the past couple of years is, one, the pace of product introductions and innovation is just spectacular. A lot of the emphasis is now focused on things other than beverage, at least in New England market, sandwiches, sort of lunch business. Are you becoming too dependent in your view on new product introductions so that, that is now a necessity to continue drove -- drive the business? What is the risk of that becoming too dependent on these new product introductions?

Weldon Spangler

So that's a great question. Our core business is -- especially in our core markets, is the beverage business. It's that daily guest who comes in every morning, maybe comes back later in the day. The thing about having limited time offers, LTOs, more often is it does give that regular guest something new, something interesting, something exciting to talk about. And when we do it on the food side, it really gives us an opportunity to compete with McDonald's and Starbucks at a higher level. And what we find in the newer markets is having that great food product actually brings in that daily guest, and we move them into a beverage guest. So there's always risk of how much is too much. But having news -- or for the numbers of guests who come in regularly, having news is important.

Paul C. Carbone

Yes, I think that's a big piece of -- to your -- to answer that a different way, John, I'd say yes and no, right. So no in the sense of when we launched K-Cups, right, brand-new category, it was 2% of sales, right. So while we don't talk about what percent an LTO is, when we launched a new category, it was 2% of sales. Part of it is because beverage is north of 60% in the core markets. So no in the sense of we don't need that LTO, that breakfast sandwich to drive a huge amount of the sales, right. But yes, because what the LTO strategy does, and it's exactly what Weldon said, it gives us the right to talk to the consumer. So it gives us that right to get on TV, POP, billboards to say, "Hey, there's something new in the store." And it gives us that permission to talk to the customer. It gives us the -- when we have that customer in New England that comes in every single morning to get a large black coffee and they see that new POP, it breaks up their normal routine to say, "Oh, let me try that." So that's the importance of the LTO. It's given me that permission to talk to the consumer, more so than the actual dollars that, that item gives us.

John S. Glass - Morgan Stanley, Research Division

In Starbucks, we'll talk about one of their key initiatives is to grow their food attachment rate, right? They're kind of a classic beverage-driving business. Right now, it's about 1/3 of the transaction to have a food item purchase with it. Which -- what's in your core markets where you're well known? What's your similar experience for food attachment? Do you have a goal to drive that business to it? Is that even a way you look at it and measure it?

Paul C. Carbone

Yes, so we don't -- we're in the process of putting in systems to actually measure attachments. So today, I couldn't tell you the exact number or part of it. So we have these systems going in. We should have it by the end of the year. Our -- so we're kind of trying to do some back-of-the-envelope math on what is attachment look like based on UPT, based on units. And I think our attachment is probably in that neighborhood, might be a little bit higher than what Starbucks has quoted. But it is a way we look at the business. It's really -- attachment-related selling is Retailing 101, and I think it's one of those last pieces from a data and analysis piece that we haven't yet got to that we're working on.

John S. Glass - Morgan Stanley, Research Division

Let me talk about the unit development in the U.S., the pipeline. I think when you announced in January that you're going to open, I think, it was 330 to 360 stores in the U.S. in 2013, that was an upside surprise relative to 2012's development and maybe expectations we had. What's -- so what's -- maybe just give a perspective of what's driving that? What kind of franchisee groups? Or maybe both of you can comment. Weldon, you've spent a lot of time in the field. What -- are the existing market franchisees moving west with you? Are they new groups? And what do they -- what is the characteristics of those franchisees versus a few years ago?

Paul C. Carbone

So let me talk about -- I'll talk about the overall number, then Weldon will give the important color. It's what everyone is looking for. So the pipeline is healthier today. We have more -- we have a deeper visibility into the pipeline today than we did this time last year, so on a bigger number, higher percentages of LOIs, et cetera. And what's really driving that is 2 things: great comps and great new unit returns. So new unit returns are north of 25%, and comps last year, we ended the year at 4.1%, 4.2%. We guided this year 3% to 4%. So that's what's driving the demand in the business. And then I'll let Weldon talk about -- I think we have some great stories on what the franchisees look like, et cetera.

Weldon Spangler

Yes, so we have a -- we certainly have a large number of existing franchisees. We're building in their markets. We have also franchisees who are moving into new markets, in areas where we have less growth now. If you look at New England, less growth opportunities in terms of new stores. They move to other areas. As we look out west, we have -- we've had the opportunity to -- we sold Houston. We sold Denver. We've got franchisee groups there now that are working. And we brought in a -- I would say a wide variety of different types of franchisees. They all certainly are well funded, have the ability to operate businesses like ours and also the ability to develop. Those are things that we really look for and we screen for. We have groups that have experience in gas, convenience. We have groups that have experience in restaurants and everything in between. So the development is strong. There's a lot of demand in markets like Atlanta, in Birmingham and the Carolinas. So those are markets that we don't think -- they're certainly not our core. And they're -- we've been there long time, but there's still a lot of demand for growth.

John S. Glass - Morgan Stanley, Research Division

What's the criteria you use to select a new franchisee? My understanding is that a franchise community, it's really a very small group of people that are really experienced. There's a lot of mom and pops, 2- and 3-, 4-store operators of any brand. But the real experienced, well-capitalized operators are actually fewer than many might think. What -- do you agree with that? How big is that universe of franchisees do you think? And also, what is the criteria you're using to really make sure you're getting the right new folks into the system?

Weldon Spangler

So it is not a -- is not as big a population as I wish it was. It is kind of narrow. And -- but we have a lot of demand, because the story is good with Dunkin' Brands. So we do get to bring in a lot of the best ones. We really look at -- we start with, are they financially able to do it and then we have them actually do business plans and present to us at varying levels of management. And the final exam, as it were, is they bring in the business plan and they meet with a cross-functional group of operations, store development, franchising, marketing and we actually look for the ability, the proven track record, to be able to develop stores. It sounds really easy, right? I go out and I sign a lease and I build the store and I open it. It's much more difficult than that. So we look for the ability to develop and somebody that knows how to run restaurants. We -- when we -- when I look at our challenges of decisions we made at some other time, we have people who maybe didn't know how to run restaurants who are trying to run restaurants and they struggle with it. So as we go forward, we're really looking for those people who know how to run restaurants and can develop.

John S. Glass - Morgan Stanley, Research Division

And Paul, you will probably, in the next month or so, talk about the class of 2012 officially. I think that -- when you finally get enough of the data in the system to talk about annualized numbers. But what's the right way to look at that? IS there a way to sort of set the stage and understand that it's going to be -- it's always a mix of stores. So when you're talking about averaging of volume, talking about mature markets, talk about developing markets, is there any way you can sort of preview how you think of the cost -- the crop of '12 did come out?

Paul C. Carbone

Yes. So you're right, we'll share the '12 cohort at our Analyst and Investor Day in May. So the way we look at is we break the country into 2 groupings, core and established, west and emerging. That's kind of how we report out the data. And then internally, we peel it back because we group west in emerging, but that range is everywhere from a new store in Phoenix and a new store in Atlanta. That's totally different markets. So we actually peel it back another layer and look at it between west and emerging. And then we also look at it -- and we're going through this process now, of markets where it's the first and second store and markets it's the fourth and fifth store, because that also impacts new unit volumes. And really, we look at that when we look from year-to-year. So saying -- comparing that '11 cohort to the '12 cohort. So early returns on the '12 cohort. When we look at them back in the third quarter, and certainly as we're getting ready for Investor Day, very strong unit returns at where we want them, we have this benchmark of 25%, and really gives us the belief that we can continue to develop. CapEx is right in that range, where we have been the last couple of years, in the $475,000 range. So we feel good about the information we'll share and feel good about what the franchisees are seeing. And then as we go into '13, we continue to have tailwinds in commodities. We have flat national pricing. So we're in year 2 of a 3-year journey of flat national pricing, where our store in Phoenix will have the same costs as the store in Boston, which will also help returns of those western markets. So the -- everything is pointing in the right direction. We're really happy with it. Of course, any story has a bump or 2 but -- a store here that, boy, we thought that was going to be better. We also have the store, wow, we never thought that store was going to be that good. But the cohorts are looking very, very positive.

Weldon Spangler

And if I can add a little to that. We also -- we have -- we put a lot of rigor into choosing the locations. And it's we have the franchisee looking at it. We have our development team looking at it. We have our operations team looking at it. So we involve people who are on the ground who have different experiences, and we match that rigor and the decision making with a lot of science in understanding traffic patterns, understanding all of those things that drive our business maybe differently than some other retail businesses. And so I feel really good about the amount of work we put into it.

John S. Glass - Morgan Stanley, Research Division

Into that point, last night, in this room, we had Buckman Associates, and they're one of several companies that provides some of that proprietary information. And their claim would be that most retailers don't know as much as they think, that they have a more simplistic view and they've got sort of a much more rigorous model. Are you of the view that you can generate that data internally sufficiently since you do have a higher hit rate in new stores? Do you use external sources? How do you get comfortable that you've got the right amount of granular data in new markets and new stores?

Paul C. Carbone

Yes, we use internal data and an internal system that was built by consultants. So we were probably in that same boat, we did not have the rigor around that. So we went outside. We had a group build a model for us. And then like any model, the nice part is we keep adding more and more stores to it so the data gets richer and richer. As we -- and when we started this on the first question, when I talked about going from 5% cash -- in cash to 25%, the first thing I mentioned, and it wasn't just because it was the first on the thoughts of my head, is real estate site selection. We have gotten exponentially better at real estate site selection because the ops guys were never involved. So these are people on the ground in a market like -- not even a new, call it, Atlanta, right, that are on the ground, that are working that market. And 5 years ago, when we made a site selection decision, the franchisee would bring it to our development team. The development team didn't involve Weldon's team, who are actually living in the market, know the traffic patterns, know the market. It seems, you say, go ahead, kind of crazy and it was, but now we have this cross-function of everyone is on the same page thinking about it.

John S. Glass - Morgan Stanley, Research Division

And thinking about the U.S. comp store sales. First, the 3% to 4% guidance was, I think, surprisingly optimistic, given the times we live in. So maybe just, one, what is your overall kind of confidence built upon in the 3% to 4%? Particularly given that you've got a large number of stores that are in the northeast, which are more difficult to comp, right. I get my cup of coffee every day, but incrementally, it's harder to get me to come in more often than I already do. But -- so maybe you can talk about that and then maybe also -- I want to also talk just about the current environment a little bit and about how the consumer is behaving. But first, what are the building blocks for the 3% to 4%?

Weldon Spangler

It starts with great operations, right?

Paul C. Carbone

Great operations, no doubt. So 3% to 4%, conveniently, is also our long-term guidance. So I get to say this, this is kind of longer term than just 2013. So if you think of the 3% to 4% and use the middle point of 3.5%, we see about 50 bps of that coming from pricing. So this is just natural. This isn't commodities shock. It's just everyday and every year-to-year, you're going to get some pricing. Of the balance of the 300 basis points, about 100 to 150 is transactions, right. So we expect to continue to grow transactions. In New England, John, where we all live, it's probably more in the afternoon than the morning. You don't expect the morning to be negative, but we're probably going to drive more in the afternoon. Outside of New England, it's both morning and afternoon. And then the third piece of that comp is mix and our ticket, driven by both mix and UPT. So mix is premium Breakfast Sandwiches. So how do we take someone from a bagel, sausage and eggs sandwich to the steak, the Angus steak Breakfast Sandwich that might be $0.30, $0.50 more, and then also UPT, so units per transaction. We talked this morning with some people about adding a turbo shot, an espresso shot to your coffee, adding hash browns to your 2-piece combo when you get a Breakfast Sandwich, adding a banana, adding orange juice. So we see UPT mix, a little bit of pricing and then transactions growing. So it's kind of long term. As we look at current environment, and I think we've said this, the first quarter last year was no storms and warmth. We posted a 7.2% comp in the U.S. We said about 150 basis points of that was from weather. This year, we have had cold weather, but a lot of storms, right, and mainly in our core New England markets. So the good news is we haven't seen any discernible impact from payroll tax, higher gas prices or delayed refund checks. Certainly, the weather in the quarter has impacted us. What we -- what I'm happy to say, and we've said it several times, is places that their weather isn't impacting, i.e., Florida, to Weldon's comments, is very, very strong. And then when weather isn't impacting us in the core markets, business is very strong. So we're happy with the business. But these constant snowstorms every single week just was brutal. And if you even think back 2 years ago in '11, which was a snowy winter, those were major storms for the first 6 weeks. So it's all of January, week 1 and 2 of February, lots of snow, and then it was pretty mild for the balance. This year, it's been smaller storms, school gets canceled, office gets closed, just throughout -- to that ritual.

Weldon Spangler

One other thing on the comps, you talked about New England, and in the morning, we still think there's opportunity for driving speed of service. And while we own speed as a core competency, even we can get better. So we spend -- our field teams spend a lot of time with the franchisees with tools to streamline in the restaurant, to measure speed of service, especially through the drive-through. So we spend a lot of our time on that. We incentivize people on that. We run contests and have a little bit of fun with trying to move people through faster.

John S. Glass - Morgan Stanley, Research Division

Related to that, your -- what sort of tools do you have from an offer standpoint to stimulate sales if you need to do so? So I'm thinking about your internet, your mobile app, which I think starts to provide some localized offers, maybe even tailored to individuals. I'm not sure you've gotten there yet. Starbucks has talked a lot about using social media, like LivingSocial or Groupon in order to drive traffic. So what are the tools that you guys have on the margin, that you think of the business, even in a local area, needs a little bit extra push that you've been able to implement? And what do you have sort of in the hopper going forward in that area?

Paul C. Carbone

Yes, so the app certainly gives us -- we can push out location-based offer. We do a lot of radio advertising. So that you can change in the moment to, if it's -- if all of a sudden, you're going to get a snow storm, you can kind of change what the DJ is saying. We have the in-store piece of it just as far as suggestive selling. The one piece that we probably don't have, and you mentioned that Starbucks has, is Groupon or LivingSocial, right. And this is really more about our model and their model. So company owned versus franchise. So you do a LivingSocial, you get a $10 gift card and it cost you $5. And when you own the stores, and we've all -- Weldon at Starbucks and my time at Limited Brands, you look at the lifetime acquisition of a customer, and that pays out all day long, especially with the margins you're getting in the store even on the $5 sale. But in Dunkin' Brands, how do we do something like that? Because that $5 discount, who pays that? We can't pay the Dunkin' Brands because on that $10 sales, I'm going to make $0.50 of royalties, all right. So I can't make that lifetime acquisition cost to work out. The franchisee, it's hard because how do I know which franchisee pays, all right. So we sell to LivingSocial, but it's going to get cash in, in our restaurant. So we probably don't have that particular weapon available to us, and it really brings up the challenge of customer acquisition in a franchise model, which I think is why you don't see a lot of loyalty programs in franchisee systems. So that's -- as we're thinking about loyalty roll up the end of this year, we're spending a lot -- we have a lot of marketing people thinking about what it's going to look like in the technologies, we have our IT. We have a lot of other people thinking about the business model of CRM, customer acquisition, how does that work. And that's just one of those pieces we don't have. We probably have the advertising that Starbucks doesn't.

John S. Glass - Morgan Stanley, Research Division

I wanted to -- Weldon, I wanted to ask you about the -- on the last call, they talked about this sort of a leg 2 of some technology in the restaurant. It sounds more like the back of the house or franchisees, and you highlighted speed of service. So what is going on from the operational standpoint in the restaurants? Is there an opportunity for franchisees to save money on their labor? And how does that -- is there any direct impact to you, or is that really just an indirect impact? Because they're happier and they develop more. Can you talk about what are you doing on the speed-of-service side that helps drive better comps?

Weldon Spangler

Sure. So you want to talk about the back-office system also?

John S. Glass - Morgan Stanley, Research Division

If it's -- if we -- if you think it ultimately benefits. How does it benefit?

Weldon Spangler

Yes, it definitely does. So we've -- we have introduced -- we're in the middle of expanding back-office inventory systems, back-office cash and back-office labor scheduling. And the inventory system, we believe, just by providing visibility and tools to help them control that food cost better, that we believe that, that will help just put more money in their pockets, which ultimately helps them, open new stores and remodel existing stores, and continue to expand the business. The labor scheduling one, we're also really excited about. We're less far down the path on it. But quick-service restaurants are all about having the right people in the right place at the right time when the guest comes in. And the -- having the tool that helps them write the right labor schedule, to understand their peaks and valleys in the business will ultimately help the speed of service. So we're working on that. We'll be rolling that out throughout the rest of this year. And we also have some -- we have some good tools for measuring speed of service. We think that it's -- the more you measure it and the more you make it visible, the quicker people respond. So our drive-through timers are right in our crew members' field of vision, and they respond when they see how they're doing. And it becomes kind of fun. It's like, "okay, here's this next guy. Can I beat my record at this point?" We're also looking at and too early to tell how far we'll take it, but we're looking at camera systems so that our crew members can actually see the guest at the drive-through. And to take it a step further, it's been tried having a camera on our crew member that the guest can see. So you create a real personal connection, which puts more pressure on the guest or, I'm sorry, on the crew member to move along. So we're trying a lot of those things. We think that all of them are -- have real advantage. The camera thing has its own challenges. So we're not sure where we'll go with that.

John S. Glass - Morgan Stanley, Research Division

I want to switch over in a couple of minutes we have left to talk about the international business. So Baskin has been your dominant international brand, and it actually continues to grow faster than the Dunkin' brand. Yet I think a lot of us would say, intuitively, Dunkin's got the bigger opportunity long term. So what are the big picture, I guess, Paul, just what are the gating factors between us getting where we are now and a faster-growing Dunkin' international business? And where are the biggest opportunities you can see?

Paul C. Carbone

Yes, so I think the base -- so you're absolutely right. Dunkin' international has a huge opportunity. I think one of the biggest gating factors is getting the supply chain right. So in today's world, if we were to open up a new country and licensee is going to open up 20 stores, the first thing that they have to do is build a manufacturing location to make fresh product. So they open up and they build that and that's going to support 20 restaurants over time. And they open up their first restaurant, and that manufacturing location, by pure definition, is losing money. And it's a distraction. The people aren't thinking about the retail. So certainly, the supply chain, the fresh supply chain is one of these things we're attacking. Couple of options. There's third-party bakers in-country. There's frozen product that has its own challenge as far as transportation, because it's light, so it's costly. So we're attacking that. Dunkin' certainly has the ability to grow. We were in China now 1.5 week half ago, huge opportunity. We haven't done extremely well there in Dunkin', but a huge opportunity for us. We visited the KFC there and they sell breakfast sandwiches, and we don't in our Dunkin', right. So in the U.S., you heard Weldon talking about we own breakfast sandwiches in the U.S. and we don't have any in China. So I think there's supply chain. I think there's certainly menu opportunities. So Breakfast Sandwiches, frozen beverages, things of that nature. So after visiting China, I'm actually more bullish on long-term prospects, plenty of work to do. But there's no reason in my mind that Dunkin' can't be a successful international brand and should be able to transcend many different countries and cultures.

John S. Glass - Morgan Stanley, Research Division

Before I have my one follow-up question, questions in the audience? Sure, why not? Can we just maybe then, Paul, just end on talking about -- so the long-term guidance is -- and this model has been unbelievable leverage-able in terms of the SG&A, right, essentially your royalty business or the small amount of some other income left, and then you've got essentially an SG&A line that grows at much slower rate. So you've got this leaps and bounds, 150, 200 basis point improvement in margin year-over-year. Is there anything though -- is there anything that we should be aware of the impedes that, that you need to make some corporate investments along the way? You've talked about international, or maybe there's a piece of the U.S. development coming down the line that's going to require some step function investment. Or should we just expect these continued leverage?

Paul C. Carbone

Yes, I think you should continue to expect the leverage in the 150 to 200 basis points. We are going to invest. And for us, investment is generally of SG&A and international. So when we redid our debt back in Q1, they had roughly a $5 million savings, we held back about $1.5 million of that savings to put into our international business. So you'll continue to see us put money into the international business. But I would expect to -- and you should expect to be in that 150 to 200 basis point leverage. If anything, we're burdened by what was delivered in the past in the -- it may start with a 3 handle and you say, "Boy, that 150 to 200 might be a little bit conservative." So I think that gives us some room to invest. But it is a business that should leverage. Weldon is going to get some more operators as we build out stores, things of that nature. But it is a business that we leverage the SG&A.

John S. Glass - Morgan Stanley, Research Division

Well, in an industry, we're talking about a good margin year of 30 to 50 basis points, 150 basis points, 200 in the bag seems very attractive. So it seems relatively very sound.

We're out of time. I appreciate both of you coming in today to visit with us. Thank you all for attending, and have a great rest of the day.

Weldon Spangler

Thank you, John. Thanks.

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Source: Dunkin' Brands Group's Management Presents at Morgan Stanley Retail & Restaurant Conference (Transcript)
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