Dunkin' Brands Group, Inc. - Analyst/Investor Day

| About: Dunkin' Brands (DNKN)

Dunkin' Brands (NASDAQ:DNKN)

May 07, 2013 8:00 am ET


Stacey Caravella - Director of Investor Relations

Nigel Travis - Chief Executive Officer and Director

Jonathan Kraft

Scott Murphy - Chief Supply Officer and Senior Vice President

Giorgio Minardi - President of International Operations

Paul E. Twohig - Chief Operating Officer of U.S.

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

John H. Costello - President of Global Marketing & Innovation

Stan Frankenthaler - Director of Culinary Development and Executive Chef

William M. Mitchell - President of Baskin-Robbins U.S. and Canada


John S. Glass - Morgan Stanley, Research Division

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

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Andrew M. Barish - Jefferies & Company, Inc., Research Division

Marc Riddick - The Williams Capital Group, L.P., Research Division

Will Slabaugh - Stephens Inc., Research Division

Sharon Zackfia - William Blair & Company L.L.C., Research Division

Jason West - Deutsche Bank AG, Research Division

Grant A. Robinson - Robert W. Baird & Co. Incorporated, Research Division

Stacey Caravella

Good morning, everyone. Thanks for joining us for the 2013 Dunkin' Brands Investor and Analyst Day. For those of you who don't know me, I'm Stacey Caravella, the Director of IR for Dunkin'. Thanks to everyone who joined the store innovation tour yesterday, where we unveiled the new Dunkin' Donuts U.S. restaurant design. We hope you all enjoyed the tour and the 3 different variations of the design that we showed, and we hope everyone enjoyed the management dinner last night as well. I want to also welcome everyone who's listening in on the webcast. We are webcasting today's event live, and it will be available for replay on our Investor Relations website. We'll also be posting all of the decks from today's event at the conclusion of today, so you will be able to download all of them from the Investor Relations website as well.

Today's presentations contain forward-looking statements as well as certain non-GAAP measures. Reconciliations of the non-GAAP amounts to the relevant GAAP amounts are also available on our Investor Relations website.

To kick things off today, you're going to hear from CEO Nigel Travis, who's going to cover our Playbook for Global Growth. You'll then hear from the President of International, Giorgio Minardi, followed by our Chief Supply Officer, Scott Murphy. After a short break, we're going to move into the Dunkin' Donuts U.S. section of the agenda, and you'll hear from Paul Twohig, President of Dunkin' U.S. and Canada; then you'll hear from Paul Carbone, our CFO; followed by John Costello, President of Global Marketing and Innovation. After a product innovation lunch hosted by our Chef Stan, you'll hear from Bill Mitchell, who's the President of Baskin-Robbins U.S. and Canada and Paul Carbone will be back up with the financial update.

We'll do a Q&A session with -- at the end of today with the entire management team, and then Nigel will do some closing remarks and he's probably already let the cat out of the bag, but there may be a surprise this afternoon as well.

Time permitting, we will take questions at the end of each presentation. Please be sure to wait for the microphone before you ask your question so that the people on the webcast can also hear your question.

I've also been given the important job of telling you where the bathrooms are. They're down this hallway over here, the curtained hallway. So with that, I think we're ready to get started.


Nigel Travis

Well, good morning, everyone. Are we okay, today? Enjoyed dinner? Okay. So you're going to have plenty of food today. Chef Stan over there is in charge of the food today, so my aim is never to have another pipeline question at the end of today, okay? You may go away confused, but that is my objective of the day. And if anyone's getting a little bit restless, we will have the analyst against the investor soccer game at lunchtime, okay?

So we're going to share with you a lot of interesting information today. We're going to make a lot -- have a little bit of fun as well. So firstly, let's just talk about us as a company. We think we're unique. Many people write about us being like Krispy Kreme or like Starbucks or McDonald's. The truth is, there's no one quite like Dunkin' Brands. And we think it goes down to the fact that we've got 60 years of heritage on both our brands. We have a white space opportunity, which, in our view, no one else has, with both brands. I mean, you just think about Dunkin' Donuts and you saw it in that opening video, we can go right across the country. So the white space opportunity is phenomenal. And then Giorgio will be talking about the international opportunity a little bit later on.

But I think the thing that really sets us apart is our 100% asset-light model. It sounds like there's some bombs [ph] out there. The 100% asset-light model, I think, is a beautiful model. It's something we talked about at the IPO, and in the nearly 2 years since the IPO, I've become even more convinced that this sets us apart. And it is interesting that I keep reading people saying that certain companies should become more like Dunkin' Brands. That tells us that our model is really working, so we feel good. And as it says at the bottom, Dunkin' Brands is unique in the QSR space.

Now I just want to go through some of our philosophy. Obviously, if you're an asset-light model, franchising is very important. And over the time, in the companies in which we've worked, and if you bring the management team together, we've all got great experience in the franchising business. I've obviously been with Burger King, Blockbuster, Papa John's and now with Dunkin' Brands. So I've been through lots of different franchising organizations, and my thoughts have evolved over time. The first and most important thing, and I think sometimes people miss this, is it's all about making our franchisees profitable. So store economics are, if you like, goal #1. The second thing comes down to the relationship. And many of you may not know this, but I started off in labor relations, or as we call it in the U.K., industrial relations. And when I was at college, I studied Industrial Relations, and I studied relationships between management and unions. And it occurred to me a few years ago, about 10 years ago, that there were some similarities. The similarities are that, on our side, we're trying to make a profit and our franchisees are trying to make a profit. The problem is, sometimes those 2 profits are in conflict. I mean, I'll go back to my days at Papa John's, where we had a supply chain that we made money on. We made $35 million a year, something like that. The franchisees saw that as coming out of their pockets. So it occurred to me that you have to accept that there is a natural conflict, and that's called the pluralistic state of reference. The unity state of reference is to say, "We're all in the same boat. We all have the same goals." The reality is, we don't have the same goals because there is this profit conflict. So our goal in life is to bridge the franchisees and us, and we work very hard at this. And I've got a team that works very hard at it. And it requires great communication and listening skills. And if you were in our BAC meetings, you'll be amazed at the sort of open dialogue. Sometimes you'd say, "Is that person on the company's side or the franchise side?" Because we have very open, constructive and sometimes very loud dialogue. And we encourage it because we think that's the best way of getting the right solutions.

Someone asked me last night, "What's your check and balance when you're bringing out new products?" It's simple. We have great, aggressive, experienced franchisees. That's the real check and balance. So we spend a lot of time communicating. We have this very democratic system in the U.S., where we have DACs, which are District Advisory Councils; RACs, which are Regional Advisory Councils; and then we have the Brand Advisory Council. So it sounds like being on the hill with all those committees, but we really do hear what the franchisees think, and it's also a great opportunity for us to communicate.

Now I've got down there that the community foundation is the common goal. It's true. And one of the things that we've worked very hard, under Karen Raskopf's leadership, Karen's over there somewhere, is she heads up with one of our franchisees, the Community Foundation. Community Foundation has gone from strength to strength. It made $2 million last year. It's got a higher goal in the next year and we work together. We have dinners together, we have golf events together. And the Community Foundation actually recently contributed $100,000 to the Boston One Fund. So we're very proud of what we're doing together, and it's a great way to get to know franchisees. Sometimes, people like Paul or John or myself have events at our houses. Franchisees pay large amounts of money to come to it and you really get to understand the franchisees. So even though we have this pluralistic frame of reference, I see the Community Foundation as being like the glue that holds us all together.

And I think also, we have a positive approach to every problem. We don't believe in putting problems off. We attack problems. And I think most of you heard me say before that, when I first came, we had many bankruptcies, we had lots of franchisees in problems, we had problem markets, and Paul Carbone and I remember, we sat around my table in my office and we attacked those problems one by one. And I think you need that positive mindset to work in the franchising business.

I think we're also flexible while maintaining the course. I personally think too many companies are very entrenched in their views. You need flexibility in the way you tackle the problems with the franchisees. So all this really means a collaborative approach. We don't always agree, but I stand on our record that we've solved problems and we've moved this business forward.

So that's the philosophical approach that we have. What I now want to take you through is the opening few pages of our Playbook. If you came here and played for the Patriots, you'd be given a playbook. I'm going to take you through our Playbook. And my colleagues are going to take you through the detail of the Playbook as we go through the day.

You've seen this probably 100 times. This is our strategy on one page. Let me just remind anyone who hasn't heard it those many times. On the top left-hand side, we have increase comparable store sales and profitability in Dunkin' U.S. That was the big focus at the IPO. We had the final way to increase the comp sales and the profitability of our franchisees in the U.S., and I think our record over the last couple of years has been very stellar in that regard. We see our reward as being in the top right-hand corner. In other words, if we do the left-hand corner correctly, our reward is we will have more stores open, and you've seen the store numbers gradually go up every quarter.

Going to the bottom left-hand side, and you're going to hear from Bill Mitchell about this today, when we did the IPO, we said simply we need to increase the comps of Baskin U.S. Baskin U.S. was a business that had been in trouble for some time. We saw it as a turnaround. It had declining store numbers every year. It had declining comps. So our whole aim was to turn that business around. And the good thing is we are turning it around, and you'll hear from Bill later on about how we're making it a slow growth business.

And then the real icing on the cake and the full [ph] growth vehicle is International. What we're doing in International is really exciting. It's not going to be an easy business to move in the right direction, but we're doing it, and it will take some time. You'll hear about that from Giorgio.

So what I'd like to do now is just quickly introduce our leadership team, and this is effectively all our Senior Vice Presidents and above in the company. I'm just going to ask each one to stand up, so you at least know who they are. So as we go through, firstly, Paul Twohig. I think he knows -- you know most -- most of you know Paul. As I've described him many times, he goes way above the spec for the job. He worked for Burger King, not only in corporate but as a franchisee. He was also a franchisee with Boston Market. He worked for Starbucks twice and he also worked for Panera. So he really ticks the box. So -- and by the way, if you have any -- got questions about Starbucks in the U.K., he started it, so he's the problem. He was worried about what I was going to say.

Well, secondly, Giorgio Minardi. Giorgio has got extensive experience in our industry. You may guess by his name that he comes from Italy, but Italy and South Africa, and he's worked for McDonald's, Burger King and Autogrill.

Next one, Bill Mitchell. Bill, I think, you've seen a few times. Bill had the misfortune to work for me at Papa John's, did a great job there. He was at Papa John's longer than I was, and he's really got Baskin U.S. going in the right direction, and Canada, I should say.

John Costello, oops, he's late. John Costello, I think he's known to you all. Recently, there was a survey and John was voted in the top 10 of CMOs in the country. His experience in retail and packaged goods is incredible. We're all delighted that John's on the team and he's got a really spectacular presentation today that will answer the many questions I heard from you last night. So John, thank you.

Paul Carbone, appointed 2/3 through last year to CFO. Don't you stand up, they all know you. Now there's the person with the second loudest voice after me, and Paul is a great part of our check and balance at the company. Working for Paul, it may not be known to many of you, Jack Clare. Jack joined from Yum! last year. He ran -- he was the CIO for Yum! International, so he brings a lot of international background and skills. He's been a terrific add to our team and he works very nicely with Paul.

Our most recent promotion on the leadership team is Scott Murphy, who's our Chief Supply Officer. You're going to hear from Scott very shortly. He's been with the company 9 years. And before that, he worked in consultancy with A.T. Kearney.

Rich Emmett. Rich is back there. He's our General Counsel. Rich worked for me at Papa John's, then deserted me, went to Quiznos, and then came crawling back and asked for a job here at Dunkin'. It shows I'm very sympathetic, so I took him on. But the thing franchisees like about Rich is he was a franchisee with Papa John's, and he also owned the coffee business when he was at Papa John's. So they like that balance.

Ginger Gregory came just over a year ago. Ginger's being an HR professional for a long time. She's worked globally. She's lived in places like Switzerland and Denmark, so she's got great global skills. She's been a great asset to our leadership team, and she's responsible for changing and improving our training that is such an important part of our operation's structure.

And then Karen Raskopf, I mentioned earlier -- there's Karen. Now the thing I'll say about Karen, if you need help in a crisis, this is the best person. She's the best communication person there is. She worked with me at Blockbuster. After I left and they had all their issues, Karen basically carried the load for the whole company. So she's great, and she also has responsibility for corporate responsibility.

Right. So being a Dolphin fan in the home of the Patriots, this is a pretty painful picture. Brian Hartline getting tackled here last year, but we love the sporting analogies. You're going to hear a lot of sporting analogies today. And we've got this Playbook that we continue to play out. And when you look at it, we've tried to put our strategy for the business, the 4 box, into football language.

So when we look at Dunkin' U.S., I think we've executed well, we continue to execute, and the message you want to hear today is we continue to be incredibly excited about this U.S. business and it is both near- and long-term growth. This is a real winner. You will go out and pay double-digit millions to get this kind of player in free agency.

We now have Baskin-Robbins International, our second best business in our view. It's driving near-term growth and double-digit, long-term growth, you'll hear about that from Giorgio. A very exciting business, and as I was saying at my table last night, I think the margin opportunity, the way we drive this business is a big opportunity in the future.

The next business, and you've heard a lot about this, so we do a lot of dump pass here, this isn't the big throw down the field, but we're excited about the medium-term, slow growth opportunity. And who knows? If we really get this rocking and rolling, this could be a really strong long-term growth opportunity. Remember, ladies and gentlemen, we're talking about growth in all 4 categories. Some of the other businesses, I'm sure you visit, aren't talking about growth. So Baskin now, we're talking about growth. That's a real change.

And Dunkin' International, as Giorgio will explain, is going to take a little bit of time to build the foundation. But over time, we think this is going to be long-term, double-digit growth. So they're the 4 businesses.

And we're surrounded, as most of you know more about the competition than we are, but we're surrounded by great competition, be it Tim Hortons, be it Starbucks, be it McDonald's, be it local chains, be it Costco coffee, they're all our competitors. And I think this year is going to be a very interesting year in our industry with potential developments. But we work on attacking the competition every single day. We talk about single stores [indiscernible], and we go out and attack those stores because one of the great things of America is it strives on competition. We learn from our competition, but we go back and we respond very strongly to our competition.

And another way of putting this is, for Dunkin' Brands, every day is a new game. So Stacey put this slide together, and I think it puts it all into perspective. If you're in the NFL, you have 16 regular season games. If you're in the Barclays Premier League, which is coming to a conclusion right now, there are 38 games. And then if you go into the NHL and the NBA, both of whom got their playoffs right now, it's 82 regular season games. And if you go into Major League Baseball, and, obviously we're very connected with both the Yankees and the Red Sox, 162 games. But for us, it's 365 games a year. So what does that mean? Well, you all know the stories that we get up at 5:30 in the morning, we look at the comps, and by 6:00 the day is done. I mean, you can tell me those stories. But what it means is that we have an absolute fanatical focus on data, on getting the metrics right. We -- and our losing day is a losing day, and we start investigating immediately why do we have a bad number yesterday, always against forecast.

And at our table last night, we were talking about luck in sports. And luck in sports -- apparently, there's been some surveys that said various sports have more luck than other sports. We have luck in this game. We have luck in the QSR business, and it's called weather. And we talked about weather in the first quarter. And last year in the first quarter, we had positive luck. Our aim is to try and take weather out of it, and our other aim is to make sure that when we have great weather, like today is a great Dunkin' day here in Boston because it's warm and our iced coffee will do well, is to take advantage of that and maximize the opportunity when the weather is on our side.

So this is the way we look at it. It's very much a retailing approach. People like Paul, John, Paul and I all come from retailing, and the thing you need to know is we will never give up looking for more and more data. And again, over dinner last night, we talked about big data. Big data, I think, is the future for this industry. We just scratched the surface here, and I think everyone else has just scratched the surface. The more data we get, the more we can drive our guests into our stores.

So talking about sporting analogies, I'd now like to introduce someone who's a very good friend of mine, someone I'm delighted to know because this person isn't just someone connected with sports. This is a true winner. He's embraced and become very helpful to my wife, Joanna and I, since we've been here in Boston. As I say, he's become a good friend. Ladies and gentlemen, I'd like introduce the President of the Kraft Group and the President of the New England Patriots, my good friend, Jonathan Kraft.

Jonathan Kraft

Thanks a lot. Good to see you. Good morning. Welcome. Nice to see everybody here. I assume there are a lot of people from New York here and we always love it when we get New Yorkers in the Gillette. And I want you to know this isn't a prop. It's actually my second large Dunkin' Iced Coffee of the day. Since -- in college, it was hard to get them because in those days, the geographic expansion hadn't started, and at Williams College, I used to actually drive over to Bennington, Vermont. It was like a 40-minute drive late at night, but I would do it when I wanted coffee. And it really is a part of my life.

When Nigel asked me to do this, this morning, I was honored. All of our businesses are private, so I don't ever have to talk to investors. A board meeting is like my father and I walking into each other's offices and talking, and probably too expediently deciding to make decisions, so I've never had the privilege of talking to an esteemed group like this.

I'm going to be very brief and just tell you why we are incredibly passionate about this brand. And our money is behind it, too, and in particular, this management team.

In 2005, the end of '05, when Dunkin' was sold by Allied Domecq to private equity, I used to work at Bain and we're investors in the Bain funds. And sometimes, we get the chance to invest alongside. And I didn't do any diligence. I just knew how much I loved the Dunkin' Brand growing up around here. And so the guys at Bain let us actually, aside from our investment in the fund, co-invest. And I just thought this was a huge opportunity because it was such a regional powerhouse, and I thought that Starbucks, in particular, was just something that really wasn't quintessentially American and that Dunkin', with the right owners behind it, not some big European conglomerate but American entrepreneurial private equity, would figure it out.

And we believed in that so much that in '07, we actually looked at taking over some distressed markets in the mid-Atlantic. And unfortunately, what I saw in '07 was something that gave us real pause for concern. The world was still booming, but what we saw was a franchise system that, outside of New England, really wasn't being well managed. As we got more into the innovation within the company, it was choppy, it wasn't well timed, it wasn't strategic. And it gave us pause, we stepped back. And I was a little bit worried about our investment in the company, even though I was passionate about the brand and it was still working up here.

And then in 2009 -- and I had some conversations with the guys at Bain during that time and -- anyhow, in 2009 or I guess the end of '08, I got a phone call and they said they were going to be hiring a gentleman named Nigel Travis. And I said, "Good." He gave me his background and we talked about it a little bit, and then I've had a front row seat to watching Nigel assemble what I think is just an absolute world-class team and then start to execute on a vision that, first and foremost, was about making sure that franchisees really could believe in corporate and that it was a partnership and growing. And the thing that's awesome about Dunkin' is that, relatively speaking, for a top-tier named brand, brand, if you're a franchisee, it's relatively capital light. And that's exciting because you can roll stores out faster and you can get a better return on your equity, which all of you understand, but you've got to believe in corporate and know corporate's your partner.

The other thing that we saw under Nigel is that innovation that was -- started to become rhyme and reason and stepping back and thinking about how to move the product innovation curve. And as somebody that stops at Dunkin' every day, this morning, I was there and I know what the current innovations are. It's the egg white with the turkey sausage and it's the chicken salad and tuna salad wrap. But I actually -- because I haven't been there at lunch time, tasted that, I bought the tuna salad this morning because I wanted to be able to represent that I had tried it, and it's actually good. And I wouldn't normally -- I can tell you that 5 or 6 years ago, I wouldn't have done that. I would've bought my coffee and I would've bought my 3 cinnamon munchkins.

And most importantly, to underscore this transformation and evolution, I'm friends -- because a lot of the big business people in this region are major Dunkin' franchise owners. They're guys that own 50, 100, 150, and you talk to them, and the world is totally different. So now as you look forward and why we're so excited about this brand, as I said, we were in the private equity deal. And when the private equity guys cashed out shortly after the IPO, our shares got sold. I believe in Nigel, I believe in his team. We bought. We reinvested all the money that we got distributed out to us. We weren't in control of our own shares even though we were a co-invest, because we were in their LLC, and the LLC was being liquidated. And we've bought. And not only have we bought equity in the company after having made a lot of money in it, we've talked to Nigel and we would be seriously interested in one of the territories. Because I want to close with saying, we do business with lots of big consumer product companies in this country. Look around this building. You'll see the names. I have not seen anybody executing so well on a national branding strategy coupled with a local grassroots regional strategy as I have seen Dunkin' do under the leadership of John Costello on the marketing side, somebody that Nigel brought in with him. And the franchisees all talk about it. So the local co-ops are allowed to execute creative ideas in conjunction with corporate. But now as they're growing a vision nationally and globally, you see Dunkin' doing more national advertising and seeding the markets that they're not in. When I say seeding, dropping little seeds in the ground, so that when they do introduce, they will introduce at a faster scale. I know all of you understand that.

And I'll just close by telling you about -- in 20 years of being in this business, and I think we're considered to be near the top of marketing and sponsorship in the NFL, I haven't seen a company get as engaged with us and using all of the avenues available to us in the company to execute as I've seen Dunkin' do, and I'll give just one example, but there are many. There's a guy on our team named Rob Gronkowski. You guys, or most people are aware of who he is, big goofy tight end who's pretty good. You guys know who he is. He's a big dude and he catches balls and he's athletic. And he's a beloved figure in this region.

And so last year, Dunkin' and ourselves -- but it was Dunkin's idea, they came up with something called the Gronk-Off, and we put life-sized cutouts of Rob in every Dunkin' Donuts throughout, certainly, the Eastern half of New England, if not all of New England. And Rob's like 6' 8". So you walked into any Dunkin' Donuts and there was a life-size cutout of Gronk, with his arm like this and there'd be a little chair there too. And what -- part of the promotion was get your picture with Gronk at a Dunkin'. And every Dunkin' I walked into for 6 weeks, there were lines of people waiting to do this, posted to social media. Now the promotion was backed with lots of traditional media in the market, radio, TV, everybody knew it existed. But then, everybody going into these Dunkin' Donuts was posting the images to their Twitter page, their Facebook page. And if you posted a video of yourself faking Gronk, executing -- Rob does a very aggressive spike after he scores, you'd be entered a chance to win, to come down here and eat lunch with Ron.

This thing, which we promoted on -- through our social media outlets but like [ph] traditional media, it just took over the whole market. You -- there are newspaper articles, radio and TV stories, and it was all conceived at Dunkin'. And I don't know what they paid for it, but I guess it was, relatively speaking, total dollars invested in the buy and they have a relationship with us. But some hundreds of thousands of dollars, and they clearly got tens of millions of dollars of value. And those are the types of people that I want managing my invested dollars.

So I appreciate everybody being here today. I don't think you could be more aligned. I said to Stacey -- I think it is Stacey over here, being an IR and holding a conference like this on the day after you've reached the 52-week high sets the peak pretty good. But I can tell you that not only are they great -- is Dunkin' and Nigel and his team great business partners of ours. We have a significant amount of capital invested in the company and wouldn't if we didn't believe in it. So even if you're Jets fans, I want to thank you, all, for being here today. Nigel's actually a Dolphins fan and I noticed he had the guts to show one of his slides had a Dolphin getting absolutely obliterated by a couple of our defensive players, so we appreciate that. It's going to happen again this year. And please enjoy the rest of your day at Gillette, and thank you very much for being here. We really appreciate it.

Nigel Travis

Thank you, my friend. I'll see you over there. So Jonathan, thank you very much, and we're looking forward to -- I think it's the 20th of October when we first play the Patriots this year, and then the 15th of December. So you're seeing these dates are very important on the calendar. So I think even Jon, you'll be there -- you should be there the 15th of December, okay, in Miami.

So we're now going to move further into our Playbook and we're going to talk about the supply chain. And again, at dinner last night, we were talking about how important the supply chain was. And if I had looked at the 4 box, the supply chain goes through every single one of these boxes. It's been very important in Dunkin' U.S. Obviously, it's critical, and Paul will talk about the economic impacts as we go through Dunkin' U.S. contiguous store expansion. Baskin U.S., when you've got small franchisees, 1.2 stores per franchisee, the supply chain and their margins are critical. And then International, the work that Giorgio is doing is very much based on the first base -- if I take a baseball analogy, his first base is the supply chain. So I'm going to bring out Scott Murphy.

Scott, as I said, has been with the company 9 years, recent promotion to our leadership team. This guy really understands the supply chain. He has to understand manufacturing as part of his job as well, because we manufacture ice cream around the world. So ladies and gentlemen, our Chief Supply Officer, Scott Murphy.

Scott Murphy

Thanks. Thank you. Thanks, Nigel, and thanks, Jonathan. Inspiring words for a Boston native to hear you say that. And I must confess, I did have my picture taken with the Gronk cutout, and I did use the little stool to get up a little closer to his height.

So like Nigel said, I'm Scott Murphy and I'm our Chief Supply Officer. So I'm going to talk about 4 topics today. And in doing that, I'll talk about my team. I've got a group of about 70 folks globally that support all 3 of our businesses: Dunkin' and Baskin in the U.S., and then Giorgio's 2 brands internationally.

We'll talk first about Dunkin' Donuts U.S., and this is probably the area that you know most about. So we've got essentially an outsourced agreement with our national DCP, which is the franchisee-owned purchasing and distribution cooperative. And I actually sit on the board. I'm only the nonfranchisee that sits on that board. Fairly large entity, 1,200 employees. We buy $1.5 billion worth of goods and equipment each year, and we ship those 65 million cases to all 7,000 restaurants in the U.S.

I'll also talk a little bit about what we call our CMLs, one of the first acronyms I'll use, our central manufacturing locations, and several of our other different manufacturing platforms that we use in the U.S. to deliver bakery products to our restaurants.

I'll talk a little bit about Dunkin' Donuts International, and Nigel is right, the supply chain is first base in Giorgio's strategy for international development. So we'll talk about the work we're doing to get the right manufacturing, the right quality and the right cost structure to help improve the partner profitability and drive AWS globally.

I'll finish with a discussion on Baskin-Robbins, both in the U.S., with our relationship with Dean Foods, who makes our ice cream for our stores, as well as some of the work we're doing internationally with our 13 plants, building capacity and sharing contingency and driving improvements for the licensees.

So let's start with Dunkin' Donuts U.S. So about 1.5 years ago, we signed a big relationship with our franchisees. We call it the Relationship Agreement that basically, as I said, outsources procurement and distribution to them. So my team owns the specs, and we approve suppliers and we approve products. And then the co-op goes out and negotiates price with those suppliers. So it's essentially a separation of church and state. We approve the products, they negotiate price.

As part of that agreement, one of the gives and gets -- one of the gets that we got was something we call flat pricing. So it's a 3-year journey, and we're about halfway through that. And the end result of that will be that every franchisee in the U.S. will have the same delivered cost of goods to their back door, regardless of where they are in the country. So if you're the franchisee in Boston, a heavy populated area of Dunkin's, you'll have the same cost of a case of coffee or a box of wheat or flour or cups as a new franchisee in California. Huge enabler to the development in our path forward as we go West, because we can now go to small markets and get them started with a decent food cost.

And the good news is, we've been able to do it without having some of the low-cost regions, like Boston or Chicago, subsidize these Western markets, which was a big concern of the franchisees. So we've done it by securing almost $125 million in annual savings over the last couple of years. We're essentially on a run rate of, call it, $40 million a year in savings, and we do it through a variety of traditional levers. No secrets here, but it's the strategic sourcing process, it's approving second suppliers, competitively bidding them out, it's value-engineering products, product optimization, making small changes to help improve the profitability of those products and passing those savings on to franchisees. So we're essentially lowering everyone's costs across the U.S. We're just doing it at a slightly different rate. So everyone's going down. It's just those high-cost areas, like the Southwest, are moving faster than the others.

So I thought I'd show a little bit of detail because last year, we talked about, for the Southwest guys, probably a 700-basis-point improvement in their COGS as we go through this flat pricing. And the good news is, we're halfway there and we're actually ahead of schedule.

So if you're a franchisee in Phoenix, Arizona last year, you saw some pretty big benefits from this initiative over the last 12 months. So I'm going to give you a couple of small examples that may seem small, but they all add up. So the first, we were able to get rid of all the fuel surcharges that the franchisees were paying. $75 a week per store. Small number but, again, it adds up.

We were able to reduce the distribution markup. So this is the actual cost of moving a product from a distribution hub, say in Illinois, down to those markets in the Southwest in Phoenix. That was $180 a week we were able to take out. We did that by opening a small center, a series of different hubs and domiciles for the drivers, and we drive fewer outbound case miles, which is the metric we track to help reduce costs.

Then they saw a big benefit in the sourcing savings. So I mentioned the $40 million a year in annualized savings. This is the franchisee share per store in the Southwest. Again, it's putting products out to bid, it's competitively negotiating, it's using e-auctions and reverse auctions on products to help drive the costs down.

And then the last one is an annual dividend. So people forget that our co-op is basically a nonprofit. So at the end of the year, if they beat their operating budget, any of that excess profit gets repatronaged back to the franchisees, based on a per case basis. So it's kind of like a tax refund, and a lot of people say, "Oh, that means I overpaid." It's not a big number. It comes back to the franchisees around March or April, and it's been a consistent number in the last 3 years, and probably over the next 3 as well.

So you add all that up, it's $400 a week, almost 300 basis points of improvement in the COGS. So you can see these improvements are happening. And the improvements are not just doing the simple things, but we essentially merged our 4 distribution cooperatives that we had regionally over the last 20 years. So we merged them into one, the National DCP. We got rid of the regional boards, we put a new professional board in place with better governance, and now we're making better decisions for the entire system than we have in the past.

So on top of that, and not included above, is some commodity relief that the franchisees have seen. So I lived through sort of some dark days a couple of years ago, where we saw commodities spike pretty high. And we've actually seen some improvement in 2013 versus 2012, about $80 a week. Add all that together, $25,000 per year per store in annual benefit, where 375 basis points improvement for those franchisees in the Southwest.

So clearly, they've seen that benefit. We're on track, and we think we'll get there pretty soon.

So I mentioned commodities. So I want to talk a little bit about this slide. And the slide's a little more complex than it may look like, but you see the main commodities that we have in our business. You see coffee, you see sugar, you see dairy, you see wheat. And then the different bars, obviously, reflect whether it's favorable or unfavorable, 2012 to 2013, for the franchisees' P&L. But this doesn't necessarily impact our P&L, certainly in the short term. This is, being 100% franchised in the U.S, this is the franchised P&L. But basically, it nets out to flat to 25 basis points improvement in 2013 versus 2012.

And the way to read this chart, the size of the bar is really a multiplication of 2 things, the order of magnitude of that commodity on the P&L, so coffee, obviously is the large one, as is wheat, times what we think the change will be 2013 versus 2012. So obviously, huge favorability in coffee, as you see in the marketplace, and things like wheat and dairy, certainly, going up. And again, if you net this all out, it's basically flat to positive for us, good news for the franchisees. And probably the better news for our franchisees is this is essentially guaranteed for the rest of this year, because most of these commodities we've bought forward through at least Q4, so we've locked in these pricings for the franchisee and they can have a stable, predictable cost of goods.

So now I'm going to shift a little and talk about manufacturing on the Dunkin' side. So many of you may know this, but if you don't, we essentially have 3 different manufacturing platforms in the U.S. that make our bakery products, specifically our donuts, and get them to the restaurants. The first is something we call a full producer. So this is how we started the brand 50, 60 years ago. It's a guy in the back of the store, frying donuts independently, and they supply donuts to themselves, that store that they're connected with, and probably, up to 5 or 10 in the neighborhood right around.

We actually still have about 300 of these facilities out there, supplying almost 1,500 shops. But the bulk of our system is supplied by something we call CMLs, as many of you have been to these central manufacturing locations on a couple of tours that we've given. Think of these as large-scale fryers, right? So the franchisees, 10 or 15 years ago, essentially consolidated manufacturing. They built larger facilities, and that enabled them to put in more automated equipment, have more sophisticated management teams and quality engineers watching this, and the net result is, the cost came down, right? We had scale, we had higher quality, and it was centralized. So we have about 100 of those facilities that range in size and they supply a little over 4,000 of the restaurants in the U.S.

So the third and final manufacturing platform we have is essentially a frozen platform. So this is something we call JBOD or Just Baked On Demand, and it's exactly that. So we did a deal with a strategic partner, Rich Products, and they actually make our donuts for us in one of their -- in several of their facilities across the U.S. So they use our ingredients, they use our formula, they use the equipment we specify and the process that is the Dunkin' process. They just do it on a mass scale and put it through a flash frozen process and then ship it through our DCP, our distribution network, to the stores.

So the advantage of this model is we can go to new markets, call it California, call it the Southwest, and open 1 or 2 small number of stores. It's not volume-dependent for a cost structure. The beauty of all 3 of these platforms, they're all designed to do 2 things: one is deliver the same consumer experience; and the second is they actually can all have significant -- can essentially have the same cost structure, if used at the right time. So what the problem becomes is when you open a CML and you only have 1 or 2 stores in that market. You can imagine pouring $4 million or $5 million of capital as a franchisee into a facility, low utilization, high cost. The beauty of the frozen platform, this is what we did in Phoenix, it's how we started the market, and then once you get to scale, 20, 30, 40 restaurants, or more importantly, in my world, it's 20,000, 30,000 dozen donuts a week, then you can actually put some capital, build a facility, and the franchisees can insource that profit margin and improve their profitability for the network, okay?

So what are we working on when we think about these 3 manufacturing platforms in the U.S.? Well, there's really 2 big things. The first is a consolidation play of the first 2 manufacturing platforms, the full producers and the CMLs. So in a lot of cases, these CMLs or these full producers have developed, organically, almost within families of franchisee networks. And so in some cases, we have CMLs delivering to stores that aren't the nearest stores to where the production facility is. So supply chain 101, right? Let's find a way to do some route optimization, change those delivery patterns and frankly, consolidate facilities where it makes sense, because these facilities actually have more capacity than they need in some cases. So in some regions, we're looking at a consolidation play of those facilities as they start to reach their useful life in their asset structure.

The second thing we're doing is really merging a lot of these manufacturing techniques. So we used to think about it as you're either a CML market or you're a frozen market with JBOD. Well, those 2 are sort of coming together. Because you can imagine a world where you get your donuts delivered in the morning, fresh from a facility, so it's easy to open up the restaurants, but then, you maybe use the JBOD product in the afternoon, because you get to use one of the biggest benefits of that, which is school bus comes, Jonathan Kraft buys all the cinnamon munchkins and wipes it out, then you can actually pull some product from the freezer. And within 60 minutes, you'll be back in business, a full fresh case, and you can recover for that day part and hopefully, drive some incremental AWS. So we're really starting to pull these together and use them both in markets to help drive sales.

So that's a little bit about U.S. and Dunkin' U.S. So now, I'm going to talk about International for a couple of minutes. So I mentioned those 100 CMLs we have in the U.S. What people don't realize is we actually have 140 CMLs in all of Giorgio's international Dunkin' markets. CML is essentially at least one for every market that we're in, because we're making donuts for those restaurants in those markets. But CML's play an even more critical role internationally than they do in the U.S., because in some cases, they're a full commissary. They help supply other products, they can be a distribution hub. Everything else, when we do the sourcing, we can pile them into that facility, help leverage the space and get it delivered out to the restaurants.

So what are we working on internationally in the Dunkin' world? So like I said, we have a lot of learnings from the U.S. on our manufacturing and we're bringing those internationally. So it's not rocket science. We have things called MORs, manufacturing operations reviews, so we've learned a lot in the U.S. and we're bringing those tools to the international markets. And we sent fleets of people out there to sit and walk through a production cycle at a facility, make sure that they're weighing product, that they're measuring, that they're scheduling labor appropriately, that they're doing preventive maintenance on the equipment to ensure the uptime happens. And -- because as Nigel mentioned, it's a 365-day business. So even if we're only there 3 or 4 days a quarter, there's a large number of other days that they're unsupervised, if you will. So it's a big training opportunity for us that we're helping the international markets, and we're using the best practices from the U.S. to help them.

The second thing is we're using the technology from the U.S., this frozen technology, but we're using it a little differently. So what we're doing internationally is we're essentially tacking on a frozen manufacturing component onto the end of an existing fresh CML manufacturing location. So think about a country where they've got 1 CML downtown that's supplying, let's say, 15 or 20 restaurants with fresh donuts once or twice a day. But there's a big opportunity, say, at a train station, remote. And most of our facilities can only deliver just based on freshness, call it 60, 120 minutes. So if you've got the frozen capability at the end of that production line, you can continue doing fresh, but then you can leverage shipping some frozen product to new markets. So it's helping Giorgio open new markets within existing countries, without having to deploy a ton of capital to start up in those new regions. And it's actually working quite well.

The last thing we're doing is essentially helping build the menu. So we have something that we call the Core 11. So these are the key items that Chef Stan, Paul Reynish from Marketing and John, as leadership, say needs to be on the menu in every one of those 3,000 Dunkin' Donut restaurants around the world. So you wouldn't be surprised what's on that list. It's the original blend coffee, it's espresso, it's iced coffee, Coolatta, 5 or 6 varieties of donuts, and then a sandwich carrier, whether that's a bagel, whether that's a flatbread, whether that's a croissant, something to enable Breakfast Sandwiches. Those 11 items need to be available everywhere, so that as I travel or any of the expats go, they can get an original blend coffee and a Boston Kreme Donut. So we spend a lot of time trying to find either local sources to make those products to our specs, or we ship them from the U.S.

Then, and this is sort of the gravy on top, it's about how do we do the incremental extra local customization for all those products, that I'm sure you're going to see in Giorgio's videos a little later, to help build check. So we spend a lot of time making sure we have food-safe suppliers that can do plus-ons to our menu and help drive the AWS in those markets.

All right, so that was Dunkin' International. Here's a couple of slides on Baskin International. And before I do that, I just want to say, Baskin U.S., we've got a great relationship with Dean Foods. We've essentially outsourced production of ice cream manufacturing in the U.S. to Dean Foods, and they deliver to all of Bill's restaurants here in the U.S. And then late last year, we basically leveraged that relationship to bring them into the International business as well. So we were able to close our manufacturing facility that Pete used to run, up in Peterborough, Canada, and basically got a significant number of savings, $4 million to $5 million in doing that, by shifting to one of our large partners for manufacturing. So now Dean Foods distributes out to those 20 or 30 markets that buy ice cream for us where we make our margin. And more than the cost savings, we now have a network of solutions for contingency, for excess capacity, that we can move demand around as we need, and it is also an affirmation of our asset-light business model, right? So we're using partners to do what they do best, which is manufacturing.

And speaking of that, I thought I'd show a map. All right? So this is our 13 global ice cream factories that we have around the world. So we've got 2 joint venture plants, so that's Japan and Korea. We've got 4 licensee plants, these are owned by the licensees. We've got 1 in Russia, 1 in India, and then we've got 2 in the U.S., that are the territory franchise agreements, Clink [ph] and Alpenrose [ph]. And then we essentially have 7 outsourced co-packer plants. We've got 1 in China, 1 in Ireland and some in the U.S. to do some prepack business. The interesting thing is this is meant to be a pretty holistic network of production so that, like I mentioned, we can move production where it's needed. So we have this fancy slide that Nigel loves, which is our tub matrix, which shows the cost of production in all these facilities, and then the landed cost in all these markets. And unfortunately, every month, we sit down and look at it and try to figure out, is there a better way to skin this cat, to ship ice cream to manufacturer, to move volumes. This a great exercise for our profitability and franchisee profitability. But for me, it's about having contingent supply. So I have excess capacity in certain places, in case of natural disasters or some other issues.

And some of them are strategically located, right? So our plant in Ireland, Silver Pail Dairies, we set up about 5 or 6 years ago to help get over some of the hurdles around regulatory constraints. So if you think about the world, there are sort of 2 competing thoughts on GMOs, genetically modified organisms, right? The U.S. thinks about it one way. Certainly, Europe thinks about it very differently. So we ultimately decided, to compete and succeed in Europe, we needed to have manufacturing within Europe using locally sourced ingredients, so that we could have the traceability and the documentation for the GMO products for the consumers.

So that's a lot about ice cream, but I thought I'd finish with a little bit of a conversation around ice cream cakes. It's a growing part of our business, and in some ways, it's a lot more complex than actually just making ice cream. And when I think about cakes, there's really 5 components. So there's the innovation piece. So John and his culinary and innovation team, and Pete and his commercialization team, come up with all these new designs on cakes. It used to be when I started a cake, it was a cake, and then an ice cream cake is an ice cream cake, and now, that's not what it is, right? We've got piece cakes, where you've got individual flavors and different toppings, so different people can enjoy their favorites in the same setting, which adds huge manufacturing complexity, but it's what our consumers want. So once those innovations are done, it's our commercialization team that helps develop the technology and the automation. Because unlike ice cream manufacturing, where it doesn't have a ton of labor, cake manufacturing can have a lot of labor and can be inefficient. So imagine placing all those individual toppings on those pieces of a cake and make sure they're in the right place at the right cost. So what Pete's team does is they work on how to automate that, how to have the right technology. And then, of course, once you do that, how do you make sure you do it with excellence, that you keep the equipment up, and that you've invested the right way to have profitable cake manufacturing.

And finally, as I'm sure Giorgio will talk about later, the cake business can tend to be quite seasonal in different markets. So we spend a lot of time trying to build excess capacity to be able to ramp up for the holiday season in Korea or other holidays in the Middle East, as well as, again, building contingency in case of natural disaster. Can't sell what you don't have, and that's part of the network strategy.

So I'm going to wrap it up here. When I think about the global supply chain, a couple of thoughts. In the U.S., we're well ahead of our schedule of implementing flat pricing within 3 years. We're a little more than halfway through that process. We're expecting a small amount of relief in commodities for the Dunkin' U.S. franchisees this year versus last year. We're consolidating some of our donut manufacturing facilities in the regions that have excess capacity, and we're leveraging the frozen solution for manufacturing, both in the U.S. for a hybrid solution, as well as in international markets to help expand growth.

We're doing a lot more local sourcing, so we're trying to find those products within country, internationally, to help drive check. And we're focusing on cakes, not just ice cream, but ice cream cakes. It's a great ticket and high profit margin dollar-wise for the franchisees. And all of these things are aimed at driving the AWS in the restaurants, globally, as well as improving franchisee profitability and, of course, Dunkin' Brands' profitability.

And that is essentially our playbook for the global supply chain. And I'm happy to take a few questions. We got a few minutes, if anyone has some. John?

Question-and-Answer Session

John S. Glass - Morgan Stanley, Research Division

It's John Glass. You mentioned this $400 a week savings for the Southwestern restaurants. What's the average savings? Has the chain, in whole, attained the savings through this process or did it net out to 0?

Scott Murphy

Yes, so it's a great question. So for those of you who didn't hear it, what is the average savings across the system. If franchisees in the Southwest saw those 300 basis points, what's the average, and the answer is about 100 basis points.

Unknown Analyst

Sorry, can you just share a little bit about the systems that you use to aggregate the data that ultimately feeds this big data objective, sort of what their nature is and how it's adapting?

Scott Murphy

Yes. So systems is a great challenge, and we're starting to partner a lot more with Jack Clare on the IT side. We're much further along domestically than we are internationally, as you might imagine. But domestically, we actually have -- we've got a great visibility, although it's a little bit of a manual process. So the co-op, the DCP, is actually just embarking on a new ERP implementation, so a unified system to pull together the 4 disparate systems that they used to have around supply chain. And we're basically building our integration in that, to tie it with our business intelligence, so that when he looks at sales for a day part for a certain SKU or a certain menu item, I can do it right now with a little manual work. I can tell you the inventory in our different DCs. The ultimate goal is to have visibility to inventory at the shop level, so that we can help drive promotions.

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

John Ivankoe of JPMorgan. As the system currently exists, you have the capability of doing things like pre-made sandwiches, if you will, out of any of the distribution platforms that you currently have. I know we've talked about donuts, we talk presumably bagels, croissants, a lot of things are distributed, but do you actually have a way to maybe reduce some of the in-store complexity around your -- specifically your afternoon food program?

Scott Murphy

Yes, we do, although I'll tell you, and I think you know this, it's a different game once you start handling produce and meats and FDA regulations around that. So we haven't pushed forward with that in the different commissaries, but we basically have, I'd say, a 75% coverage in our footprint from those commissaries to deliver, if that's the decision we decide to go. All right? Yes.

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Steve Anderson, Miller Tabak. I just have a question on your commodity costs. It's a 2-part question. How much of your commodities have you contracted again through year end? And have you started to look at 2014 as well?

Scott Murphy

Yes, so commodities are an interesting piece for us. And maybe, I'll just start, if I have time, is to say our commodity strategy, because our franchisees have the co-op, has a fleet of people that manage commodities, and they've got a relatively, in my opinion, conservative approach to commodity management. So the first goal is around continuity of supply, right? God forbid the day we don't have coffee, right? You can't sell what you don't have, so make sure we've got good coverage. The second thing we do is around managing volatility. So what's terrible for these franchisees is to see huge spikes in their cost of goods. They need the ability to plan, so again, conservatively buying forward. And then the third thing, obviously, is around cost of production. So we're not doing complex derivatives and collars and hedges and all sorts of vehicles like that. We're essentially buying forward when and where it makes sense, to help contain those costs and deliver on that strategy. Commodities, in general, are probably about 1/3 of the $1.5 billion in purchases, whether it's direct or as a component. Like that sugar number you saw up there, it's not just the sugar that goes into our drinks, it's some sugar in the baking process in our CMLs, and it's also the sugar that's in our bakery items like muffins and other products. We aggregate that stuff for our buys. So 2014, we actually expect -- don't hold me to this, but we actually start to see a few of those categories continuing to go up a little bit, so the bottom half of that chart, the things that were going to the right, and so we're starting to actually lock in coverage for at least Q1 on those categories. And again, coffee, anyone's guess. There've been some interesting things that have been happening in South and Central America, and we're starting to push our coverage out on that, because we think we've probably hit a low on that as well.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Thanks. Jeff Farmer, Wells Fargo. Last year's presentation pointed to, it looked like $245 million in cost savings. You had already achieved through the first 4 years of this program, and I think there was some contingency on saving another $100 million. You sort of alluded to being ahead of schedule. But is that in reference to that $100 million? Or is there an opportunity to get greater savings than that?

Scott Murphy

I think 2 things. So I appreciate your bringing the last year's report. And I think that's actually looking backwards, so it's a slightly different timeframe, but you can look at the $40 million to $50 million as sort of an annual run rate. And I think there is upside for us to secure. I think as we consolidate our facilities, most of the savings on there are around strategic sourcing. It's not around consolidation of the facilities and everything else that we've just started to touch on. You hear things like the UPS, no left turns. Interesting story. In New York City, we moved to night drops of our product to the franchisees. In doing so, in Manhattan, we saved $250,000 in parking tickets, right? So small changes like that, that have never been on the radar screen, we're starting to do. I think there may be some upside to that as well.

Unknown Analyst

So I just wanted to ask you, one of the slides showed 60 million dozen donuts for the international part of the business, which just some back of the envelope math suggests a way bigger donut mix internationally than is in the U.S., U.S. being mostly coffee. So if the international, what percentage of international is donuts as opposed to coffee? And what does that mean for the economics of the International business?

Scott Murphy

Yes. So I think -- I don't know if 40%, 30% to 40% International would be our mix on donuts. So I would tell you that, obviously, the profitability on Beverages is higher than donuts, but donuts are still a very profitable business. So I wouldn't think of it as a drag on the P&L. I'd think of it as an opportunity to add those Beverages internationally and continue with that donut volume in those markets. All right. Great. Thank you very much.

Nigel Travis

So just on that last question, it is fascinating. When I went to Latin America with Scott, year before last, and you go in the planes in places like Columbia and Peru, you see people taking boxes of donuts to give to their relatives in some of these countries. I mean, donuts are seen as a great gift-giving opportunity.

So I recognize you all have been trained by us to think that Beverages are good and donuts aren't so good, but Michael, there is some good things that are donuts. And there's plenty of good ones that are back there, all right? Okay. We've got to move on to International.

And before we do, I just want to show you some numbers, I think, are helpful to put everything in perspective. At the end of the quarter, the quarter we just finished, Q1, we had over 17,500 stores. Internationally, I think this gets to some of Michael's numbers -- sorry, globally, not internationally, so this is the U.S. and International together, we sold 2.4 billion donuts and munchkins. And that takes me back a couple years. I went to speak to my son's class, and I was stumped by the then 5-year-old who asked me, in the U.S., they didn't actually say the U.S., but they only thought the U.S., they said, "Do you sell more munchkins than donuts here?" So I scratched my head, I came back and asked all the experts, no one knew the answer. And we then did some -- we had to dissect it all and we found that we sell 3 donuts for every munchkin. So a piece of irrelevant information.

Now I think the next number's very important, and we said it on the fourth quarter earnings call. We sold, last year, 13.2 million ice cream cakes globally. Both Giorgio, who's coming up in a minute, and Bill, have got goals to boost this. And we talked about this again last night. On average, in the U.S., average ice cream cake sells for $25. It may not be the highest percent margin, but the dollar opportunity for our franchisees and licensees around the world is immense.

The next number is ice cream scoops, 778 million globally, and this is interesting. These last 2 numbers are obviously much the same, 2.1 billion guest visits globally last year. And again, one of the fixations with the data and the metrics, we want to get even more visits every year, both through the new stores and getting our guests to come back more frequently. And Michael, number for you, 2.1 billion beverage units sold globally, okay?

Okay. So let's go and look at the whole world. We've now got 7,700 restaurants outside the U.S. The long-term potential is 15,000. Don't ask me when. This is a bit like the number we talked about in the U.S. with 15,000. It will happen 15, 20, 25 years. We think we have unlimited potential internationally, and we think we can get to 15,000 one day.

So this is where we stand today. If you look at the future, I should say, if you look at the future, you'll see that Europe, where we have very few stores today, about 400, we think we can get to 1,300. Us Europeans, like Giorgio and I, may think that's a conservative number. So Asia, where we've got a lot of stores today, we think we can get to 3,900. The Middle East, which is a real strength for us today, up to 1,200. And Latin America, where, particularly on the Dunkin' side, I think we've done very well, must be all those donuts, I think we can get up to 900 stores. You then add on the U.S. of 15,000-plus stores, and that is the future of our restaurants globally. So obviously, big strength in the U.S., very nice mix around the world, and I think the big unknown is how many stores we can grow in Europe, India, China and places like that.

So I'm now going to introduce Giorgio Minardi. Giorgio, as I said, has been with us just over a year. He's going to give you an insight into the slightly more complex world of International. Giorgio?

Giorgio Minardi

Thank you very much, Nigel. A great thing I've learned coming after Nigel in the presentation is he gives you live increases in your targets, so I've just seen that 15,000 is the new number. So it goes like this everyday. But in Dunkin', we're used to that, but it's a pleasure to be here today. And in these 20 minutes, I'll try and really convey to you the international strategy. And we're very delighted, last February, we had our convention, where more than 450 franchisees, suppliers, our staff all came together, and we addressed the strategy, which I will, in a few slides, try to represent to you today, because it was important to step-change the business. Obviously, some comments that we're very donut-centric is true. Internationally, that was our heritage. But we've seen and we've learned also from the U.S,. and so we know that we needed to change the pace and change the way forward. And so I'll take you through this very quickly, and hopefully, this will give some clarity on where the company's going.

Before I do that, I just wanted to also give you a quick snapshot on how we did last year. As Nigel said, I've just been here 1.5 years. My heritage, I was an executive at McDonald's for 17 years, then I was in Burger King. I ran the Northwest division, the U.K., which is their second largest market. And so it was important, as I came in, to try and contribute and give immediate contribution to the brand and to the business.

The thing was that, most of you might not know, but it is a strong contributor to the business. So I wish I could have taken a month off, figured it out and come back, but it was a balancing act to change the 4 wheels of a car while it was actually going pretty fast. And so if you just go through briefly, I mean, we still grew 7% net openings on Baskin. Our comps were up 4%, 4.2% for the year, and we opened those in Mexico, 3 new regions in China and Vietnam. So you've probably heard this millions of time, but Baskin International is the jewel and is giving us a lot of satisfaction, and is giving us the encouragement to step-change this business as we move forward.

On the Dunkin' front, a slightly slower pace, and we will keep this slow pace as we go forward, because of the things that Scott and Nigel were talking to you about, and that is we need to change the model and we need to make sure that supply chain steps up the business proposition. Compared to our competitors, we make most of our products. We make the ice creams and we make most of our bakeries. So it's essential to make sure that the supply-chain system is in place to be able to sustain our business as we go forward.

So moving into the future, as I said, and this is where we are today. Leaving the convention, the feedback we got that it was the first time they saw a strategy that combined 2 brands with clarity and distinction. And I think we are very encouraged to see how immediately the franchisees, after they got back, started to endorse it. Because plans are great and easy to develop, but if you don't have behind you your system, it really doesn't get you very far.

So the first pillar of key growth and strategy [ph] is all around our brand equity, an important piece that somehow we lost down the road and we needed to bring it back together as a key brand. And so the marketing team that works on this is fantastic, and really helped managers to really focus on what are the key elements to get our brand up and build that demand as we go forward, and they are the differentiation piece. The menu elasticity, which is important, because as we were discussing, many markets are centric to donuts, compelling advertising and marketing to regenerate the attitude. And really, the retail expression, because our business is a fast-paced business. We turn over and we remodel stores much quicker than traditionally occurs [indiscernible]. So it's really very important to have a strong team behind the driving -- the growth drivers.

The second important, most important driver for us is the unit economics. We learned from the U.S., but it was something that we are implementing. We are adding a lot of resources to make sure we're not just guiding the franchisees but actually leading the franchisees, which is a different act. Supply chain comes first, as we always said, because obviously, it is important that we are innovating and we are driving our process through that. Strong operations, the background I have, obviously, from McDonald's is one that we are driving that very firmly. And then the regional structure support, which has changed, changed 5 months ago just before the convention. We used to have 2 vice presidents running both brands and then they have their teams around the world. But I felt that we were very distant from the customers, the consumers and the franchisees. So now, we've created 5 regions with 5 vice presidents that are in the regions much closer to our franchisees and to the customers. And most important, they are accountable for the P&Ls. So even if we're a franchise organization, what happens to the franchisees is something that we have to take care of, so something that we've been really driving with a lot of attention.

The third key driver is to accelerate growth. And this is something that excites us a lot in International, and you'll hear more about it as I go forward. So the pace of growth is going to have to change. Right places are a fundamental, and right partners. And this might sound very simplistic, but this is where the franchising business, most of the times, you get tracked away, either because you fall in love with a franchisee and you start to give them the territories or other times, you just slow down the pace or you go too fast. So really, this is the rhythm of International, that we're really paying a lot of attention. And I'll go in these 3 growth drivers, for you individually, so hopefully, it will give you more clarity. But the thing that really is important around this is that, as we drive these 3 pillars, we indirectly are driving AWS because they are all focusing on the same -- in the same area. So I think that's what you'll be seeing, that's what you saw a little bit last year. The first quarter was great for us, the comps are up even higher than last year, and we're starting to see the momentum as we go through with our new strategy.

Differentiating our brand equity is an important piece of the business because obviously, we're starting to build the demand for consumers that are used to seeing us maybe either as donut shops or just beverage shops. And this is a fantastic one shot chart that will explain that. So let me quickly take you through this and explain it because it's all condensed in one shot. On the Dunkin' side, we launched a new concept at the convention, which was called the Fresh Brew International. Everybody loved it. It captured the essence of what the brand wanted to be and inspire, and was supported by our menu innovation, which is fundamental.

These 3 platforms are important because they build on each other. They do not trade off on each other, which is a classical error that we made. And I think that as you will see and as we unfold, you'll understand that we are slowly moving in with the reward proposition, and then trading them up with a Refresh and Refuel. On the Baskin side, we have the Happy 1.0. This concept was already in place in Japan. We have over 1,000 stores like this, and it did so well that the marketing team really managed that and now is in gear, and we are starting to open -- I think year, we have 200 or 300 remodels in this new concept, which was highly alike.

Again, the 3-tier strategy on the menu, Indulge, Celebrate and Refresh, that builds on each other, driving AWS, driving the experience and the quality, and all undermining the fact that we are trying also to be flexible to allow our franchisees to have some local adaptations to the menu. So something that we're very, very proud of and I think that you'll be seeing more about that.

Diving into the 3-menu strategy, and I'll touch on it. The Reward piece, obviously, is the bakery, the donut, the premium donuts, the products that people know us for. We have a tremendous amount of efforts around that. And then as you see, we're starting to enlarge the menu and starting to give products and innovation that we didn't have before, a little bit like what the U.S. is doing, and that is where the beverages and the coffees come into place. And then lastly, the Refuel piece, which is the menus and the sandwiches that we have and we're introducing them. They're now all over the world, which is giving really our brand equity a different perspective. So we're moving from the doughnut-centric to the beverage-centric. And this is why Nigel was saying, while we still are growing and we are still being very profitable for the franchisees, and for us on the Dunkin' side, it might take a few more months to get this into the restaurants, to get the remodels and get the pace going as we're seeing -- as we'd like to see it grow.

While on the Baskin side, the model is much easier. Obviously, we make the product, we manufacture the ice cream and it has a 12-month shelf life. So it's easier to manage. It's not so critical as the manufacturing of Dunkin'. And there, we've really nailed it down to Indulge. These are our 31 flavors. It's what people know us for, it's the quality, it's the fun. And then the Celebrate platform is all around the cake technology, which Scott talked about.

We're extremely excited about this, because the cake technology that we're implementing internationally is slightly different than the U.S. We really have taken a high approach to it, where we have ice cream cakes that are very, very different. There's some great stories. We sold last year 8.7 million cakes internationally, which is a large number as we're starting to drive this new -- this platform. And Korea, in 3 weeks, which was my first December on this whole -- it's kind of like working in the stock market there. We were counting the cakes as we go, we were ramping up towards Christmas. And in 3 weeks, they sold 1 million cakes. So that is now a ritual in Korea. People are going in to get their Christmas cakes. We're doing this in Japan now, and we're starting to implement it in the Middle East, where we have 700 stores or so. So it is something that we see, that we can really start to back very intensively. So we're really excited about that.

And then on the Refresh side is our Beverages, our softdrinks, milkshakes. It helps create the frequency. So when our customers come into our restaurants, they're not just asking again for a scoop of ice cream, but they have a large, more expanded menu, and this, again, will help AWS and build the brand -- the equity around the brand.

So I'd like to take you through 3 commercials and fast-forwarding as much as I can to -- hopefully, they'd allow you to understand also the spirit and the energy that we're trying to put behind the brand essence.

The first commercial is one that I'm looking at, Paul, who is the Chief Marketing Officer. Paul, can you just stand up. I'd like you introduce you, because he's fantastic. Paul is from New Zealand. He's our Chief Marketing Officer internationally, and he actually at the heart of driving this platform. And this will be launched next week in Korea. It's exciting. It's starting this new journey around extending the menu. And I hope you like it.


Giorgio Minardi

So a very animated, creative, it's touching the young adults and bringing a spirit, changing the profile, so we're very excited about the summer in Korea. The next commercial is, again, what I was talking to you so passionately about, our cakes. This is a commercial that ties more around the family, ties more about the quality and the fun, and we had launched this last December, and that's where you saw most of the millions of cakes that we have successfully managed to sell.


Giorgio Minardi

So the technology, I have to explain, of this cake, which is rather unique, is that it's 8 pieces of 1 ice cream cake that gets cut up and then basically, it's divided. And then you make 8 different other flavors and then they come back together and it basically becomes a jigsaw puzzle and you have 8 different flavors. And you'll be seeing this technology going on and on. There's actually a chip on there with your iPad. You can actually get a happy birthday song on it. So the technology of Korea is way ahead of where we are. But very exciting, and this is going into the Middle East and most of our countries. So I think you'll be hearing more about this in the next future.

Moving on to the next commercial is from Latin America, and this addresses them all massing around our coffee and our quality coffee.


Giorgio Minardi

Apologies, this was Japan. This is what -- we've launched this last week. It's the same piece-cake that we have in Korea and in the Middle East, and this should be the romance around coffee.


Giorgio Minardi

So very excited about how we communicate with our customers, but as always, then it happens in one key place, and that is in our stores. We have these 2 new concepts that I talked about, concepts that we've tested, concepts that our franchisees love and we're implementing as we speak. They're giving a whole ambience, tonality. The Dunkin' on the far left is warm coffee, and it really manages to expand and address all the menu innovations that we have. Baskin, obviously, also is very, very attractive. And we're doing very, very well in the stores that we have already seen that we're starting to implement these restaurants.

So moving to the second growth driver very quickly, obviously, I understand time, it really -- we're trying to focus on 2 key areas, and that is the supply chain, and I won't go through that again, because you've heard that from Scott, but strong operations. It's fundamental and this is something that we've been implementing since last year, is to have operations, right, hand-in-hand with our franchisees. We do RORs all the time. We have got the trends of how operations are performing in our restaurants. We work very closely with our franchisees, and the key is, obviously, to push them to increase, as much as possible, their scores.

Obviously, the customer -- the customers and the feedback we're getting from the customers are important. And important is that we continue to capture the essence of being a culture-driven business.

So strengthening operation, leveraging all the tools, this is something we do on an ongoing basis, executing regular restaurant operations reviews, establishing baseline operation metrics and implementing technology solutions, something that we didn't have in the past, and that we're using the data that comes in, obviously, to be able to manage better our business, and driving operations as we all know, improvements, positive on comps and, obviously, on sales. So we're very, very focused and determined around this area.

Supply chain, we've talked about it before, I won't go through it another time. Scott hit on all of these, but it's about improving quality and cost manufacturing in order to be able to sustain new country growths, balancing global with local, fundamental, particularly in the low GDP areas of the world, innovating donuts and manufacturing platforms and enhancing the cake production, which we've addressed several times.

The last key one is the one that excites, I think, all of us most. It's because, once you get your engine going, it is the most important part. And that is accelerate the store pace, place growth, right places and right partners. So our commitment is to now grow and shift our store growth, on an annual basis, from 6% to 8%, and that will get us to Nigel's 15,000 stores. He says to all of you, "I don't know how long that will be," but he has told me where that needs to be, and it won't be too far. I mean, we are driving our business. Last year, we opened 404 stores. We will continue to grow that pace, and we will continue to grow in a much more quicker way.

But the important part in driving growth, we have, today, more applicants and more franchisees asking to sign up on Dunkin' and Baskin than we can actually handle. The important piece is how you choose them and where. And this is the fundamental strategic difference that we're having today versus past -- in the past. So I'd like to take you through this very, very quickly.

55% of our stores are in this segment of the business, and they are the more mature markets, the ones that have a reasonable high average check of $7,500. And the profits coming out of this is 77%. So this is what drives or sustains our business internationally, of these markets. Japan, obviously, Korea and the Middle East are our driving forces.

We are in the midst to add a fourth engine to that, and that is Australia. We are in the middle of selling a master franchisee agreement in Australia to one of these partners that have been sensational, which is the Galadari group. We hope to close this deal by the end of this quarter. We are extremely excited because we know how they work. They've opened more than 700 stores in the Middle East. They opened 60, 70 stores in an impeccable way. And we'll be doing a slight joint venture with them in here, and will drive with them the growth. We are looking at opening 100 stores in the next 5 to 10 years. I think it'll be shorter. We've been a bit conservative on that. But it's exciting, because this is the second largest ice cream market around the world per capita. We are at 90 stores right now, and they do exceptionally well. Some of you know that we inherited that market a few years ago, and it took a few years to clean it up. Obviously, the franchisee that was before didn't leave the house in good order. But we managed to fix that up now and it's a nice little jewel. And I think with this partnership, you'll start to see the driving pace in the right location that is so essential for us to leverage our success in the business.

The third area where our businesses are mostly focused are the areas where we have a lower GDP. And we have, in this again, more donut-centric, they're $2,400. We don't get a lot of royalties out of this segment. They do very, very well. The unit economics, obviously, for the low breakeven they have is fine. We are market leaders in most of these countries. We do far better than most of our competition. But obviously, there is one that we will continue, but it's not an area of the world that is particularly attractive as we're trying to change the pace and the growth of our business.

The one area of the world, which is quite astonishing, is where my previous companies that I used to work for actually are the ones that they have most of the profit coming out. So we haven't gone there yet, which is quite amazing how this is played in the years. And this is what we call the white space of international. So we are -- only 5% of our stores are in these markets. So we hardly have touched Germany, we've just started to open a few stores in Moscow. We're not in Turkey, we're not in the U.K., we're not in Switzerland, we're not in Scandinavia, all those markets where the average store sales will be from $11,000 to $15,000. So getting even closer and higher than what the U.S. is. So this is a highest potential growth for us. And this is the area where we are going to absolutely start to focus our business on.

So I'm sure that some skeptical people will say, "Well, aren't you coming late?" The fact is, yes, we are coming a bit late in these markets, but we're coming into these markets, I think, with the right idea and the right positioning and the right concept. And I think this is the most important piece. So Germany -- and I also want to add, in these markets, we will not go with one master franchisee. In order to make sure that we don't put all our eggs in one basket, we are going to use multiple franchisees. So we'll break down the countries in 5, 6 regions. And this is what we've started to do in Germany. In Russia, we'll be opening Saint Petersburg by the end of the year. Germany, we've signed up with Frankfurt, Hannover, Munich and all these stores we're starting to open as we unfold the year, very, very encouraging.

And then the U.K. piece, which is one that's going to be the most challenging one, not only because Nigel is for the U.K. and he knows all about the U.K., but it will be very challenging because obviously, there's a lot of competition there. But I think we can position ourselves as we're positioning ourselves in most part of the world, and not as a luxurious brand, but actually being closer to our consumers' needs, as you see in your experience in the U.S. I think we have a nice opportunity there. So we're really ready to go in that. We're doing most of the due diligence on these 3 platforms, strategies that we talked about, as we speak. And at the end of the year, we'll be opening the U.K. and it will be very, very exciting.

We also have in the pipeline to open in Brazil, another important GDP growth market. We'll be opening that probably first quarter next year. And we're extremely excited. You'll be seeing other countries opening as we speak, but this is the focus for us, and this is what we're going to try really drive in the next months.

So going to the point of the folks that might be skeptical, and this is a great example, of Frankfurt, which we opened 6 weeks ago. Actually, the store's not so big. The trucks are in the back for the supply, the store is not actually not big, but it's done $600,000 in sales in the first 6 weeks. Yes, it's a honeymoon period, but to have Germans line up, I haven't seen that yet in my life. They're actually lining up, still today, every day, to get their coffee and their donuts and their beverages. So it's very, very encouraging to see this. And you'll be team more store openings, I think in the next month, in Frankfurt, so very encouraging to them. And again, the partners are fantastic. They have been hand-picked, and I think you'll see some great momentum as we go, as we speak.

So again, just driving, leaving you with the 5 key drivers of our business. This is a 2-day presentation in 20 minutes, I apologize for that, but it's driving AWS is our primary focus. Optimizing supply chain is critical to sustain our business. Focusing operation is our new motto for our culture, and growing most high profitable markets is going to be our focus for our business. And lastly, we believe picking up the pace will not only excite us all, but will give us a sense of accomplishment. And I think you'll see in the next months as we go along, if you keep track on international, I think we'll be -- hopefully, we'll be seeing some encouraging results.

So that ends my presentation. Slightly over time. If there are any questions? Sure.

Unknown Analyst

Quick question on marketing. How many stores can you -- sorry, how many stores can you really impact efficiently with electronic media and TV?

Giorgio Minardi

You mean inside the stores?

Unknown Analyst

No. In the international markets, you don't seem to have much density. And if TV is going to drive brand equity, brand perception and all that, do you need to open a lot more stores before you can really impact the business?

Giorgio Minardi

Yes, yes. Well, The answer is yes. Obviously, we need to have a certain threshold before we can devote most of our marketing dollars. Most countries have quite a solid marketing budget as we start up. We use different venues obviously. We use a lot of the social media and we use a lot of outdoor, a lot of radio to help build up the brand. But the most powerful part of it is actually PR and communication. So when you start up like Frankfurt, you just have to do a few interviews. Nigel does a couple of them and, all of a sudden, the brand awareness starts to resuscitate, even in Germany. But as we grow and the marketing budget starts to get bigger, that's where we can really start leveraging. It wouldn't make sense at the beginning of the journey to spend too much money on -- into the markets also. Because as you see, we normally have -- we really have a difficult time in serving customers, as we saw in Germany and Guatemala and all the countries. So the beginning piece is one that we normally ride out in a different way. But as they start to get to at least 100 stores, then we normally start to really participate in advertising in a more fashionable way.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Jeff Bernstein from Barclays. Giorgio, 2 questions, perhaps. Just the first one, you mentioned Germany as an example and you talked about going with multiple franchisees, and splitting up the country. I know in the past it was more, like you said, more eggs in 1 basket. So I'm just wondering if you could talk about the pros and cons and why maybe multiple might be better? And then separately, there was no mention -- I know in the past management's been open to maybe equity stakes in some of these markets, where more than just a franchise relationship but perhaps having some ownership above and beyond that, especially maybe in the new markets? So I'm just wondering the full process on that.

Giorgio Minardi

Yes, well, I think that right now, we still determine with the light asset model. I think right now, that's our challenge. We believe that and we see by choosing the right partners -- and I think the question actually can connect with each other. If you have the right partner and he has the strong leverage and he has the operating experience, you really manage to use the light asset model. And that's why we've actually tried to break out the countries, because obviously, franchising agreement is kind of like a marriage. You might start off well, but you might end up in a different situation. So not having all our eggs in 1 basket is critical for us in these countries, and that's a bit of the step change. Unless you have an enormous franchisee, like Jubilant in India. Obviously, we feel very comfortable in that and that is different. In terms of the equity, we may do some joint ventures where we feel we need to be closer to help start, as we're doing in Australia. It might happen, but it's not going to be a norm. I think right now, we're pretty happy with the pace we're going, and we're seeing some great, great growth rate. So until we see -- if we manage you get to that 8% growth rate a year, I think we're very happy to keep it that way in order to sustain the model that Nigel has been addressing.

Nigel Travis

Can I say something on that? I mean I think it's an interesting model. We heard a lot of feedback from you guys last year about Burger King sort of investing in project services. I think we've actually put ourselves in a nice situation where, in Spain, we went in, we saw an opportunity in a really tough economy. I mean, I don't have to tell you how tough Spain is right now with their 27.6% unemployment. And then, so that's if you're like a tough situation. And Australia, I think, is a great situation, where we're really excited about what's happening. So we're involved there, even though were effectively selling down. So I think we've got 2 experiments is the best way of thinking about it, Jeff. And we're very flexible going forward. We always have to remember that our mantra is asset-light. It doesn't mean, as we have in the U.S., where we've effectively got company stores in Dallas and Atlanta and in the Boston area, that we may not go in with more investments. So we're going to keep an open mind. But don't think it's going to happen, as Giorgio said, every single time.

John S. Glass - Morgan Stanley, Research Division

It's John Glass. When I look at the slides and the average weekly sales for the mature JV markets and then the growth markets, they come out at less than $400,000 a year for some of those mature markets and $125,000 a year in average volumes for some of those growth markets. Now maybe there's kiosks in there, or maybe there are some differences. Maybe parse that out and what's a full store do? And maybe it's also blending the 2 brands and I'm not seeing that. And more importantly, what's the breakeven? Where do you need to -- are you actually -- are franchisees making a lot of money at those levels or do you have to get a lot more volume in order for them to make money, and therefore develop?

Giorgio Minardi

No, and that's the interesting part. I mean, interesting part. On a local level, most franchisees, I would say 80%, 90% are all in the 15%, 12% to 15% EBITDA margin. So Korea is, right now, running at 18%, 20% margin, so very profitable businesses. Obviously, the key there, and that is why we have Scott playing such a this critical role is, when you are in low-GDP countries, you have to have local sourcing to be able to really grind out the business and get to that, but the breakeven is also much lower. So it's amazing to see in countries like Thailand and Indonesia, and I'm sure none of you have been there, but the stores are beautiful. The business is growing great. Obviously, when you compare them to the U.S., they're much smaller, and that's why we're tending to drive towards now this white space, which I think will be more comparable to what we have here today.

John S. Glass - Morgan Stanley, Research Division

[indiscernible] markets with $125,000 average sales volumes that are -- people are making 15% margin with $125,000 top line annually?

Giorgio Minardi

Yes, yes. Because donuts are USD 0.30, USD 0.40 when you sell them from the stock. So obviously, the market -- the overall cost and the sales in these are much lower. Plus, in this mix, as you said, a lot of them are kiosks, particularly in Southeast Asia. And so that skews away that restaurant. I think in the future, with Paul, we're working on trying to actually break that down to give you an idea. Because that'll give you a sense of what the mother stores are driving and what the kiosks are driving. I think that will be something that we've been talking about that might be useful. But most of the franchisees are doing extremely well.

Nigel Travis

A good example that I think I have given some of you before is, in one of the Southeast Asian countries, they were owned by a private equity firm. And the average weekly sales, from memory, were about $2,300. And the private equity people sold last year, and they told me at one of our conventions it was their best ever investment. I know it's hard to believe, and, John, I'm one of the world's biggest skeptics on this, like you are, but it is amazing. And in many of these countries, they've had the stores there for many years. They've worked on their economics. They do, do advertising, but it's a very low-capital investment. And you could argue that it's because they don't have all the equipment that you see in the U.S. stores. So sometimes, in these markets, the actual store build is $80,000 to $120,000. So that really brings down the build-out. And then going back to what Scott was talking about, if you've got a CML that's really got the stores to support it, that again helps the economic model. I think, we've got time for one more question because we're nearly at time for break. So...

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Jeff Farmer, Wells Fargo. I'm just curious where you stand with the development -- or actually Dunkin's infrastructure in markets like, again, the emerging growth markets, the white space markets, how much more do you need to do there to make sure that these franchisees have everything they need to move forward? And I think you're involved with supply-chain site selection, marketing and all these things. But where do you stand right now and where do you think you'll be in a couple of years?

Giorgio Minardi

Well, thanks for that question. Well, as I said, we are gearing up now on this white space. I've talked a little bit about the U.K., Germany. I think we'll rapidly -- I'm looking at Paul. If I cannot give too many numbers, he's been giving me that. But you will see hundreds of stores going in today, in a very short period of time. And I think that is really thanks to the supply-chain system that we're now getting ready, that will allow us to go quicker. And I think that's always been, I think, on the Dunkin' side, a bit of our drag is we have to make all these products. And as our franchisees start to move into second cities, they have to move to another CML. We're finding ways now to be able to accommodate that. So I think you will be seeing a lot more penetration in the white space within a very short period of time.

Nigel Travis

Giorgio, I think, Jeff's question was really about how much more overhead and G&A...

Giorgio Minardi

Oh, G&A. No, the G&A -- I think you all know, Nigel, our G&A is within the light asset model. And so it will always be amongst, if I remember, 3% to 4% on an average every year. So we won't -- in doing what you're seeing and what I've hopefully conveyed to you today, it does not change the metrics that you normally see in the U.S. or International. So only a few changes might be or the future in ventures that we might be going towards. But the rest, the marketing, the good side is the royalty. This is another thing that we need to talk. Now it's at 5%, something that, in the past perhaps, wasn't always focused. We might have a year or 2, like in the U.S., at 3%, but then starting in our franchising agreement we'll go at 5%. And that's why it's so critical with the white space, because you can go straight in with that proposition. So hopefully, I've answered your question. And I hope to have a chance to meet you all later on. Thank you very much.

Nigel Travis

Jeff, just to say, I'm not quite as bad as Giorgio made me sound. I mean, I actually think we probably need to put some more people into international. I mean, one of the huge successes, I think, we had firstly on Dunkin' in the U.S., then Baskin in the U.S., is take the operation ratios down. I mean the example I think we've quoted many times, is Dunkin' U.S., we used to be like 110 stores per field support employee. We're down to 60 now, and Bill did very much the same with Baskin U.S. So the focus, very much our operating culture is to try to put some more people in the field. I think some of the corporate functions, be it marketing and supply chain, probably are more or less okay. But it's really the operations people. We need more people in the field to support the stores. And given the fairly ambitious plans that Giorgio has for development, probably a few more there. So I'm not quite the ogre as he makes me sound, but anyway.

So with that, we're going to come back and talk about Dunkin' U.S. after the break. So can I suggest, Stacey, 15-minute break? There should be food and drink at the back. Relax, and we'll see you in a few minutes.


Nigel Travis

We encourage everyone to sit down please.

Okay. So we talked about, if you like, the longer-term future with international with Giorgio. And by the way, just to remind you, we will have a Q&A again this afternoon, so you haven't missed opportunities. If you wanted to ask more questions of Scott or Giorgio, you'll have more chance later on. So just write down those questions please.

So we now come down to the business that we're truly proud of. There's been a lot of work put into it in the last several years. I thank Jonathan Kraft for pointing out what was before and what it's like now, that was very helpful and unplanned.

So we're now going to introduce Paul Twohig who, as you will have read, was recently promoted to President, Dunkin' Donuts U.S. Paul?

Paul E. Twohig

Well, good morning, and thank you for the opportunity to spend some time with you talking about Dunkin' Donuts U.S.A. What I and my team do is we're responsible for the day-to-day operations in Dunkin' Donuts, as well as the real estate construction and franchising arms of Dunkin' Donuts.

So there's 2 things I'm going to talk about today, the first one being operations, the day-to-day functions in our restaurants, and then also, get into the topic of store development and our growth.

All right. So if I've had the chance to speak with you before, and I have for many of you, this looks vaguely familiar. This is the thing that we do every single day. And it's not terribly exciting, but it's making sure the trains run on time. We look at building and continuing to build an operations culture in Dunkin' Donuts, and that starts with, every day, with people. And it's the people that work on my team, it's the franchisees, it's the people they hire behind the counter, that we need to make sure are right every single day. Because those people create the guest experience, and I'm going to talk to you in just a little bit about some of the things that we've done differently and some of the progress that we've achieved in improving the guest experience. You put those 2 things together, the right people producing the right guest experience, because we know we're going to get some great marketing, some great product innovation. So if we can take all of that with our people, executed well, we're going to deliver every single day for the franchisees profitable top line sales.

So our franchisees and the relationship we have with them is paramount to our success. Everything we do, even at times when it is kind of unpleasant with franchisees, is all about having the right relationship. And I know when I joined the brand 3.5, almost 4 years ago now, this was a big focus, about making sure we have the right franchisees and making sure we have the right relationship with them. We have a very, very intense focus on providing to the franchisees teaching, coaching, advising, not sneaking in and finding something wrong. And I know that's a little bit -- one of the things we're going to talk about in a little while is about our announced visits.

When we come to the restaurants with our franchisees, we tell them well in advance when we're coming. And we're going to talk about why that's a bit of different and the success that it has driven. We also have a very robust advisory council system, through all levels, starting at the store level or a district advisory council, then we have regional advisory councils and then we have a brand advisory council, gives us the opportunity to talk to franchisees about things we want to do, things that can help drive their business and things that will make a difference to them. This has also helped us drive things like digital menu boards. Having that kind of system that communicates to the franchisees has made that a lot easier.

The restaurant manager training, the work that Ginger Gregory and her team have done to improve the overall training platform, but especially at the restaurant manager level, has made a big difference. And Nigel mentioned this before, is where we have reduced the ratios, all right? So go back 3.5 years, the ratios were anywhere from 80 to 100 stores for each operations manager, which essentially meant that ops manager was only getting in there twice a year, tops. We've brought that down to 50 and made it more manageable. But the biggest thing we did was, the primary client of that field guy, that operations manager, became the restaurant manager. Because if you want to change the way restaurants operate, you talk to the restaurant managers and then the franchisees.

Franchisees have also really wrapped their arms around some of the data that we've been able to provide. We talked at dinner last night in a couple of the tables about how big a difference it has made for both us and our franchisees to be on one platform for POS, the Radiant system. That kind of opportunity that has presented us with being able to collect real-time data overnight, so we know, first thing in the morning, how many munchkins were sold down the street in Foxboro every single day.

All right. What's changed as we operate our restaurants? Go back at the start of this program. So we have this program, I'm sure you've seen it, where there's a survey on every one of the receipts that are produced in a Dunkin' Donuts. You see it every day as a member of the consuming public. Everybody wants a survey from you. Well, we're no different. And we started this program, I believe, back in May of 2010. And the company that operates this has a number of QSR companies in the fold. So there may be 30 or 40 companies. When we got into this program, there's a QSR average of all those companies, so it's 30 or 40 companies, and we were part of that average. When we started, we were 9 points below the average. As we sit here, December 12th of the end of last year, we were 2 points above the average, an incredible effort by the franchisees and our field guys working with John Costello's team, Rebecca Zogbi, who many of you have met before. This -- the insight that we've gotten from the consumer has been incredible, allowing us to tackle problems that the consumer would tell us about, whether it be order accuracy, drive-thru speed of service, hot coffee or not hot enough, cold sandwiches or overcooked product. That kind of data we get in the stores every single day directly from the guests.

So this was kind of how the journey started. So we're thrilled that we're ahead of the average, all right, which makes us above average, all right? We're not stopping there. There's no point in stopping there. We believe we can continue to drive this successfully. So if I look at this chart here, if you go over to the left, when we started this, we did these unannounced visits. So someone from the brand would show up at a store, show a badge to whoever was in charge of the store and say, "I'm here for the inspection," all right? So they'd walk in, they'd spend 2.5 hours, on a tablet, checking this, checking that, say thank you very much, and go home.

So we felt good because we were checking them, all right? Store manager, or whoever is running the store, felt lousy because he had no idea what just happened. And we came to the conclusion that if we wanted something to change, we should probably tell someone we wanted to change it. And we've started these announced restaurant visits, or these restaurant operations reviews. So we give the restaurant 3 weeks' notice, all right, and we come in, our guy, field guy comes in, and spends the day with the store manager, because part of the deal with the franchisees is if we're going to announce them, you're going to have that restaurant manager available to work with my guy. And what they do is they spend the day together watching the operation and talking about how it can improve. Now some of you are out there saying, "Oh sure, you gave him 3 weeks' notice. It's going to be great." You're right.

Two days every year, I have 7,000 perfect Dunkin' Donuts, all right, nothing wrong with that. But what it does do, it shows that store manager and franchisee how it could be, and that's what we work off of. And all the preparation that goes into these events, I get a lot of things fixed because they're scored. No one wants a bad score. And if you want someone to change their behavior and you're going to come in and help them, you got to tell them you're coming, and you got to tell them when you're coming. So those have made a huge difference. The guest satisfaction survey that I talked about before have also made a difference. Every single store gets guest comments every single morning. So they know what their guests said about them yesterday.

Now we've recently added to the announced restaurant visits some unannounced restaurant visits that aren't as robust, aren't all-day affairs, they're more 1 or 2 hours. But again, it's helping to validate if we're really making the progress we think we're making with the announced RORs. And the guests are telling us we are making progress.

We do a number of other things. We have our field guys visit. And if you were part of the tour yesterday and spent some time with Stephen England over at the sandwich station, that just isn't Stephen England. Our field guys are out, how can I help you modify that sandwich station as it stands right now, without the new equipment, but how can I help you improve it ergonomically. We have a thing called the GSD, the guest service diagnostic, which is an event that takes place where our field guys look for lean opportunities, for lack of a better term. And they're really looking at how they can help the store manager take seconds out of transactions. What you saw from Stephen was certainly a bigger plan of how we're going to add or replace equipment that will also do the same thing.

We, this year, introduced a rating system for our franchisees, where they have to achieve a certain score based upon these restaurant -- these RORs, also the unannounced restaurant visits, guest satisfaction and some of the contractual obligations they have with us, things like paying us on time, doing remodels on time and achieving their store development agreements. And we believe this approach is going to continue, as we say at the top of the side, we'll never going to stop working on it, but it's good to allow us to continue to drive execution in the stores. It's by no means perfect, I get it. But every day we see improvement, and that's been going on now for 2.5 years.

One thing we're never going to forget about is America Runs on Dunkin', and we really believe that under a variety of ways. And the one thing that is near and dear to my heart is the speed. We believe -- in fact, our guests tell us we are very good at speed, inside and at the drive-thru. As drives-thrus become the more dominant platform for us, because we're already -- just over 50% of our locations have drive-thru. And in those over 50%, over 60% of the business they do goes through the drive-thru. I would say, as I look at our platform, our store development going forward, it's now tell me why you're submitting the site without a drive-thru, all right? Everyone has recognized, certainly myself with my background, Jon Gaiman with his and now our franchisees, the drive-thrus play a critical role in driving our business, especially in new markets, because it's the ultimate form of convenience.

Again, if you spent any time in the -- on the tour last night, Stephen took you through what we're looking at, at the sandwich station. We recognize the sandwich station represents a big opportunity for us. And it's been incredibly successful for us up to now, continues to reward us by allowing Jon and his team to provide us some great products to run through that sandwich station. But we recognize that with all that success, we've got to be out in front of it, and how we're looking at improving the speed and the quality of what comes out of that sandwich station. It's been -- it's exceeded our expectations with the success, but we've got to be careful about staying in front of it. And you saw some great things from Stephen about the new TurboChef ovens, this new toaster, some of the process changes that we've made. And again, there's no one great big idea. There's several 2- and 3-second ideas that, when you add them all together, it provides some real improvement.

The crew training, you should have also seen the new crew training, how to build the sandwiches at the station. Much easier for the crew to use, more pictures, less words, makes it much easier for the crew people to learn how to build the product.

So suffice to say, as it relates to operations, we're pleased with the progress we've made over the past 3 years. It's never ending. Business is 365 days out of the year, in many cases 24 hours a day. So that never ends. And we're going to continue to identify opportunities for improvement, because we're talking to our guests every single day and they tell us when we need to improve.

All right. So let's go from operations to our growth vehicle, store development. It's something that everyone is quite interested in. Let me first say that the demand for our brand, I don't know that it's ever been stronger. And the beauty of it is and the thing that's so gratifying to us is that most of that demand is being driven by our existing franchisees, which tells us that we're doing something right with them, either through relationship, unit economics, providing them the opportunities to build a business for generations.

Now at the same time, we are bringing new franchisees into the system, but it is a highly, highly selective group of people. I'll share some things -- some stuff with you in a bit about how selective that is. But all of our new franchisees, they have to have all 3 of these things. They have to have experience, they have to have passion and they have to have resources. I think sometimes in the past, both Dunkin' and other brands have accepted 2 out of 3 or 1 out of 3. We're not going to do it. We don't have to do it, because 90% of our growth is coming from our existing guys, who we know have all 3 of those things. So I'm not going to settle for a new guy not to have all 3.

The demand in California has been crazy. It's been great. Quite gratifying. I think within 48 hours of announcing it, we had a couple of thousand hits requesting information. We will be selling, as we've announced back in January, Southern California, and we're already in the process of -- I think we've had our first day of business reviews, which I'm going to show you that a little bit more graphically in a minute here.

All right. So all this and our great first quarter, gives us some great visibility into the balance of this year and going forward. So as you may have seen already this morning, we have such confidence in our 2013 development, that we're taking our original range of 330 to 360, and targeting the top end of that range for this year for net new Dunkin' Donut restaurants in the U.S. It was a great first quarter. We're feeling very, very strong, very, very confident of being up on the high end of that range.

With that, we're also raising long-term development guidance, where we're at 4%, accelerating to 5%. We're looking at, on a long-term basis, Dunkin' Donut U.S. net development, 4% accelerating up to 6%. It's been -- we're off to a great start this year. And as we look at what's out in front of us, we feel very good about those 2 conversations.

We've talked a lot in the past about our continuous development strategy. That continues. These -- the coffee cups represent some new market entries that we did in '12, and the donuts represent some SDAs that we sold in '12. So if you go all the way out west, that would represent Denver, where we sold SDAs, and we have not entered the market yet, but we have approved 4 groups with store development agreements. Also you see down in Texas, we have several SDAs that we sold down there. We sold one in Austin. We sold a number in Houston. I think we did Amarillo. But very excited about what we're going to do there. We opened a new markets in Milwaukee. I think that was referenced earlier about this group of existing franchisees got together. They were out of the Northeast and mid-Atlantic, and they bought a 35-store SDA out in Milwaukee. They've already opened 6 or 7 stores. Another example of they recognize how great this business has been for them and they've taken it out to Milwaukee. But we will continue to approach this as a contiguous -- we're almost in California, but we don't want to -- it wasn't going to be right for us to jump states, just a methodical logical process out west.

So a lot of times people ask me, "What's the process for a new market?" And I thought I'd give you a little color here and show you about Denver. So Denver. When we first announced we were going to be recruiting franchisees for Denver, we got over 700 inquiries about becoming a franchisee in Denver. We then vetted those down to 18 groups. And we asked those 18 groups to provide a business plan and financials on what they'd do if they were selected. We then reviewed those 18 business plans and the financials and selected 4 groups and sold 4 SDAs. And then have begun the site selection and approval process. Soon, they will be going into training, getting financing if they choose to go that route, building, training their own people and then the opening. This process is a 2-year process. What I just thought I'd do, because inevitably, I'm sure there will be California questions next year as to, "When are you finally going to open in California?" Well, we announced it in January. So if you wanted to put L.A. up top there, we're really only in maybe just the beginning of the business plan process. It's going to be 2015, most likely, before we have a lot of action -- before we have action going on in California. Because what we're not going to do is we're not going to compromise on the candidates, whether it be their passion, their resources or their experience, and that's going to take a little bit longer. It's also going to take a little bit longer maybe to find the right piece of real estate. To find that drive-thru that's at the corner of Main and Main. So that's why, in a very brief way to look at it, why this process takes 2 years sometimes.

So to sum up development, great Q1, feeling real good about where we're going to end up for the end of the year. We're feeling comfortable about our long-term growth rate. On the operations side, we're very pleased with the progress we've made there. That's never ending, as is store development is never ending. Those are the 2 things that we can count on every single day, that we work at every single day.

So that's kind of my story about the ops side, store development side. Got a few minutes, would be more than happy to take questions. But as was mentioned, we also have questions later today.

Andrew M. Barish - Jefferies & Company, Inc., Research Division

It's Andy Barish from Jefferies. Just wondering on the industry comparison, what areas you improved the most in? And then from an understanding perspective on the rating system, that sounds like it's new. I guess, how have you held franchisees accountable in the past, and then what does the new rating system mean in terms of sort of ramifications for addressing underperforming stores or not?

Paul E. Twohig

Sure. The first question about what got better -- and again, this sounds like a copout, but everything got better. If you were to take the questions we ask the guests and said there were 10 categories, I'll tell you all 10 of them got better. Now which ones got the most better, drive-thru speed of service, friendliness and cleanliness. Now the ramifications of the rating system and how did we hold them accountable before. Before, there was a system based upon these unannounced visits, all right, where they come in and do an inspection, and also if you paid on time and you had met your other obligations. The only -- but we did away with those. And this new system incorporates the announced and unannounced and GSS, the guest satisfaction survey, and all the contractual obligations they have to us, remodels, if they have an SDA, building out their SDA. So that's the system we're going to use going forward. The -- as far as identifying stores that aren't performing, how is it different, I don't know that it's a lot different, it's just it has more metrics that helps you identify them and hopefully identify them sooner, all right? So someone, if we do 2 RORs a year and 2 unannounced visits, and you've got 2 remodels that are supposed to be done, we know when you're struggling, right? Because we check it all the time. So maybe we can get to them sooner, before things get out of hand.

Unknown Analyst


Paul E. Twohig

Yes, John [ph]?

Unknown Analyst

As you start moving west -- and I appreciate the detail on the Denver market case study, how many of those can you do per year without increasing staff? And is it -- has this become a little more of a challenge as you stray further from the home base? At some point, you have to ramp up your resources to support the franchisee growth.

Paul E. Twohig

Yes. I mean, we're going to have resources out there. We have already a VP for real estate, living in Los Angeles. We've got construction people out there. We have development managers out there. We have a market planner that lives out there. So we've got a whole team already living in Southern California. And they all have backgrounds, extensive backgrounds in doing development work in Southern California. So I'm feeling pretty good about that. Operationally, how do we support it? Well, I don't need to worry too much about it yet, because remember it takes 2 years. But certainly, the plan would be is to have people on the ground there before we need them, not too far before we need them, but before we need them. So we've had a lot of conversations about this. I feel really good about the development team, because it's already in place working already out there. The ops team will layer in probably 6 to 12 months from now.

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

It's Steve Anderson. Just as a follow-up to the real estate question. Is there a focus on urban versus suburban markets? For example, are you focusing more on the suburban drive-thru locations first and then hitting the urban cores?

Paul E. Twohig

We don't discriminate. We'll open urban, we'll open suburban. There are some great urban stores that -- storefronts that we'd never -- you'd never contemplate a drive-thru. We're looking for all of them. So certainly -- but I got to tell you, I ask every time I see a site, they come through that doesn't have a drive-thru, why? Now they'd say, "Well, it's in Manhattan, Paul, that's why." Okay, I'll take that. But otherwise, I need a bigger answer. These drive-thrus can really drive, no pun intended, a material difference in sales.


Marc Riddick - The Williams Capital Group, L.P., Research Division

Marc Riddick, Williams Capital. I wanted to ask about this -- the unannounced visit, once you get to the restaurant managers after the first visit, if you will. First of all, are the restaurant managers required to be there for the unannounced visit? Because, in a way, you're following up on the initial, correct? Or is that the whole team?

Paul E. Twohig

No. They're not, then it wouldn't be unannounced, right? So, no. What -- the purpose of the unannounced visit is to validate that we're actually making progress.

The purpose of the unannounced visit is to validate that we're actually making progress, all right? So I get it, if I tell you I'm coming, I'm going to clean everything up. I get that. So if I then come in 30 days, 45 days later on an unannounced visit, I'm bringing a copy of the goals from my announced visit. And I'm like, "Okay, how are these guys doing?" Now, so here's what I'll tell you -- I probably shouldn't tell you this, but I'll tell you anyway. All right? So the -- I know I'm not going to tell you this part, but I know what the scores are of the announced visits, all right? I know what the scores are of the unannounced visits, all right? Shocking news, the unannounced visit scores are lower, but they're not as low as I thought they would be. The delta, surprisingly, is not as big as I thought it would be, all right? Me, I was pretty excited about that, all right? So it might actually be carrying it over. Who knew?

Marc Riddick - The Williams Capital Group, L.P., Research Division

And as a quick follow-up, the restaurant managers that you meet with in coming in, sort of -- and this is sort of a ballpark kind of question. But how far along do you believe that they were on initial training, as far as the restaurant managers? Were they where you wanted them to be when you first meet with them, and then, from that standpoint, sort of building from that base of knowledge and experience?

Paul E. Twohig

Yes, it is different all the time. And that's one of the things those -- our field guys, our ops managers are going to look for, is what has this fellow or young lady been through? What training -- because we have this online university that gets better and better every single day. But we can also check what courses they have taken. And so, sometimes, they're struggling in a certain aspect of the business because they've never learned about it, all right? So that is always one of the things they check, not only for the store manager, but the entire crew, all right? So someone is not making the turkey sausage sandwich correctly, all right, let's go look to see that they went through the training for the turkey sausage sandwich.

Mic for people hiding in the back.

Will Slabaugh - Stephens Inc., Research Division

Will Slabaugh with Stephens. A follow-up question on the franchisee scores, what are the repercussions for a poor score, and maybe importantly, more importantly, consistently poor scores? And how have those changed over the past few years?

Paul E. Twohig

The rating system is where we kind of make the judgment about what's the penalty, if you will, of running or operating stores below a certain level. And stores that operate that achieve a low score on their rating system can be and will be classified as unable to expand. There's not much worse thing I can do to a franchisee than tell him you can't have any more of these things, all right? So that is one of my primary leverage points. Is that if they struggle in operating the stores, and despite all our efforts -- because -- just because they have one bad visit, we don't shut the well down. We're going to -- our goal is to have everyone expandable, all right? We don't have that right now. We've got most, but we don't have everyone. And I guess when you look at a population of 1,000 -- over 1,000 franchisees and you say, "Well, 90% of them are going to be expandable," that's probably reasonable. I think it's -- for us right now, it's a little bit more than that. But I think that would be a fairly reasonable number for any franchisor.

Can we get a mic up here too, all right.

Unknown Analyst

How do you try to manage or limit cannibalization and how do you try to prevent your franchisees from competing with each other too aggressively or excessively?

Paul E. Twohig

Yes, that's a good one. Cannibalization is -- it's part size, part art. It really is. Doing very extensive market planning. We do, when appropriate, we do these things called customer intercept studies, where -- so let's say, you have a store and I want to put a store 2 miles from you and we think there might be cannibalization. So we will spend time in your store figuring out where the guests are coming from. And plot it on a map and find out if too many of them are coming from where I want to put the store, which means they'll probably come to me, not to you. Now, the thing we have to recognize and our franchisees have recognized, there will always be a certain amount, in mature markets, a certain amount of cannibalization. A certain amount is okay. So it's really, every site's different, every decision is a snowflake, if you will, and we'll go in and look at it each one of these and deploy the market planning mapping that we have available to us, customer intercept studies, a whole variety of things to figure out how to manage cannibalization.

Unknown Analyst

Paul, drive-through speed of service is an obsession in this industry, magazines rank it every year. I think the standard, the gold standard, if you will, is like 120 seconds by some of your competitors, broadly, in QSR. What's your average drive-through speed of service? What do think the right standard is for this brand, and how do you -- what are you doing to get that down?

Paul E. Twohig

And again, been in this business -- been working with drive-throughs far long time, and the standard of 120 to 150 seconds is pretty much the standard out there. That's from the menu board till I pick it up. We're there and we're on the better side of that, on average. And because it's very much an obsession of ours, how do we do that. I think -- but the guests, his speed of service time starts when he gets in the line, all right? So the industry has a standard about the menu board to pick up. The guest says, "Well, that's assuming I'm not out on the highway waiting for -- to get -- 14th in line." So I think the opportunity for us is to continue to look for ways, whether it's -- Chick-fil-A does this very well. Get outside and do outside order taking, all right? They've got a great system where they get out in the line and they'll take your order. They have a machine, they'll swipe your card. That order is already paid now, ready to go for when you get there. Is that something that we can do with, I don't know, the app at some point? There's still a lot of work for us to do with drive-through. We're better than most in -- but we recognize there's still a lot of work to do.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Paul, Jeff Bernstein. Just a follow-up, I know we talked a little bit about this last night, but there aren't too many in QSR that have the multiple brands with which to kind of pursue a strategy. And it does seem like some that have it have ultimately decided it's just not the best strategy for them. It would seem like, with your 2 brands, they're somewhat complementary of each other in terms of daypart and seasonality. So just wondering, I mean, it hasn't been brought up yet, and I'm sure it might be later on. But of your future openings, what percentage would expect that to be? And maybe can dive into the positives and the negatives as to why we don't see more of that? It would seem like Baskin is somewhat of a small counter and would drive incremental revenues at different dayparts and seasons and whatnot. It seems like a win-win, but obviously, there's some reasons why it might not be?

Paul E. Twohig

Well, we've got 1,100, 1,200 of what we call combos right now. So that's where we have a Baskin and a Dunkin' together. And you got to be careful about saying, well, it's not as easy as just stapling their counter and a couple of tubs of ice cream on the side of a Dunkin'. That's been the problem, because it's almost becoming hidden inside the Dunkin' and really hasn't gotten its -- the full impact of there being a Baskin in it. So it's a little bit more than just stapling it on, which then means you're going to have to put on maybe some more square footage into the business. Baskin has done very well for us in Chicago, New York, Washington, Baltimore. I've got many franchisees in those markets that won't do a Dunkin' unless it is a combo. I mean, that's the way they look at it. Whereas there are other markets that it has not been as successful. New England, as an example, you'd see very few combos here. We're going to continue to drive combo openings. What percentage? I don't even know if I'm supposed to tell you, but I don't even know it off the top of my head. So you don't have to worry about that. But we're going to continue to drive that. It's an opportunity with the franchisees who are willing to get behind it. Because it's more complicated to run a combo than a Dunkin', all right? Make sense. You've got to run 2 brands at the same time. It takes more work. And one could argue, maybe you're damaging the performance of the Dunkin' if you're trying to operate that combo.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

But if you're going into a new market that perhaps doesn't -- well, either has Baskin, which has already been successful or doesn't have either one. The opportunity to go right in with both, rather than just one, so you don't have the add-on idea or just trying to let people know that Baskin's in there. It would seem like in so much of your wide space, we are one brand with these 2 kind of layers within it, would seem like a win opportunity for future growth?

Paul E. Twohig

Yes. You know what? As we develop Denver and Houston and the markets out west, we'll -- as we do in our established markets, we'll look for opportunities to do combos. We also have to be mindful of the standalone Baskins there out west. We got to be careful about cannibalizing in that way. So there's a lot that goes into it. It's a fair question and we're going to continue to drive the success of that. We think we've done pretty well with it, we've got 1,200 of them up and going, but we're always looking for more. All right, one more question, I've been told, and I'm done. Yes?

Unknown Analyst

You talk about what opportunities that you have with having a common point-of-sale system, which I think is, correct me if I'm wrong, but I think is systemwide in Dunkin' in the U.S. I mean, what kind of information is being gathered? And kind of in a perfect world, in the next 3 years, what advantages that you think that can bring for the system?

Paul E. Twohig

It is one of the greatest things ever done is to get this system in the U.S. under one point-of-sale. The -- and I'm sure John will discuss how we could speak more to it, but what -- having that enables so many things as it relates to loyalty. The capture of -- our ability to capture information and data, in -- the next day, to be able to analyze that and say, I've got all the information for all of the U.S. right here in front of me, I'm not waiting for it. I know how I did in every single store from a comp sales basis, I know how I'm doing in every single market, I know how many bottles of Coca-Cola came out of the Coke cooler, how many munchkins we sold down the road, it has given us that kind of data by 5:30 in the morning. I don't know many other QSRs that have that available to them. I don't know that we know how much more this can do for us. I mean, we're still -- 5:30 is a constant ping in my household. It starts pinging 5:30 and I think it's quarter to 6 before it ends. But that kind of data allows us to stay focused on the things that really matter. We wouldn't have that without Radiant. Jack Clare, our CIO, is here today. Another guy that can probably -- is certainly more imaginative maybe than me about what's possible out of that.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

And I would think John would go talk about certainly the marketing, the loyalty implications, hopefully soon. But have you gone back and looked at things like how many labor hours that you use at certain dayparts that kind of help the franchisees allocate their labor hours better? I mean, are you far enough down that path?

Paul E. Twohig

Okay. Yes, because that's a whole another subject, what we call back office system. And that's about creating the ideal food cost and being able to take inventory, automated scheduling, cash management, that's a whole other thing. We've got the automated -- we've got the ideal food cost done. We've got inventory done. Labor, we're not quite satisfied with what we have and more work needs to be done, and cash management is complete. Franchisees absolutely love the inventory in ideal food cost. It tells them, for the first time ever, what their food cost should be instead of just making it up. Or saying, the store down the road does this much, that means what I should -- this is ideal based on what they actually sold, and that's a big deal. But I know we've got to move here. Be more than happy to talk more to you about that, because that's a big one. All right, I'm done. Thanks, guys.

Nigel Travis

Thank you, my friend. Thank you very much Paul. And we could talk about that last subject for a long time. I actually have this record at home of how responsive he is at 5:30 in the morning. And the mystery shopper data that I have shows there's room for improvement. So we'll keep pushing it. But anyway -- but I think it's fundamental. And one of the messages I'd like you to leave today is that we're constantly refining the information we get and we really think there's a long way to go in the future. And going on to international, as Giorgio mentioned earlier, we're a long way from where we want to be there. So we'll keep going down that path. Right, so in terms of data, we've talked about operations, talked about development. And I know one of the things you're very interested in is the returns on stores. So for 1 of 2 presentations today, I'm going to bring Paul Carbone over.

Paul C. Carbone

Thank, Nigel. All right. Thanks, everyone. So we want to talk about the 2012 cohort, the results. But before I get into the data, let's kind of recap a couple of pieces that we talked about development, right? So Giorgio talked about taking development, accelerating it from 6% to 8%, right, driven by the unit economics of the international business. Now I don't have the data like we do in the U.S., but clearly, our confidence of being able to accelerate development is based on what we're hearing from the licensees that these are profitable units that are open. And then Paul talked about, we are now guiding to the top end of our range of 330 to 360 this year. So that top end represents 5% net development. When we went public a couple of years ago, we said we're going to accelerate to 5%. So now we've updated our long-term guidance of saying now we're going to grow to 6% net development. And what gives us the confidence to come out, not only first quarter results, but to raise our long-term guidance, is the unit economics and the cash-on-cash returns that we've seen, since 2008, growing, and then let's talk about the 2012 results.

All right, so first year sales on the left, and this is both core and established and west and emerging. So you see, the core and established for 2012, about $17,000 AWS, all right, of the new stores. And then in west and emerging, about $18,000. So you see that as a pickup from 2011, all right? And that pickup is a couple of things that we can talk about. First is just the general mix of stores. So if you think about the emerging markets, that's everything from Little Rock, Arkansas and Atlanta, Georgia, right? So as we open up stores in the emerging markets, the mix of where we open that is going to kind of drive that top line.

And then on the right side, your EBITDA, so the profitability of those units, right? And nice that you've seen the core and emerging just about 15%, about 14%, kind of flat to the 2011 cohort. And then in west and emerging, it's ticked up to about 13%, coming off about 10% on last year. So a couple of things there, higher top line sales is driving a higher EBITDA, Scott has talked about the commodity impact, that we saw in 2012, is driving down to the bottom line. So many factors really driving the 2012 cohort. You see the new markets there, so Little Rock, Montgomery, Baton Rouge, Des Moines, right. So this is not only just the emerging markets, but as we begin to go west.

All right. So now we're going to take all of the stores and really focus on emerging and west, all right? So that's the growth story of Dunkin', that's why we're all here and that's what really drives the value. So again, first year sales, close to $20,000, so $18,000. So almost reaching that $1 million mark out of the gates for 2012 in 74 sites. So you see, back in 2008, there's 101 sites in that grouping. And we'll get to the cash-on-cash returns back in 2008, we've all talked about them, 5% cash-on-cash returns, and we know what happened at that level, we stopped development, all right? Then 54, 43, 55 and 74, so you see that acceleration of development in the emerging and west markets. And then on EBITDA, you'll see the same thing. '10, you saw the drop down in '11 due to commodities going the other way, and then the pickup back to '12, seeing nice EBITDA close to 12%.

All right. So here, when we showed this chart on the left last year, it was about beverage dollars. And we've really changed the focus in the company from not only beverage dollars, but to high margin products dollars, right? So Beverages continue to be the holy grail. Absolute highest margin, there's nothing like Beverages. But right below Beverages is the business that John's team and Paul's team have built in the restaurant, is these differentiated premium Breakfast Sandwiches, right? Far above donuts and bagels and the bakery part, right below Beverages. So we call those the high-margin, that's really what we look at to the health of the business. And that's really a new weapon that we've had over, probably, the last 3 years, to drive unit economics in all of the stores. So you see first year, high-margin dollars. So $8,000 back in 2010, a little over $8,000, dropped down to just about to $8,000 in '11 and back over $8,000. So the nice part here is not only are we growing mix, but the top line is growing, right? So accelerating those dollars, which is really driving the profitability.

And then on the right, the build-out cost. So high-margin product dollars going up, build-out cost coming down. So a nice picture there. Question is going to be, how far can you bring build-out costs down, all right? So I don't know how much lower we'll go, we continue to value engineer, all right? We don't want to go too low because we don't want to take equipment out of the restaurant, right? We don't want to make the restaurant too small. We talked about Fresh Brew last night being about on par with the current image, right, so that's good, so it's not going to go up. But at that $400,000, a little bit over $400,000. So when we look at this, what the sales are, what the EBITDA is, what the CapEx is, those are all inputs to the cash-on-cash output. So as long as we're hitting -- and I'll show you in the next slide, as long as we're hitting that 25% cash on cash, even with the Fresh Brew, if this ticked up a little bit, I know it certainly wouldn't made us concerned, it wouldn't make our franchisees concerned, and it certainly wouldn't hurt the returns as long as we're still hitting that 25% cash on cash.

All right, so 2012, we talked a lot about this. Many of you said, we're -- we didn't warn or not talk about it, that everyone expected it to be good -- a good and healthy number, and it certainly is. So again, greater than 25%, that's our bar. We've set the 25%, because we've talked to franchisees and what they've told us is that's what they need to continue to develop, 25% cash-on-cash, and they're going to keep rolling out stores. So happy to say, for the third year in row, we're over that bar. You can see where we've come from in 2008 of 5%, no question why development slowed down. We've all talked about what we had to fix, what's changed, and we can talk about that as we take questions. But certainly, we are absolutely delighted with the way the 2012 cohort was opening, all right? We opened most of the stores in the fourth quarter, all right, and we had a tough first quarter. So we've annualized these stores, taking into account a little bit of weather, but we feel really good that this cohort is very, very healthy and that it's going to continue to perform in 2012.

All right. So here, we do talk about beverage dollars over the many years, right? So this is something that we look at and our beverage dollars continuing to grow, right? So even in the 2008 sites, right, beverage dollars are growing up to $6,000, all right? On the right, cash-on-cash returns, where they started at 5%, they're a little bit over 10%, right? So what that tells us is, one, you can move the needle, all right, so you can take those 2008 stores and you can move them from 5% to 10% cash-on-cash returns. What it also tells us is that real estate site selection is one of the biggest drivers of success, all right? Paul talked about it, we talked about it last night at dinner. And sometimes, if you don't have the right real estate site selection, even of all those things that we fixed, you still have your 2008 locations at 10%, 12% cash-on-cash returns, all right? So the real estate one is the one that's really difficult to fix.

As you go into '10, '11 and '12, you see beverage dollars continuing to tick up. A step down from '10 to '11, but that's really driven by the overall volume and the mix of market that we opened in 2011. And then it's stepping back up in 2012. And then our cash-on-cash returns, right, phenomenal year in 2010, again, because of mix of markets, mix of stores, right? Hitting the hurdle rate in '11 and then hitting the hurdle rate in '12 on 70 -- 74 sites. So again, seeing that progression as we go forward.

All right, so this is what drives the development, all right, and why do keep -- people keep -- why do franchisees keep developing in this brand, all right? So great comps and great new returns on units. So average initial CapEx, about $420,000, all right? A couple years of ago, it was about $460,000. So you've seen that step down. Will that go down much more? I don't think it's going to go down much more. We don't expect it to go up. Average unit volumes, this is about the $18,000 a week, close to $1 million. And I tell you, we all wait for that time where we can stand here and say our new units volumes were $1 million in our cohort. And then the cash-on-cash return, anywhere from 25% to 30%. And as we look at the cohort in '12 and we look at the spread, right, so on the top line, the spread isn't too variable off of that $936,000, right? I looked at it this morning and they were all in the $700,000 to -- there was 1 store that was at $2 million, all right? But they were all really tight between $750,000 and $950,000, all right? So nice tight range.

More importantly, the thing that we look at a lot is against our projections. So every month, during our financial review, a group of us in the Dunkin' business, we sit and we go through every store that's been approved, their pro forma and their cash-on-cash returns, all right? And then post them opening, we do the said-did analysis, right, we said it was going to do this, what did it do. And really that gap is where we've gotten a lot better, all right? So our projecting ability, which is a combination of the field teams and our finance teams, when they come up with these pro formas, now that tightness, that spread, is really tight, right? And that's what makes us feel good as we talk about visibility, all right? So we see the pipeline, we see those pro formers -- pro formas, and what is that site line to know that we can continue to develop?

All right. So as we look to drive, right, to 6% net unit growth and continue this journey across the U.S., what are some of the things we're working on, right? So new sales layers. So how do we find new things in the store to drive the top line? K-Cups is a classic example. What's the next K-Cups, right? What weatherproofs this business? What are those new sales layers? How do we continue to grow K-Cups, right? So there's a big concern of once we've rolled over the rollout of K-Cups, would it turn negative, right? So we had a great fourth quarter. We talked about, in the first quarter, double-digit comps in K-Cups, right? And what we've learned is K-Cups reacts to innovation like everything else in our store. So John and his team continue to innovate against K-Cups. We launched mocha caramel, we launched hot chocolate in the fourth quarter. We continue to innovate in limited time-only offers on K-Cups.

How do we build that high product -- high-margin product mix, all right? So those Breakfast Sandwiches that keep driving dollars. How do we take iced coffee ritual, not only outside of the northeast, into Chicago, down south into Florida? How do we exploit iced tea to really drive more beverages?

Focusing on the restaurant build-out costs, all right? So I think this is less about -- we're going to continue to value engineer and we're going to try to take costs out of the restaurant. But this is more about as we go to Fresh Brew, keeping it in that $420,000, $450,000, $400,000 because there's a mix into that average, keeping it leveled, and in that same range, to continue to drive new unit returns.

And then as Scott talked about this morning, continuing taking money out of the supply chain, all right? So at 7 -- the net 700-basis-point improvement that we're going to see in the southwest restaurants, that will all be baked in when we go to California, right, continuing to drive those economics in those new restaurants. So keep the sales where we expect them to be, through many -- site selection, great operations, marketing, right, taking out cost out of the system, driving high-margin products mix and then keeping the CapEx relatively flat as we see this going west, and our developments going forward.

All right. So let me open it up. We have about 10 minutes. I can open it up to questions.

Unknown Analyst

I wanted to ask about, if we want to believe in the story for the long haul, not this year or year next, but 3 or 5 or even 10 years, what happens when interest rates move higher? Is 25% cash-on-cash returns good enough as an unlevered? And most of these guys are financing more than half of the bogey at what are very favorable rates today. Are they going to still build at these rates if interest rates move significantly higher in the next 3 to 5 years?

Paul C. Carbone

Yes. So I think, similar to even our company, as you know, rates are at historic lows. These are unlevered returns, right? So they're levered returns are much higher. And as we look at cash flow -- our data around cash flow probably isn't good as it is pure P&L. But what we have is they can still absorb higher interest rates. So today, they're probably in the 5% to 6% range, right, they're taking out 7-year notes, 5% to 6% range. And they're probably, on average, financing 70%, right, and putting down 30%. The returns, we believe, from a cash flow perspective, are still there. Obviously, the unlevered will stay the same. The cash flow will still be there even in a tickup in interest rates.

Unknown Analyst

Paul, a couple of questions. One is, of the improvement in EBITDA, the new stores this year, how much of it was just the supply chain versus are you actually getting efficiencies beyond that? Or is that just a reflection of cheaper cost of goods? That's first.

Paul C. Carbone

Yes. So there's a couple of things. The increase in EBITDA -- you mean like in the 2011 cohort?

Unknown Analyst

2011 to '12, your supply chain gave you, I forget what the -- what was it, 100 basis points last year or whatever the...

Paul C. Carbone

Yes. So in the Southwest, there was 300, right, but that's just in the Southwest. So I think it's a combination of, really, 3 things that have driven that EBITDA. The first is top line has continued to grow, right? So those dollars flow through at a very fast rate. The second thing is that we have some supply chain synergies, all right, coming out of it. And then the third thing is this growth in the high-margin products. So even at flat sales dollars and flat supply chain synergies, just the mix towards the high margin will give you better EBITDA. So it's all 3 of those.

Unknown Analyst

And then just -- I can't do the exact math on your high-margin products, but it does look like, actually, the percentage actually went down a little bit as a percentage of total, maybe it went from like 50% to 45%? What was that? Why wouldn't that be going up as a percentage of total?

Paul C. Carbone

So it's really about mix of markets, right? So the good thing about the -- I mean, one of the facts about the 2012 cohort, right, is it had a lot of newer markets, right? So you see my top line higher, that's the $18,000, all right? One of the -- the flipside of that -- so I don't have as many Atlanta stores in there, for instance, because that's an established market. The flipside of that is I certainly have a lower high -- I have a higher donut mix in those newer markets, right? So while the newer markets give me a higher top line, right, which is good, which doesn't -- that's why the '11 number never made me nervous, the mix is definitely different. So it is -- on the EBITDA, on the base of 74, it matters what markets we're going into.

Unknown Analyst

Is it -- last follow-up. In 2010, remind me what made that such a special market in terms of volumes, your volumes? Is that Atlanta, for example?

Paul C. Carbone

No, it was actually some of the newer markets, right? We go into these, what we use to call frontier markets, so we're opening our first, second store and we're just doing very, very big volumes. And what you see is they don't really -- it's not like it drops way off. But you're seeing those big volumes.

Unknown Analyst

Paul, kind of a similar question. I was going to ask why 2010 was so good? And do you -- you referred to the commodity cost pressures in 2011. Maybe just talk about 2010, '11 and '12, the class of stores, the geographic mix? What drove those variances to make 2010 so good, 2011 less good and then 2012 very good?

Paul C. Carbone

Yes. So on the top line, coming back to really as in -- if we go back, I mean, I think it's -- let me go back to the slide. Right, so let me go back to first year sales, right? So there's a couple of things. One, small data set, right, 43 stores to 55. But it really is -- and we study this a lot, going from '10 to '11, it's really the location in the markets that we were in. So again, in 2010, similar to '12, we opened a lot of new markets with first, second and third stores, right, which do a lot more volume. In 2011, just by the way, development -- this wasn't -- I wish I could say it was planned, but the way the development schedule rolled out, 2011 was more -- still in emerging markets, but more built out or established emerging markets, right? So you're not going in there with those big openings. From an EBITDA perspective, right, so '10 to '11, the drop down in '10 to '11 was 2 things. One, the lower volume, right, so you get a little bit, but that's really when we saw the full coffee impact hitting the bottom line and commodities really hitting the 2011 cohort as they annualized and got open for the first year. And then we're seeing a nice -- the tickup back in '12, and then we'll continue to see that when we're here 1 year from now and we're looking at the 2013 cohort.

Unknown Analyst

Just one more and you sort of alluded to this. But just looking at the same-store sales trends for the classes, or the cohort classes of '09, '10 and '11, and you alluded to this, but how have they performed sort of in the second year, third year, fourth year of operation?

Paul C. Carbone

Yes, it's a great question. And this is -- Dunkin' is unique in all of the retail businesses I've worked in. So when we open a new store, right, and let's call it the 2010 cohort, for that general first year, it acts like the cohort, right? Across west and emerging, it acts in that 7 of the -- in 2010, that $17,500 AWS. And then as it comes into the comp base, so in year 2, it begins to act like the DMA, right? So it's like it shed its cohort relationship and then begins -- and then really acts like the DMA. So if it's in the Phoenix DMA, right, as it comes into the comp base, it's going to comp like the rest of the Phoenix, right? It won't necessarily comp like the rest of the 2010 cohort, right? And I think that's because we do so much local marketing, in-market, so it becomes -- it looks more like the DMA than the cohort. But interestingly, and we've looked at this -- and I've never seen this in my past. Usually in my past, when was I at The Limited, a cohort would hold onto itself for about 3 years, and a second-year store would comp in a general range with a third-year store. And Dunkin' -- and we're seeing this now for 3 years, it flips over, as it gets into that comp base, to act like a store in the DMA.

Unknown Analyst


Paul C. Carbone

Okay. so the question is then, how do those new DMAs perform? All right. So what we've seen -- and we've seen this now for about 6 or 7 quarters, all right? So on any -- 1.7 comps in the first quarter, core is below that, right? Now because my core is so big, it can't be far below it, right, just by the map. Outside of core is always above it, right? So we're seeing the west and emerging, and even the established markets, comp higher than the core markets, right? And we like that, because that's the growth and that's what we would expect. And then, we also look at daypart, right? So in the core markets, we see the afternoon growing a little bit faster than the morning. But because the morning is so big in the core, it has to be close to the average, right? Outside of core, we actually see dayparts kind of even. Because I think we have opportunity in both the morning daypart and the afternoon daypart.

Sharon, did you...

Sharon Zackfia - William Blair & Company L.L.C., Research Division

If you go the Beverages slide, it looked like Beverages, as a percent of first year sales, actually took a step back last year. And I guess, I would find that a little bit surprising. So obviously, off of a bigger average unit sales volume. But can you give us any context behind what you're seeing in the markets now with beverage sales and how you expect that to ramp as a percent of sales to get to maybe that 50% target over time?

Paul C. Carbone

So why as a percent of sales? So that goes back to, as we were talking about -- because I think you saw this with the high margin in -- as far as Beverages, too. And I'll go to the Beverage slide. So it's where we open the stores, right? So these are a lot of new markets, store #1, store #2, right? So volume is higher, right? Beverage dollars in the '12 cohort are above the '11, but the volume raised -- the volume was bigger because I'm into newer markets, where I'm on first or my second store. So donuts are becoming a bigger piece of the mix, all right? So that's kind of why, on the absolute numbers or on the percentages, it stepped down. What we look at is beverage dollars, right, because that's what drops it to the bottom line. On our march to mix to some percent, mix is the easiest way to show this data, all right? What we talk about internally, we talk about mix, but really what we like to talk about is comps. Because I think in 5 years, if I'm standing up here and we're talking about this 2012 cohort and I say, "My Beverages have comped at 5% every single year and the rest of the stores comped at 5% every single year, all right, and my mix hasn't moved," I think we'd all be very happy, right? Because these returns would be off the charts. So I don't know when -- we've moved mix from '08 to '12 from about 35% to 40-ish in these markets, but we've raised the top line. So it's really about comps more than anything else. What we want to see is we want to see Beverages and those high-margin products comp at or above the entire store. And that's kind of how we think about it versus truly targeting a mix percent. One more question.

Yes, I think I'm out of it. Perfect. Thank you.

Nigel Travis

So after talking about all those numbers, which are clearly very important and all the development, is the big finish up to lunch. So this is designed to make you feel hungry. And also, many of the questions we heard last night regarding marketing, mobile, loyalty, all that kind of stuff. So I'm delighted to bring up here, John Costello.

John H. Costello

Thank you, Nigel. Good morning, everybody. Recognizing that I'm the only thing between you and lunch, I'll be guided by the advice I got many years ago for pre-lunch speakers, which is to be interesting, be brief and be gone. I also promise to feed you at the end of my presentation.

Nigel has talked about -- and for those of you that I haven't met, my group is responsible for marketing, research and product development in our retail channel businesses for both Dunkin' Donuts and Baskin-Robbins in the U.S. and globally, working very closely with the other functional areas and the division presidents. What I'm going to focus on in the next few minutes is Dunkin' U.S.

Nigel has talked about our business being driven by a 3-way combination of operational focus on the guest experience, product innovation and marketing innovation. I think what you saw from Paul Twohig is a lot of the good things going on from an operational standpoint. And what I'll do is round that out by going deeper on the marketing and product side. I'll also provide more depth on our product pipeline, which I know a lot of you are interested in, as well as greater detail on our strategy in the digital, mobile and loyalty spaces, and how that's going to unfold as well.

We're really guided by -- our job is to really drive profitable sales for our franchisees. As you heard from Nigel and Paul and Giorgio early on, when we drive profitable sales for our franchisees, good things happen. They invest more in the stores and they build more stores. And we implemented, in 2010, a 5-part strategy to do that. The first is really to drive sales through brand and product differentiation. What many of you have commented on is we do far less discounting than a lot of our competitors. So you won't see us doing 2 for $3 breakfast sandwiches. We do, do strategic discounting and trial, but it has a purpose. And so number one is really building on differentiation. We're really fortunate in that, on both Dunkin' and Baskin, we have these unique brands that have 60 years worth of heritage, but also are as relevant today.

The second is increasing beverage and coffee focus, you heard that from both Paul and Nigel. Coffee offers high margins for our franchisees, but also drives real ritual. Our third strategy is to really protect and grow the critical AM daypart. As all of you know from studying QSR, breakfast is a very, very attractive daypart, and then many folks view breakfast as the healthiest of all QSR. That's pretty much our core business. And what's exciting to us is we have found, whether it's a highly established New England market like Boston or New York, or new markets that we've just gone into, enormous upside in potential on the food and beverage side, in both driving transactions or traffic and ticket.

Next is growing the PM. Our stores are open many, many hours, a large number are open 24 hours. And we found a real opportunity to drive that PM hour business, leveraging the staffing that's already in there and the capital investment that our franchisees have met. And what our customers have told us is they want the right combination of food with the right combination of beverages and the right store environment. So a lot of it has been Paul's focus on the guest experience. It was also part of our strategy to roll out WiFi to all of our stores last year. It was part of the philosophy of the Fresh Brew store design that you saw, which I'll talk more about.

And then lastly, maintain our strong value positioning, which is really the right products at the right price. We really very much are focused on value, not just discounting. We back that up with some very strong tactics that we've learned over the past 4 years. We're driving the business with the 12 marketing windows through the year, and I'll give you a little more detail of how that unfolds in both new and established markets to drive both transactions and ticket.

Continued news through product innovation. What we found on our limited time offering strategy, if done right, is it drives both ticket and transactions. Breakfast is very ritualistic. People like to go to the same place, oftentimes have the same thing, but they also like to try new things. And we call our strategy Familiar with a Twist. And what we find, particularly with product innovation, is it can drive additional ticket and visits in our core markets, but also drive trial in our new markets. So that limited time offer strategy is driving trial and ticket in all dayparts.

And also, a strong advertising media and local programs, you heard Jonathan Kraft talk a little about our leverage of national and local. We moved to national media several years ago, a number of you have commented on that. And what that does is provide, through the efficiencies of national media, leverage in both our established markets, which are getting more advertising for less money, and also new markets, which might not have gotten TV for 2 or 3 years. Before we did that, it might have been 2 or 3 years before a new market ever got TV.

Paul talked a little bit about Denver. Denver, right now, has gotten millions of dollars of Dunkin', coffee and product advertising. So when we opened our first stores in Dunkin', that, combined with our grocery coffee business, means we're not just the East Coast donut chain that came to town, but in fact, a full-service restaurant that offers a wide range of coffee and other beverages and other food, and increased focus on technology and loyalty, partnering with Jack Clare and his IT organization.

To give you an example how our calendar unfolds, everybody tends to overindulge in the year end. And January comes and goes, "Oh my gosh, I ate too much over the Christmas and New Year's and Hanukkah holiday, and so I really need to get my act together." So we did a regional expansion of the Turkey Sausage Breakfast Sandwich, which was a big hit, and moved into our top 5 breakfast sandwiches of all time, combined with our Sausage Pancake Bites and dark hot chocolate. By the time February 1 rolls around, people go, "Wait a minute, I'm a little bored." And so February is chocolate lovers month. And we came out with the heart-shaped donut again, with a Brownie Batter filling and that set, on Valentine's Day, the single largest donut sales in our history, topping last Valentine's Day. So what it's doing is -- the one question you ask is, in a 62-year-old category like donuts, can you drive sales? And the answer is, yes, through product innovation.

We also used that as an opportunity to low rollout our bakery and expand our Bakery Sandwiches, which are really driving our PM business. In March, we're rolling out right now our Angus Steak Breakfast Sandwich, an example of a very powerful LTO, but also a whole new platform of bringing in a steak-based protein for both the morning and afternoon. In April, we rolled out our Chicken Salad and Tuna Salad Wraps to broader geography. We did a really fun tie- in with Baskin-Robbins Iced Coffee flavors, which are great products, but also provides exposure for the Baskin-Robbins brands. The Turkey Sausage was so successful in January, regionally, that we're rolling that out nationally in April -- or, excuse me, in June or May.

And then, what you see up there in the upper right is a chicken sandwich, we've developed a new -- both, a new breaded chicken protein that we currently make available in the Southeast with our Chicken Biscuit Breakfast Sandwich. And we're now expanding that nationally, in June, with a chicken sandwich as part of our Bakery Sandwich line. And what this shows you is the leverage we have with an exciting new protein, in this case chicken, which is driving great sales in the morning in the Southeast, where Chicken Biscuit is terrific, becomes a national protein in June with this rollout. And are rolling out also my favorite oxymoron, which is the Hot Chocolate Coolatta. So just imagine all the wonderful things you like about hot chocolate, but frozen. It's even better than you think.

What I'll do now is you often ask about products. Last year, we rolled out 30 new products and tested over 40 products, with a very high hit rate. And you may have seen some of them, but not all, so let me take just a few seconds to give you a quick tour of everything that was rolled out last year.


And what this gives you a feel for is the range, and the question is, how much do they help? And here's an example of what we did, just to give you some additional facts. This is just 3 representative, it's the Big n' Toasted, 2011; Smoked Sausage in November of 2011; and the Angus Steak. These are generating $300 to $500 incremental increases in profitable AWS for our franchisees. Paul Carbone talked about the high margins on Breakfast Sandwiches. We're also introducing these without discounts. But you can start to get a feel, hopefully, when you see the facts here that not only are these creating consumer excitement, driving traffic and ticket, but they're also driving profitable AWS for our franchisees, which is enabling them to invest in the stores.

And what you've seen over the past 3 years, starting with Wake-up Wraps in 2010 to the Big n' Toasted in 2011, Bakery Sandwiches in 2012 to Turkey Sausage in 2013, is this steady stream. And as I mentioned to a number of you, our product pipeline is the strongest in history. And some of you tease me and say, "You always give me a -- you always tell me what's coming in the 2 or 3 months, and why don't you give us a peek under the tent or open up the locked doors to culinary?" So we made a decision today to do exactly that. And at the end of my presentation, we're gonna provide you with an opportunity to test over 100 products currently in our product pipeline, encompassing beverages and food across Baskin and Dunkin'.

You'll see you'll get a chance to taste the crispy chicken protein I mentioned, as well as the new grilled chicken protein that no one has seen. You'll get an opportunity to taste some fruit-filled oatmeal bars that we haven't discussed with anybody. And for the adventurous among the group, yes, you'll get a chance to taste the Glazed Donut Breakfast Sandwich, and you'll be surprised how good that is, and at only 360 calories, it does qualify as a DD Smart item. But even I wouldn't do that. But you'll get the -- and what it will do, and you sit there and say, "Well, you got in," [ph] and we've also held back a few secrets.

So the question becomes, if we're going to let you taste 100 products that are clearly in our development process, how do we have so many winners?

And the answer is, we've developed, over the last few years, a product development process that I'd put up there with the top consumer products companies. It begins with concept testing among consumers, where we're benchmarking, where we've, in essence, concept tested every new product we've launched over the next last 4 years, and we have benchmarks in there, and benchmark that demand with equal market sales.

We back to that up with century testing. How do they deliver on the concept? It's one thing to have a proven concept, but how does it test?

We've developed our own proprietary new product model that forecasts marketplace performance. And again, based on -- we benchmark that against how the market predicted and how it performed. Once we've convinced ourselves, up there in step 4, we then go into operational testing, partnering with our operations group and into alpha and beta testing. And this really varies. Doing something like a heart-shaped donut is relatively straightforward, but something like Big n' Toasted, where we've created a completely new sandwich build, is a little more complex. We knew we had a winner in the Big n' Toasted when we went into a top secret alpha test to see if we could build it, and the sales were so great we couldn't see -- we couldn't measure operations because we kept selling out of it. And we said, "Perhaps this is a good idea," and we accelerated that.

Once we've done that, we'll step back and say, "Based on what we've learned, what are the unit economics?" Does this, in fact, provide a very high-margin product for our franchisees based on consumer demand, sales forecasting and the amount of labor and time it takes to build. And then go into market testing, where we'll measure the level of marketing we anticipate. And then finally, we'll get down and work closely with Scott Murphy's group and do sales forecasting to make sure we've got the right quantities on that. Franchisees are involved in the process. All throughout the process, they're giving us ideas. We have an innovation task force of a small group of franchisees that are looking at way out front and giving us real-world perspective. Also, our product development program, which is highly focused, the team also is permitted, with 10% of their time, just to do something that's interesting, and that's where the Glazed Donut Breakfast Sandwich came, or they will look at trends of sweet and savory. So what you have is, at this time, we have well over 100 products in development, all of which are going through a funnel of a highly disciplined -- to measure consumer demand, profitability, supply, operational things. And in fact, there are certain things we go more quickly, if the demand is high and they're simple operationally. There's others that we slow down. If they take a little bit longer to build, we'll work closely with our operations partners to say what can we do before it gets to franchisees. So a highly disciplined process, and again, we'll give you a peek under the tin on that.

Beyond product, the key thing is the power of the Dunkin' brand. As I mentioned to a few of you at dinner last night, we're in an interesting position, in that the Dunkin' brand really has power across a wide range of categories. It gives us permission to go in a lot of different areas. And I think that's because we very much are the brand that gets you running in the morning and keeps you running all day. It's more than just a slogan, in many ways, it's our purpose. You often hear about purpose-driven companies, and ours is very much to get you running and keep you running all day long.

And also governed by authenticity. And so what we do in the product and our marketing is really leverage the power of this brand and leverage that authenticity. So in answer to the question that a lot of you ask is, "How long will "America Runs On Dunkin'" be around?" And the answer is, it'll be around very, very long time. It really defines our reason for being. We've built on that with "What Are You Drinkin'?" where what we found with Dunkin' is, as powerful as our coffee and beverages and food are, what's even more powerful is the love that our customers have for the Dunkin' brand and the power of "What Are You Drinkin'?" has really let, if you will, customers talk about their love for the brand. And in many ways, what we found with this campaign is it's got incredible extendibility.

And then we've put together this combination of national and local marketing. And in some cases, we talked about our sponsorship of the pre-game show for Monday Night Football. This is really the digital expression of that. We're doing more and more integration of traditional with digital, where you'll see us, if you're watching the hockey playoffs, a very strong Dunkin' presence on that, which obviously people say, "Don't sports skew a little male?" And the answer is, yes. If you watched any of the award shows this past season, and you watched the, if you will, the pre-game for the award show, which is the red carpet, you saw whether it's Mario Lopez and Maria Menounos on the red carpet or others, a very strong Dunkin' presence, so integrating that love that everyone has for Dunkin'. And I talked a little bit about "What Are You Drinkin'?" and the power of that, and what I thought I'd show you, rather than a regular Dunkin' ad you've seen, is here's an example of how we took "What Are You Drinkin'?" and our bringing it to our Latin customers, which is the fastest-growing demographic in the United States. So let's take a look.


What we find on "What Are You Drinkin'?", it cuts across all demographic groups, all languages. And in fact, our international team is using "What Are You Drinkin'?" in a number of countries to build our coffee business there, to supplement the donut and bakery business that Giorgio has talked about. Another part of it is, our LTOs and how do you create that demand. As I mentioned on the LTOs, they drive greater ticket among our loyal users who want a change of pace. They also drive trial. What we find is coffee drives food and food drives coffee. We've talked about -- you saw a clip in the opening about our Smoked Sausage Breakfast Sandwich, which moved into our top 5, and we're following that with the Spicy Smoked Sausage Sandwich. So here's a way of how we help introduce a new LTO and a fabulous product to our guests.


I love the line, we'll be eating in the car. What you see there, beyond a very relevant situation, is the appetite appeal in all of our ads, product is hero. What you also see here is the integration of, in this case, our partnership with American Express but also the DD app. So we're using conventional media to drive downloads of the DD app. Paul talked a little bit about enhancing the in-store experience, working very closely with Jack Clare, our CIO. We're rolling out digital menu boards nationally, as we speak. And those really have the potential to be transforming. Some of you saw them yesterday in the new stores. These are separate initiatives we're rolling out in existing stores.

What's exciting about them, and you can see them right here, is really they become in-store advertising and ability to drive new products. It's also people -- when people come in the morning, an opportunity to drive PM sales, there's an opportunity to personalize these by region, as well as personalize them by weather. So very, very exciting. We rolled out, in 2012, retail merchandisers, which you may have seen in the store, depending on store size, are 2 or 3 or 4 feet. These are driving incremental sales. Part of the success of K-Cups is we've, in essence, doubled the space in stores to merchandise K-Cup LTOs. And it provides a tail, if you will. So when we do pumpkin LTO on K-Cups, in month 2 when the advertising goes off, it can remain in the store on the merchandiser.

And finally, the Fresh Brew design, which is really -- builds greater coffee authority, but what also gets lost in the graphics is -- working very closely with operations, has really been engineered to handle high traffic flow in the morning, as well as a place to pause in the afternoon. So we're a grab-and-go business. We're not the place where you're going to spend all day on your laptop looking for a job. But what a lot of guests have told us is we want to get in and out fast in the morning, but if we're enjoying a Bakery Sandwich, some of our guests want a chance to pause. And so beyond the graphics, a real sense of improving the guest experience in those.

A lot of you have asked about digital and mobile, and I'll talk about digital and mobile on this. And digital and mobile is a critical part of our strategy, but we are somewhat different than some others in retail and QSR, in that traditional marketing still works very, very well for us. And what do I mean by that? Television, radio, outdoor and point of purchase remain very effective marketing tools with a very good ROI. So you'll read of some organizations, and even in consumer products, who are saying, "Wait a minute, forget old marketing, old media. Let's jump into digital and social." In our case, we're moving very aggressively in digital and social, but recognizing that traditional marketing continues to work very, very well. So our strategy on digital and mobile is to focus on what's relevant to our guests and not get buried in the hype.

So in some cases, and here's an example where I talked about ESPN, where we're sponsoring the pre-game show, we've integrated our pre-game Monday Night Football sponsorship with ESPN mobile, which is one of the real powerhouses, to provide a seamless experience. In the upper left, an opportunity to be the fan of the week. Our Dunkin’ fans have real loyalty and there's a real power of inviting them to be our partner. From time to time, we also showcase their loyalty on our billboard in Times Square. We did that at New Year's. So imagine, an opportunity to be fan of the week, but also have your picture up on the crossroads of the world.

And Twitter, what a lot of people forget about social is it's very, very powerful. In essence, what social is, is recommend by a friend. But it's a dialogue, it's not advertising. So we use Twitter to create a dialogue. So while our numbers are going up, we've got 8.5 million Facebook fans, we're not chasing just the numbers. We're really chasing engagement and impact. So digital and social will grow faster than traditional marketing for us, but we recognize it's engagement and a dialogue with fans, not just getting caught up in the hype.

Mobile remains very, very powerful and I'm going to talk about mobile loyalty and CRM. Mobile is very much the center of the strategy. It's the place where our customers can use their mobile phone to find a Dunkin', find a new Dunkin'. It's also a way to pay, you can load on multiple cards on here. But also it's a way for us to engage. I know all of you have the app, but right now, if you fire it up, what you'll see is both national and local offers there, which is very, very powerful. So very much the center of our strategy, and we're off to a pretty good start.

We shared with you some of these numbers, and this just gives you a feel for the ramp. We had 500,000 mobile downloads at the end of Q3. We reported over 2 million at the end of Q1. Today, we're over 2.4 million downloads, so you can see the level of increase just from our analyst call a short time ago. So our mobile apps are growing significantly. We're not at a point where we want to or we're going to report mobile transactions as a percentage of total transactions. They're growing very, very nicely. And I think when we do choose to report that, you'll be very pleased with the traction.

Strong gifting. Our mobile gifting continues to grow. Our Valentine's Day gifting was the strongest Valentine's Day gifting in our history, driven by mobile. And we're anticipating very strong Mother's Day and graduation gifting as well. And we're also, today, delivering geo-targeted offers. I mentioned the offers today, and what our guests told us is they want offers relevant to their DMAs, but they also want national offers. One of the questions that came up was the power of Radiant data. We're getting it 5:30 every morning, sales by store, by SKU, by hour. So we know what our sales are of all of our product categories, and that enables us to deliver geo-targeted offers.

So in an example like the Northeast, where we have strong morning transaction, it's an opportunity to build that ticket or try Bakery Sandwiches. In a new or emerging market, we can use that opportunity to build coffee ritual, we're also trying it. So we're delivering that today. So on the mobile, ramping up very quickly, transactions are ramping up, activations and redemptions are ramping up, gifting is ramping up. So broad-based growth and we're starting to leverage that already.

You've also asked about loyalty. And we are still on track to launch that in 2013. We're using mobile to get people to enroll in DD Perks, they're registering their cards. And then what's a little bit different than maybe some of our competitors is again, our strong focus on franchisee profitability. So our loyalty program is going to roll out with a focus on driving profitable sales, and will roll out very strategically. And this may be a little hard for somebody in the back to read I know you've got a book, but so for example, our strategies, increased frequency, expand daypart visitation, increase tickets.

So if you're in the core, you may get offers to maintain that AM business, but also drive the PM. But also even in new market, build that AM and get coffee trial. And what we have is a combination of very robust DMA-level business, combined with rapidly growing consumer. And we talked to a couple of you last night, so we'll in fact use a combination of Dunkin' sales data, Dunkin' consumer data, what we've learned about daypart strategies, as well as third-party data.

So what do I mean by that? We've got a lot of people who signed up for Facebook, we've got a lot of people that are on dunkindonuts.com. We've got partnerships that we can leverage, whether it's Jet Blue or American Express or Facebook, to leverage their information. Most of you are probably familiar with datalogix or Acxiom. Each of those have databases of over 100 million users. BlueKai, you may be less familiar with. They have a specialty in digital loyalty. So what we're going to have is a combination of third-party data, our transactions that we know from our sales data, and customer data, but it's going to be, in essence, a move toward one-to-one marketing combined with DMA marketing, combined with what we've learned about what's driving the daypart as we roll out on this. And it's on track to roll out in 2013, just like we discussed with each of you.

But a fairly robust platform that will start out today as mobile, moving to loyalty, moving to, in 2014, a CRM platform. Jack and his team have a lot of experience in that. Our marketing team has a lot of experience. And so what you're going to see is highly targeted. We believe this will be -- provide a real competitive edge. As I've talked to a number of you, we're growing not just sales but we're growing franchisee profitable sales. So you won't see us simply buying customers for the sake of buying customers. You'll see our focus driving profitable sales.

Kind of stepping back for a second, I want to make sure, as we talk about all the innovations in product and loyalty and mobile, we don't gloss over too much just the power of the Dunkin' brand. At the top, you can see the brand keys, shows us #1 in coffee loyalty for 7 consecutive years. Harris did their first-ever poll where they did coffee and QSR, and their research showed Dunkin' as the #1 brand in the coffee category. We are #1 in QSR for the Hot/Regular Flavored Coffee category, we're #1 in Iced Coffee, Bagels, Muffins and Donuts, and we're #2 in Breakfast Sandwiches. Think about that one, our 2 largest competitors have double the store count we have. And we are #1 in most of those categories and #2 in that. And finally, I've talked about the rapid growth you're seeing in Facebook and also mobile. So really leveraging that brand power.

And then also, as Giorgio touched on, we've reorganized to have marketing leaders in each of our business units, but also are leveraging it. So for example, all of the learning we had in building the mobile app is focused right now in building and helping Bill Mitchell, and we're building a mobile app for Baskin-Robbins, leveraging our Dunkin' Donuts experience. We're also -- have the ability to leverage that for Giorgio and his team internationally. So what we're doing is using a combination of business unit marketing with shared services to leverage that experience. And it's everything from advertising to mobile to loyalty, to even guest satisfaction, where we're using a similar guest satisfaction system in Baskin that we have in Dunkin', and are exploring the same thing in several international companies.

So hopefully, what you see is a very disciplined approach that's really designed to leverage the power of the Dunkin' brand, partnering very closely with operations and technology to drive a combination of both mass marketing and one-to-one marketing, driven by mobile and loyalty.

With that, before we get into the food, I think we do have some time for questions. So we can take some Q&A. Okay, somebody down here.

Jason West - Deutsche Bank AG, Research Division

Jason West with Deutsche Bank. Just a question on the marketing budget and how you're going to leverage that over time as you expand westward. Can you talk about what the contribution is to the national marketing budget from the corporate side, and then also from the franchisees? And how do you see the corporate contribution changing as the store base grows, or is that pretty much all leverage?

John H. Costello

Yes, our advertising fund is 100% funded by the franchisees at 5.9% of sales. So we do, from time to time, make strategic investments from the corporate side on -- primarily on Baskin-Robbins U.S. and on international, we also make it on Dunkin' side. So for example, we use corporate contributions to help accelerate the rollout of the Radiant POS system on Dunkin'. But those corporate Dunkin' contributions tend to be strategic and relatively small in the great scheme of things and are -- which is good. On the Dunkin' side, it's 5% -- 5.9% of sales and is over $300 million a year. It's roughly split. There's a small amount for administration and strategic initiatives. And of the sales driving activities, is roughly split between national and local, and those are very tightly integrated. And what we're doing is using national advertising to get the economies of scale of national media buys across the country, enable us to do things like the pre-game of Monday Night Football and the NHL playoffs. And then we'll tightly integrate that with local market spending that can either be for a regional product or to enhance that, but all very, very tightly integrated. You heard Jonathan Kraft talk about, just from his perspective, as an important partner, how tightly integrated. But roughly -- beyond strategic initiatives, roughly half national, half local. We've now, a couple of years ago, got to the point where national advertising made sense. So as we expand nationally, what we get is more leverage. As Paul and his team open up new markets, they get the benefit of national advertising that they've had for several years. We get the benefit of more money going into the fund, so our economies of scale actually increase with every region we opened. That was not the case before we had national media, where each new market required investment spending. Because we did the same thing I mentioned earlier, we have literally millions of dollars of Dunkin' TV going into California right now on coffee, food, as well as the marketing behind our grocery coffee. So we're, in essence, building demand in California. When Paul opens up the first stores in Denver, they will have gotten the benefit of national marketing for several years. When those stores open, we can then use the local marketing just for local store marketing and grand opening, so that's where we get the leverage.

Nigel Travis

Can I just make one thing clear. Our royalty rate in the U.S. is 5.9%. The ad fund is 5%. So they effectively pay 10.9% over, but as John said, they fund just about everything on the marketing side and another benefit, the asset-light model. And we get our royalty stream, which is 5.9%, with the ad fund having a 5%.

John H. Costello

And of that 5%, small amount for administration and strategic and the remainder of the 5% is roughly half national, half local. And we like that blend, as do our franchisees.

If there's no other questions, what I want to do is shift to the product part of that. And what I want to introduce is our host for that. Stan Frankenthaler, who is our Executive Chef and VP of Innovation. And I'll kind of embarrass Stan by giving him a little -- give a background. Stan has got over 35 years of experience. Last year, the National Restaurant Association -- come on in here, Stan. Last year, the National Restaurant Association awarded Stan and his team the MenuMasters Innovator of the Year, 3-time James Beard Best Chef nominee. He's operated 3 successful restaurants in the Boston area, including having his own cookbook. And prior to Dunkin' and after he'd run those restaurants, actually ran concept for Whole Foods in the North Atlantic. And so Stan and his team is part of our secret ingredient, driving a lot of that product innovation. And what Stan is going to do is give you this unprecedented peek behind the locked doors of our test kitchen, where you'll get a chance to see and sample over 100 new products. So...

Stan Frankenthaler

Thank you. Thank you, John. Thanks very much. The team is very excited to serve you lunch today. And I think this is the part in the meeting where I get to deliver the line that I'm the only thing standing between you and lunch. So I have just 2 minutes. We're really very excited to be here, takes a lot of planning and preparation to pull this off. And the teams have been preparing for you, well, cooking for you since about this time yesterday, making waffle cones, putting the finishing touches on the Baskin-Robbins ice cream cakes that you're going to see. Today you're going to be able to taste over 100 items that you haven't seen before, right? John said, "Let's pull back the cover, let's show them, show them a lot. Go ahead, show them a lot." "Are you sure?" He's like, "Yes, go ahead, show them a bunch of stuff." So we really appreciate that you folks have written really nice things about Dunkin' Donuts and Baskin-Robbins innovation, both here in the U.S. and around the world. So we thought we would show you some appreciation.

We have a robust pipeline in all of our categories, on all of our platforms. Our teams' mission is to drive profitable top line sales through the creation of differentiated new products and platforms, across all of our menus and across all of our marketplaces. We are very consumer driven. We very much intend to evolve the menu along with our customers, our current customers, as well as new customers that we're going to meet in new markets, and we're going to reflect our customers changing tastes and changing menu needs as well. And you'll see so much of that today. The cross-functional teams, that John described to you as part of the innovation-to-market process, have been planning this for several weeks. They've been, as I said, working really feverishly since yesterday. I think everybody knows that we bake fresh every day, so the bakers were up in the middle of the night starting to make bagels for you and make donuts and show you a lot of the new bakery products. I can smell the bacon cooking, I hope you can, too, right? So we've been cooking bacon for about the last 15 minutes.

And when the curtains are drawn, it's really -- you can start anywhere you want, okay? Dunkin' Donuts and Baskin-Robbins are all about fun. So if you want to start with ice cream for lunch, I encourage you to do that. There's 4 stations back there. The marketing teams are there to receive you, the innovation and culinary teams are there to cook for you. Our ops services partners are there, helping us to set up this event. We've had equipment here. The team has been here for 3 days, wiring up all the equipment, great venue, right? We get to work in some really cool places, but tomorrow, we're going to be back in the lab, of course. So we have sandwiches, breakfast items, we have lunch items, we have items that are part of the pipeline for 3 years from now, right? Marketing needs 2, 3, maybe 4 items from each category a year. You saw in the U.S., we launched over 40 products. I think we launched over 77 products globally last year, very proud of that, very proud of the team.

So you're going to see ice creams, cakes, cones, soft serves, sandwiches, breakfast, new bakery items, new bagel items, items you've never seen before, beverages you haven't seen before and some beverage platforms that you haven't seen before. So I hope you're very excited by all of that. The team is a very diverse group and we have composed the team intentionally to be that way. So you're going to meet chefs, food scientists, culinary nutritionists, hard-knocks bakers, folks who have owned their own restaurants and run them, as well as folks who've created products and private labels for other large brands as well.

So we don't want to hold you back any longer, could you guys start to open the curtains? And without making you wait any longer, we'd love to invite everybody to enjoy lunch. Please enjoy all the stations. Please engage with the cross-functional teams that are there. We have tables set up for you here. And for anybody who would like a salad or something to add on to their lunch, where you found fruit and things this morning, you'll find salad for lunch. Thank you very much, please enjoy your lunch, we are here to answer questions, maybe vaguely. Thank you.


John H. Costello

I think -- can you hear me? Well hopefully, when a number of you ask the question of, "Do you really have 2 years' worth of product in your pipeline," you got a feel for the fact that we actually have well over 2 years in our pipeline. And if you can believe it, given the limited space, we actually were not able to show you everything in the pipeline. It's well over 100 products. We gave you a peek at what's at the top of the funnel. They're going to go through all of the rigorous testing, so given past experience, I think a very high percentage. But these are all products that are done, ready to go, working through commercialization and earning their way into the program. You can imagine what it's like to create samples for a discerning group of 100 products in an NFL football stadium. And so I thought you'd enjoy seeing the people from our culinary marketing and op services team. Someone asked, "How in the world how do you create all those products in the middle of a football stadium?" And the answer is, it's not easy. So join me in giving a round of applause to all the folks who made it happen.

They are available for catering on weekends, if you have wedding or a big party coming up. Thanks, again, team. It was terrific.

Nigel Travis

So don't ask any questions about marketing overhead. Anyway, no, they do a terrific job. And John, thanks for the sort of multiple session on marketing, digital and innovation. But you may well have more questions for John later. You may have questions about the products. And if one of them is which order do what products get rolled out, the answer is, we won't tell you. So with this, we're going to change our pace here again. We talked about operations and success in Dunkin' U.S. We're now going to move to a business that's slowly moving into the growth mode, and that's Baskin U.S. So, Bill Mitchell.

William M. Mitchell

Good afternoon. And first of all, thank you for affording me this opportunity. My name is Bill Mitchell, President of Baskin-Robbins U.S. and Canada. My favorite flavor is Love Potion 31. It's very important for you to know. And I do want to correct Nigel, if I could, this morning. So he started off saying that my play was the dump pass, it's better than a fumble and an interception. But actually, Nigel, in American football, that's either a hook, a flag or a post. Tom Brady does it very effectively. And it's actually, statistically, if you look at it, the #1 first-down play in the NFL. So I have to redeem myself.

Today, we're going to start and end with a few common themes. One, Baskin-Robbins' drive of execution in a Pink Spoon plan. Two, our marketing differentiation. And as you saw with John's team and the products that were in that freezer and the upcoming products we have coming out to our guests, seems to be a slam dunk to me. And I think something that each and every one of you want to talk about, at some point, is the path to growth and what that looks like with our new franchise base -- and I did say new -- our new design and new initiatives.

So with that, if I may step back just a little bit and give some history of the brand. Our comp store sales to the left. And for those, this comprises of: our Dunkin'/Baskin Combos; our Togo's/Baskin Combos, which is still in existence many don't about; our standalone; and our military performance. That comprises these numbers today. So as you can see, we just ran up against a phenomenal 9.4% growth from last year. We did say that we had 600 basis points of weather. But we had a good run. And technically, until we hit this Q1 of '13, which I'm still very proud of my team, we set many sales records going back to when we started chasing comps in 1997, and had 6 consecutive quarters of growth. So we continue to be encouraged with our franchise engagement, our franchise relationships, and focused on the 3 pillars I just mentioned, moving our brand forward.

Our new restaurant development, we spent a tremendous amount of time here. And really dissecting each and every single ice cream store within the U.S. and Canada. And many of you were here, I believe, 2 conferences ago where I said we have 192 stores that we're very concerned with. The interesting thing about those 192 stores is they had an average volume of $1,000 more a week and 68% of that real estate was good. So in addition to really cleansing our landscape, we spent a lot of time going through and dissecting which ones need to stay, which ones need to go. George Begovich, who's in the back of the room -- George, if you raise your hand, put together a phenomenal program called accelerated transfers, which candidly, if we had a franchisee that didn't want to play along to the rules or couldn't perform to our standards, we promoted them to customer. We did that successfully 124 times. So we've worked very, very hard at dissecting our business, making sure that we set the platform for growth. And as I mentioned earlier, we're pretty excited about a new design, a new breed of franchisee and the franchisees that we have left to grow with.

As you saw on Paul's presentation, we are also very, very focused on our operations metrics. I would say that I'm pleased, but we have a lot of work still to go with the movement that we've made. The beautiful part about getting this amount of data is we are just now figuring out some new things. For example, we have permanent flavors, which many of you hopefully tried at lunch. We have regional rotators that we bring into different parts of the country. That could be my favorite, Love Potion 31, it could be Baseball Nut, it could be German Chocolate Cake. These are flavors that we rotate into certain regions. And what we're figuring out by a lot of this operational data on how we need to be more friendly or be more cleanliness-oriented, engage our customer, of course, Pink Spoon sampling, which I'll talk about in a minute, is we're figuring out different things when some of our guest might say, "We'd like to see more selection of cakes." And of course, we'll dial down into a freezer that looks like that over there and say, "How many more do you want," or "Should they be in a different flavor?"

And today, I would say, some of the fun parts that we're learning, our franchisees would say that 75% of the their guests that walk in don't realize we customize a cake in 31 flavors with 4 formats and we can do that in just about any design within 24 hours. We're also going to improve, as I'll show you later today, on that ordering, as I get concerned that we're a little stuck, and have been in the past, at the tablet from 1972, that's still is double-sided, and how we're going to use technology and use with a lot of information that we're getting on a monthly basis.

With that, you can see this program where we know the best part about this entire piece -- and credit to Rich Emmett, who's in our room, our legal counsel, that this little Pink Spoon, 18 months ago, is a federal trademark today for Baskin-Robbins. So we take our Pink Spoon very, very serious. That is our bridge today to our consumer, and we have really levered that up. And why that is impassionate to me? We did some work and we segmented all of our stores from all the business that you can possibly look at, and 1 common denominator came through. The stores that offer the Pink Spoon sample, at 80% or greater, granted they had higher comps, they also had higher intrinsic knowledge of our recipes, so they knew how to build shakes and smoothies and sundaes to spec without a whole lot of digging through the recipe files. And at the end of the day, the franchisees were making $183 more per week than those that weren't using the spoon. So it was a pretty easy mantra for me to jump on and say, "Let's jump on something that we've obviously have a federal trademark on, that our franchisees believe in." And so we've harnessed a tremendous amount of efforts around this Pink Spoon and our Pink Spoon culture. What does it mean? Very simply, we have to consistently engage and execute against Pink Spoon.

We just recently finished crew rallies around the U.S. We had record numbers. We had 4,000 team members, franchisees driving team members to these rallies, where we can pump them up for the selling season. And we're now experiencing over 98% of our franchisees showing up for our district meetings. They're coming out in droves to hear what the message is as we move our business forward. We've been working very closely with our franchisees, and as I've described to the leadership team, I believe we're in a good-to-great stage. At one point in time a few years ago, I'm not sure what name I would've been called, other than Bill. However, I will tell you today, leaving many of them and my last one in California, literally my hand was sore from high-fiving franchisees for a week, where we saw droves and hundreds of franchisees show up to this meeting. So very encouraged about our operational plan, very encouraged about where we're going, as well as our relationship with our franchisees.

With help from John Costello and Dan Wheeler, we've got some great marketing programs of the product that you see in the back. And it basically comes down to 3 levels of execution from our marketing team. Getting guests in the door. We're using our flavor-of-the-month strategy. We're known for flavors, it's differentiating us from our competitors. You'll see us continue, as you'll see in the back with -- that is a triple vanilla flavor, Vanilla Bean, our #1 flavor with that mixed berry waffle cone, we'll be introducing that here very shortly. But we've seen that bringing in a new flavor and a rotational flavor has been very, very attractive to our customer. Trading them up. This is simply -- and you'll see a spot here in a minute where we're taking those great flavors and we're matching them into sundaes, into shakes, and in my opinion, we're in our infancy of being in the shake business. And we'll also pull that flavor through in a cake. So if you come in and your favorite flavor happens to be Jamoca Almond Fudge or, in the case that you'll see here very we're shortly, with Jamoca Heath, that we'll not only give that to you in a scoop, in a cup, in a cone, a waffle cone, we could also blend that for you in a shake or even make a cake in that cone -- with that flavor. So we're very, very encouraged by that.

And then building the brand, and hopefully you did have the opportunity of going back and looking at that freezer at lunchtime. I was very proud of that, by the way. And my job is to make all of those look like that around the U.S. and Canada. I will candidly tell you we're not there today. But the amount of cakes that we have on display and the amount of customers that we have pre-ordering for holidays now to customize their cakes have been very impressive.

So with that, I do what they show you couple of spots, some things I would ask you to pay attention to -- and again, kudos to John's team on this, is as you're seeing our flavors, you're going to hear some zings and some noises calling your attention. Primarily we do 15-second spots. Our franchisees have asked, and as we believe in, we want to differentiate ourselves with product and product knowledge. So you won't see a lot of hand artists or actors or actresses in these spots. But what you will hear is a voice overture and intense focus on our Baskin-Robbins products.


William M. Mitchell

Franchisees love this product. We love this product. Again, differentiating us, borrowing on heritage of customization. But also, the little trick in that is we're getting into this mold technology, where we can actually create and operate at the unit level to have a more consistent product. So going forward, you will see us, as we're launching into Mother's Day, hopefully, some of you saw the spot where have our tried-and-true designer handbag being featured right now with a new favorite, and a ladybug, which I think you might've seen. Next, I'll go into, again, a piece of the strategy. We'll see one of our flavors, Jamoca Heath, and it's pulled through in a Cappuccino Blast.


William M. Mitchell

Quickly became my #2 favorite. I don't want to change my name badge and make it better than Love Potion 31, so I didn't go through the effort. But phenomenal flavor, if you haven't had that product. Digital, we're very proud of where we've been in this space. Last week, we just crossed over 6 million Facebook fans. And as you heard from the strategy from John, we're borrowing from some of the Dunkin' ideas, as well as the ability to launch into the digital space. I'll talk to you more in a little bit about our online ordering efforts and our mobile efforts. But we've seen, as it's been recognized that we have the 9th largest engaged Facebook fans, meaning not only do we have fans, but they like to play with us every day, and they like to redeem our offers. Here's a few of the most recent. In and around Easter, as you can see, the egg actually shakes up a little bit, and the picture to your left, it creates the Chick Cake. So we featured the Chick Cake, which went in accordance with our traditional Bunny Roll Cake. And, as you know, that can happen, they also sprouted a bunch of the little chickens. So we did feature through Easter, not only the grown-up Chick Cake, but also the chickens to go with that. Really leveraging on differentiation, leveraging on a customization of cakes.

We've also been very, very successful, as you can see, with using Facebook coupons, using Twitter, and other social mediums. We think this is a huge launching pad. The amount of growth that has happened in the last 18 months, with a brand that is a 68-year-old American iconic brand, being recognized not only by kids, but by folks your age and my age, has been truly overwhelming. We also have grown our Birthday Club, which I encourage you if you're in and around a Baskin-Robbins, to please join. My wife recently got her notification, as well as I did, when it was time for her birthday to go buy that cake. We have over 5 million Birthday Club fans today. We look on expanding that as we're getting into the technology business. And as you can see, right above birthday cake, we offer, which has been a question I've gotten many times in the last few days, "What about this yogurt business?" And as you can see, we featured, coming right out of the gate, with a Berry Passionate frozen yogurt, which works very well for us our franchisees as well.

Here's a little bit of our cake technology. We're going to continue to push technology. And I'll show, a little bit in a minute, the application of this. But if you can see in the upper right-hand screen, that's a ladybug cake which will be now featuring. There's multiple different designs we can do with these domes. So we have shipped domes instead of having traditional artists in the back. It still takes some artwork, but we're trying to make these products easier to execute for all of our operations team. And here's an example of the ladybug cake, clearly differentiating, can pick all your favorite flavors, as well as your cake. And as I mentioned earlier in the conversation hearths, we're not going to leave behind some of the traditional favorites. As you can see, graduation is now coming up, you'll see us put a tremendous amount of effort in and around our graduation cakes. And really, we have the opportunity, as we talk about often, of not just celebrating the holidays of the 1950s, the Mother's Days, the Father's Days, but we have the opportunity of selling products at National Administration Day, Boss's Day. If you walk into Hallmark, as I do all the time, you'll see an array of different holidays that we can capture on, and those are the things that we'll continue to grow as we differentiate our cake business.

As we look at online ordering, clearly, a business that I've been in, in the past, and I enjoy this quite a bit. I think it gives us an opportunity to reach out it. It gives us an opportunity to help remind our guests of different occasions. So if you'd like for us to remind you about a bar mitzvah or a birthday or a wedding, we'd surely like to do that. As well as an anniversary cake, potentially for your favorite loved one. We are currently testing online ordering, live time, we just shut down the operations test as of last week. Just so you have it, one of the stores that was in the test is right down the street from my house. I'm not sure how that happened. But I was able to order a plethora of these cakes. And I'm very, very pleased with the operational execution, as well as the creative work in and around our online platform.

The little tablet to the right is a little more than just a little iPad. I think this tablet has the ability of clearly putting us in a different position than our competitive set. Today, if you walk into a Baskin-Robbins, we're going to ask you your name, was the occasion is, hopefully, we will write down "Happy Birthday Vince," and not "Vents", and we'll ask you to come to our location 2 times, one to order that cake and the second to come pick up that cake. And we'd ask do that in 24 hours' notice. We believe we can make that a lot easier for our consumer. Not only the online platform, but this gives us the ability of changing that flipbook that you might see, with the cakes in it in the corner, to creating actually a cake environment, differentiating us, again, from our competition. But walking in a Baskin-Robbins store and clearly seeing that product is hero in the dipping cabinets, but also there's something else going on in there with video boards and cake merchandising and cake tablets, where you can go and plug and play, pick your favorite occasion.

Somebody asked a question, I thought it was a great softball lob to Twohig earlier, when you asked about innovation to single platform. John, I think you asked that one. And probably the best thing that we have done at Baskin-Robbins is we installed a single platform. So we're working off a par [ph] system that can intertwine with all of this. Very exciting one day that I can visit your office park and ask you for all the birthdays that are within your office, load them into this machine and have them routed directly back to my store. So we see this as an opportunity not just to use it on an in-store basis, but the opportunity for our franchisees to go out in their communities and interact within their communities and their guests to bring in more business.

Here's another example of just some capitalizing on local favorites. So we've done a nice job recently of getting into what are the occasions that sell. For example, for the Super Bowl, we loaded up those markets with football cake and football cake decorations. We have many that we shipped baseball helmet designs to, those of you that are baseball fans in this room. The addition is you can -- we have now created a lot of online training apparatuses, where we feature one of our premier cake decorators and we do webisodes, like Food Network, called Cakes with Cathy. So we have decorators and franchisees from around the U.S. dial in, look at different techniques on how to make cakes and look at different techniques on how to design what's going to work for them, not just for us on a national basis, but how they can customize things that work for them. And most recently, I was in Louisville for the Kentucky Derby and walked in, actually Sunday, to see some leftover derby cakes in one of our stores that were there, made out horse heads and, of course, a rose cake and featured the winner that won the derby. So we do have opportunities to localize many of our designs as we go forward and we can do that using traditional ways, but also the electronic platforms that I've mentioned earlier.

We've got other ways to grow, and as we said and Nigel has said many times, one of the things that I am charged with doing is driving the ad fund, which is ever so critical for us. We're very fortunate recently, where we have rolled out to our franchisees a program and a plan. And we needed a 2/3 vote and the franchisees voted overwhelmingly to support it with the matching funds. So we're excited that we're getting internal generators. I often have talked about, and Nigel gives me credit of talking about weatherproofing the concept, which I'd be shocked if I got to be able to sit down today without asking that question. But we're looking at many, many different ways to weatherproof the concept, and this is one. This is our first attempt at going into grocery and channel. The neat thing about this product is -- and there are several, is it's proprietary technology offering 2 different flavors in 1 freezer bar. So in my opinion, clearly, this has clear superiority over the competition. And we've introduced, to start, with Rainbow Sherbet and Rock 'n Pop Swirl, 2 of our more favorite kid flavors. Today, these are being sold in 15,000 outlets around the world. We launched them less than 6 weeks ago. We expect these to get into 50,000 outlets. And probably one of the coolest things, no pun intended, of this product is every one of them going out has a bounce-back redeemable coupon to one of our franchisees stores. So this is just one idea of many that we'll continue to explore, as we find ways to both generate dollars for the ad fund and weatherproof our concept.

I thought that I would give you a look at, as again, there's been a few presentations on Flavors 1.0. But first of all, and I think I described this earlier, about really optimizing the restaurant base. And we've worked diligently doing this. We feel like we have a level-set platform, and as you saw by that graph, there's been some closings that were brought forward that we needed to bring forward, some franchisees that needed to get promoted. So very excited that we have really completed a long 36-month task of, what I call, optimizing the base. We want to grow with our existing franchisees, and we have tremendous incentive programs that, literally, we just rolled out at the end of March. So they're just now getting some legs with our franchisees. But again, we worked very hard on the unit level economics piece and identifying what it means to work at a Baskin-Robbins. And we have applied the appropriate incentives to get growth. And we like to grow, very much what we said earlier, is we like to grow with the 90% of the existing franchisees we have, and we believe we have a compelling model to get them there with compelling incentives. We also have an opened up some attractive offers outside of our existing base, which include the work that Jon Gaiman and his team are doing in driving new franchisees in the door. And we've also, as a former veteran, just launched a military veterans program, with some serious discounts and incentives to bring veterans into the Baskin-Robbins business, as we think that's an appropriate fix.

With all that considered, we've been working hard on unit level economics. I'll show you a picture of that in a minute, so I'm sure there'll be some questions about what is the stability of the financial model and what work have you done. A couple of pictures, just to highlight. That picture to the left, that Baskin-Robbins is one of my favorites. We threw a lot in that to test our brand 2 years ago. Probably the best test that came out of that is we figured out in week 1, we could do $27,000 a week in the Baskin-Robbins if the operating model could handle it, if we could push the volume. So that specific shop ended up at a little over $700,000 in Madera, California. It started to really, really determine for us what the Flavors 1.0 image was about, and what the revenue generators were about using that image.

So today, let me back up and talk a little bit about this, and I know this is in the lingo of the group. We believe we can get to a cash-on-cash return at 25% to 30%. Albeit new, we have some great success stories. As you can see on the bottom, we've opened 100% of our stores in the last 20 months exceeding this model. I would not be personally excited at the $360,000. However, I can tell you that that's the floor, not the ceiling.

Secondly is, we have reengineered the cost of the building and we've taken a very, very serious look at the generators. What is truly ambience that is needed in an ice cream store and what are those that produce a cash-on-cash return for our franchisees. With that, we've been very, very excited, although new in launching the new platform, at where this can be. And again, I would just reiterate the point that with our current economic state, $360,000 is, by far, the floor. And we're very excited with what we've got going on with our franchisees that are growing, and believe that we can replicate this very quickly.

So with that, just to back up. For Baskin-Robbins, we're going to drive the Pink Spoon culture. Again, it's working for our franchisees. It's something that we own with not only our franchisees, but our customers. We believe we can move and launch our business very quickly using technology, with the digital cake book, as well as online ordering, which you will see very, very soon. And we believe this path to growth and really hammering unit-level economics, redesigning the concept and launching it with incentives is something that we'll give a lot of attention to.

With that, questions?

William M. Mitchell

Yes, sir? Mark, let's go right here, and I'll come back to you, Mark.

Unknown Analyst

[indiscernible]. Perhaps shed a little light on some of the benefits that those California Baskin-Robbins are seeing from being able to sell K-Cups there? And maybe if there's any read through to other locations maybe in the future?

William M. Mitchell

Sure. Great question. First part of the question. What has been the benefit of K-Cup sales for the California franchisees? Very exciting. We are meeting our expectations. If you look at what it's done for the California business, it's about 2.5% of their growth. So we have seen it move very, very quickly. It's another one of those examples, Mark, of weatherproofing, where we've put in a product that I've seen when it does sleet and rain, and we hope it never does. But it did happen several Fridays ago in the first quarter when the gentleman that runs that part of the business had to go out and buy coats for his children because they didn't own any. But that week we saw a flatline movement of K-Cup sales and we saw a slight deterioration in the Baskin-Robbins sales. So we're excited about what we've seen. And of course, we're just going to continue. Interesting enough, and this is a go-figure moment, that we've seen following the LTOs, which has been very, very critical and a part of the program from Dunkin' Donuts, that our flavored coffee K-Cups move very, very quickly. And we love the introduction of LTO K-Cups because we see that launch even greater when we introduce those flavors, including hot chocolates. Yes, sir?

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Steve Anderson. Just wanted to ask again about the cake sales. Do you have any metrics on that and any historical movement on that? That sounds like that could be if not a, specifically, a transaction driver, but a ticket driver.

William M. Mitchell

The answer is, yes, it can be both, by the way. So the transaction driver being the other occasions, other than the holidays of the 1950's, and the ability to process those, and the ability to learn how to do order ahead, which has been key for us to do. The metrics, currently we sell 4.4 million cakes in the U.S. We look at the variation of those sizes. We look at the variation of those designs. We measure those diligently each and every day and every month. Because it's my belief that as we learn, for example, from the Chick Cake and our after-action review, and how did the Chick Cake perform, and how many shops actually produced and sold those Chick Cakes, we'll look back at historical data to say, "How did that Chick Cake perform against the Bunny Roll?" And those types of metrics we can match very quickly.

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

What percentage of the mix are cakes right now?

William M. Mitchell

20% in the U.S. Questions? John?

Unknown Analyst

Is there anything you can point internationally from Baskin that you could be readily transferable to the U.S. that are a major sales layer site [ph] that you have you seen in similar markets?

William M. Mitchell

Yes, I think there are 2 things. One is, I like how the soft serve product has been used. So we are also embarking on different ways of using it, which I think you've tried at lunch. That piece cake, very interesting to me. So I love the work that the Korean team has done in designing that piece cake. I think it truly takes a differentiation of cakes to a different level. Our complexity, candidly, to it figure out, is our labor wage is a little more than $0.67 an hour. So we've gone down the production route and had a tough time with it. But we're not giving up and it's one that I think, as we get the recipe right and the design may be a little bit more simplistic than what you're seeing in the back, that we can actually produce and make those within our stores.

Unknown Analyst

Can you get back to the soft serve? I just don't remember. I mean, is it everywhere and, I mean, can you use that as kind of an everyday low price offering that can bring people into your store more frequently if they weren't [indiscernible]

William M. Mitchell

We have. We've used it as everyday low price. We've seen it is a transaction driver. To be candid, we haven't figured it out. And it's one of those categories. And an example would be, we launched a promotion with Waffle Chip Dippers. It's a phenomenal promotion where we use waffle chips to actually dip ice cream. Franchisees would say, "It was an okay promotion," because it drove a lot of traffic. But we did something -- we got a little lucky here, we produced a new product called Apple Cinnamon Crisp, and it came in a waffle bowl. And so we saw the Sunday business take off, but not necessarily the soft serve business. So to your point, we continue to want to look at innovation within soft serve and we're going to work over the next year to really figure out that platform and how it moves the needle and how we need to spend against it.

Unknown Analyst

Bill, could you talk a little bit more about your coffee platform? If it makes more sense to include Dunkin' coffee a little bit more into Baskin? Or if there's something else that you have in mind beyond just the Dunkin' K-Cups out in California?

William M. Mitchell

The answer is not today. As my boss has used some political capital to get me the K-Cups, and we're not going to go outside of California at this point in time. We have in the past, and I think it's a good idea to use some Dunkin' coffee recipes in our ice cream. As you've just seen, that Dunkin' is using some flavors in their coffee from Baskin-Robbins. So we do own the ability and have the right to do that, have done it in the past with success. But as far as hot beverage, has not worked for us. And it's a misnomer to me, we've tested it a couple of times. I've put Keurig into Baskin's using some other products, and although franchisees from time to time, especially in the long winter months, will say "Bill, can you please give me hot coffee and hot chocolate," every time we do, we don't get a return for it, and they're often wanting me to buy the Keurig machine back from them. So we haven't figured that one out. We have used some warm bakery using our existing equipment, the waffle iron, to produce some Belgian waffles and some hot brownies, which those products have worked for us. So we do believe we need to have something warm and potentially baked in our business, but not necessarily in the hot beverage arena, unless we get into some type of hot chocolates or flavored chocolates in the future.

Unknown Analyst

Bill, can you talk about the broad frozen snack, frozen desserts category. Are we past the peak of the yogurt craze? And just what's going on competitively and how it's impacting your business?

William M. Mitchell

I wish I had $1 dollar for every time somebody asked me about yogurt. I made a comment 3 years ago, and last night at dinner, somebody asked me the question, "Bill, you stood up and said," -- they also kept my notes too, Scott. "You stood up and said, you're not going into the yogurt business. Do you think you made the right decision?" And answer is, I do today. Now what we did to combat that is we put in a plethora of yogurt, hard-scooped products, where you could pull through in shakes and smoothies. We put a lot of external advertising saying, "We also have yogurt and it has live and active cultures." Franchisees, at that time, were saying, "Bill I'm really scared. I would also challenge you, if you haven't, to go out to those same franchise community trade areas and it is a wasteland of yogurt shops. And once, when we were outnumbered in California at 5 -- 5 yogurt shops to 1, that scale is inverted. And where we have a franchisee that's engaged in the community, when they're running the ball, since we're running on a playbook, straight down the field and they know what's going on and we give them the tool of a live yogurt product, we've been able to subside that. We clearly do know, however, that yogurt has moved west to east. And so, we've had to use that playbook and adopt that. And especially in small communities, where we might have Cleveland, Tennessee, a one-store franchisee, that 3 yogurt places open up, it's clearly a treat business and we have to do other things like take-home quarts of yogurt. Like the ability to push cakes when we need to push cakes, at least to subside that push. But the good news is, today -- and again, I just finished an exhaustive 2-month road tour, where I didn't get to see my teammates or my family for probably about 8 weeks, I didn't get 1 franchisee to ask me to put yogurt in and I interacted with over 98% of my franchisees. But not one would say, "Bill, can I have the $20,000, 2-head Taylor Head machine? And by the way, I'd like to get 3 of those and put $60,000 into my shop." Not one franchisee asked me for that in 2 months. 3 years ago, probably a couple hundred were writing me notes, but not today. Great question, Joe.

Done? Last question. Thank you. I appreciate your time, and thanks for your interest in Baskin.

Nigel Travis

So we gave him the red card. Okay, so one more presentation to go. And this is all the really exciting stuff that you guys have driven to look at all the time, the financials. I mean -- Paul, what's the point?

Paul C. Carbone

The most important stuff.

Nigel Travis

The most important stuff, yes.

Paul C. Carbone

It's all about building the model. All right. So I have a couple of slides, just to tie it up. And then we'll go to Q&A. So a quick recap of Q1, you've all seen this. We think we had a great first quarter despite the weather. Revenue growth, a little over 6%. Op income growth, a little over 12%. The margin getting close to 44%. And then EPS growth, up 16%, despite about 120 basis points of weather impact in Dunkin' U.S., despite about 600 basis points of weather impact in Bill's business. And then just had an absolutely fantastic development quarter, as we talked about.

So a little history and this, more than anything else, is we talk about what is Dunkin' Brands and was in the investment thesis behind Dunkin' Brands, and I think these 2 charts -- and I have one more, really speak to it. So growing off income -- and even in the 2008-2009 period, going into 2010, during the depths of the financial recession, our operating income was basically flat, all right? So I think that talks about the stability of our business, really what we bring to the table. And then, margin expansion. So the other side of that is, not only are we looking to grow margin dollars, but we're looking to grow margin rate, long term in that 150 to 200 basis points. I would say, as I give that long-range guidance of that, I'm only burdened by our past of here, growing at roughly 250 to 300 basis points in the past. So I continue to say, long-term, it's 150 to 200. But obviously, this business has the ability to leverage its expenses.

All right. So clearly, we talked a lot about this, Nigel started out with this, this asset-light 100% franchise model really allows us to have a leveraged capital structure. We believe we will always have an amount of permanent debt on this company, while still remaining financially fixable, all right? So it's really the best of both worlds. We will naturally delever through minimum debt repayments and then growth of EBITDA. And as you think of that, think about it, the 1/2 turn to 3/4 of a turn a year. Just through natural, again, EBITDA growth. Fourth quarter to first quarter, we delevered about 20 bps. Share repurchases, right? So the returning of cash to the shareholders, that's the other story of Dunkin' Brands. We are committed to that. We do not need a lot of cash. Our CapEx guidance is $25 million to $35 million. So we bought back about $450 million last August. We had an elegant way of doing it through the private equity, when they did their cleanup trade. Our ongoing dividend, we remained at a 50% payout ratio at the end of the fourth quarter. We increased it from $0.15 to $0.19, really driven by the share buyback, holding the payout ratio flat. And then, we returned about $520 million last year to shareholders, and that's both through dividends and the share buyback. And you see a 32% shareholder return in 2012. And I looked over again at that calc this morning, and that was having our stock at about $33 year end. So clearly, between $33 and where we are today, again, driving shareholder return in addition to the dividend.

All right, so 2013 guidance. Most of this stays as is, except for development. So Dunkin' U.S. comps still 3% to 4%, all right? So even with the weather impact in Q1 of 120 basis points, we continue to feel very confident that we will land between 3% and 4% comps in DD U.S., 330 to 360 total net units, right? As we've said, now we believe we'll be on the upper end. So we're not changing that. But we're saying we will be on the upper end, still 450 to 500 remodels. In the International business, Giorgio, 400 to 500 net new unit development. And then Baskin, 1% to 3% comps. Again, reiterating 1% to 3% comps even with the first quarter and the weather impact. And then 0 to net negative 30 net development in Baskin. And you heard Bill talk about getting this to a slow growth and as we look at getting that to net positive growth in the future. So the Dunkin' Brands continuing 6% to 8% revenue growth, 10% to 12% off income growth, you saw that in the -- both those numbers in the first quarter. Again, leveraging off income margin. $1.50 to $1.53 EPS for the year. And then, $125 million to $135 million free cash flow, obviously, before any debt repayments and payment of the dividend this year.

All right. So long term, again, the one -- we've updated it. So U.S. consolidated comps in the 2% to 4% range, that stays the same. The next one is what we update is for total net unit development 4% to 6%, so that was 4% to 5%. So we're updating that 4% to 6% with an opportunity to accelerate. So interestingly enough, those numbers, that's a DD U.S. number. And then a Dunkin' Brands global number, right? The numbers work out the same, 4% to 6%. We'll continue to stay a leverageable cost structure, 150 to 200 basis points, strong free cash flow.

You've heard me talk about before, that we're comfortable in this 4.5% to 5.5% range of leverage. I think, today, these are interesting days today with debt so inexpensive. And would you, if you were to relever, and we think about this probably in the back half of the year and at the beginning of next year, as we've talked about, would you lever up a little bit higher, and then let it run back down to that 4.5% to 5.5% range to take advantage of rates? We find that interesting. It's something that we certainly talk about all the time. On the revenue side, 6% to 8% revenue growth, same 10% to 12% off income. And then growing EPS a little bit faster than off income, again, by share buybacks, looking at tax strategies, et cetera. So this, again, is the story about returning cash and cash flow to shareholders. It's the thesis behind what we do every day, it's what we believe in. We don't need a lot of cash, and we really do look at this as investor's cash.

All right. So just a couple of modeling updates. This one, it's in your book. And I think the big one here is the G&A, so setting it off the right number for 2012, of $209 million, growing 3% to 4%. Updating the depreciation number. It seemed like, in the first quarter, when we talked to a lot of you, because we've gotten rid of the Peterborough factory, I think we -- I guess you're surprised to the good side on a lower D&A number. You'll see the equity from the joint ventures and then interest expense is just a reiterating of the interest expense once we refinance. All right.

So a quick update on financing. And I've talked you guys enough where I don't think there's anything really new or groundbreaking there. Should we just go straight to the larger Q&A?

Nigel Travis

Yes. Okay, so I'm asking all my leadership team to come up here. And we'll do the same things with the microphones. Is it possible to turn this projector off for 1 sec? Because every time I move around -- thank you. Oh, that's great. So we've got about half an hour and just perhaps a bit more for Q&A. Jeff's dying to go first. But let's just get everyone settled down first, Rich. Jeff?

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Thank you, Nigel. Well, just because everyone's kind of looking back to past slides and seeing what was said a couple of years ago, just 2 questions as it relates to the numbers that you just threw up at the end there. One from a G&A perspective. I think a lot of investors are still trying to get used to the idea of 100% franchise business and where the margins could ultimately go, and G&A is the biggest component of it. Some I'm just wondering if you can talk a little bit about that 3% to 4%, the biggest buckets within there, and kind of where you see that going longer term in terms of which line items are more leverageable than others? And the follow-up question is just as is lends itself to the operating income margin, 150 to 200 basis points. I mean, you're in the mid-40s now, and you said you're kind of running well above that. So as you look out 5 years, I mean, is there a reason to believe that once the investments are done, in terms of westward expansion or international, that, that number naturally gets larger or gets lower? And where's the ultimate number go-to, does it go to 60% in 5 years, or is there a reason to believe it go higher than that or.

Paul C. Carbone

All right. So on the 3% to 4% -- so let's talk about G&A. Our G&A comprises 2 buckets, think about it. 2/3 of the G&A spend is payroll and 1/3 is IT costs, legal costs, all other. So on the 2/3 piece of it, all right, I think most people would like a 3% raise a year, right? So that's kind of a couple of percent on the total. So 2/3 of 3%, we're going to have some additional headcount. And then we look to the other bucket, the 1/3, growing at 2% to 3% a year. Right? Again, just inflation or what not. And that's kind of how we come up to the -- that's one way of coming up to 3% to 4%.

The other way we get there is our focus on trying to limit G&A to half of revenue growth, right? So we've built this 2 ways, bottoms up and tops down, and we like to look at it both ways. And I think what you've seen from us is we're very focused on G&A. We're very focused on costs and making sure we're controlling costs, although I think you've also seen from us investing where we need to invest. So we refinanced the debt. We flow half the savings of 3 quarters of savings to the bottom line. We hold back $1.5 million to invest in international. So I think it's the balance of those 2. And I think we've done a pretty good job. From a margin perspective, so I think I can go out on a limb and say, we'll never get to 100% margins, all right? So somewhere between where we are today...

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Why not?

Paul C. Carbone

There we go. So I think in 5 years, when we're talking, Jeff, will I still be able to leverage 150 to 200? I'm not sure because the base will get so much bigger, right? So every incremental dollar, if the base is at 60% or 55%, I get less of a margin improvement or a bps improvement. But there's nothing fundamentally in this business structurally that says I have to stop at 50% or I have to stop at 52%. We've run this out. We continue to see leverage. We run it out 4 or 5 years. I've looked at all of your models. You still get -- you can still leverage this business. There's nothing that says that there's any natural breakpoint of I can't leverage past x.

Nigel Travis

So let me just add a couple of things, Jeff. I mean when I look at it, I try very hard to stop legal, finance, IT, HR, supply chain growing. But obviously, as we grow around the world in particular, possibly supply chain has to grow. Marketing probably has to grow because international is a different model from the U.S., where most of it goes to the ad fund. And clearly, through all the operating businesses, international, BR and Dunkin' U.S., we're going to see some growth in development and operations. But basically, the drivers are the field people growing to cover the stores and development and marketing, to try and hold as much as we can, to start functions as flat as possible. That's the way I see it. I think next question is -- John? Unless someone else -- did someone else have it?

Unknown Analyst

Nigel, I wondered if you could talk about your thoughts about the CPG business as you evolve, right? K-Cups was a big part of this story originally. It's sort of -- as you've lapped, it's died down. Specifically, how about the canned or bottled iced coffee business? Is that a starter or a nonstarter based on your franchisee relationships? Can you talk about how your packaged coffee thoughts are evolving as you -- in the U.S. and, particularly, internationally? When is the right time to bring those products to international markets?

Nigel Travis

I'll say I think the whole thing's an interesting subject. When I think back to the IPO, the fact that we decided we'd do K-Cups just in our stores and not in channel, I look back and think that was one of the best decisions we made. It helped our franchise margins, it kept franchise relationships strong, and I think also we were able to watch what would happen to the K-Cup business. We continually have thoughts about where we go in the future. I think our model basically is that we're not going to go into a channel any time soon unless we see an opportunity to help our franchisees by doing it. So I could imagine a day where we'd have some of kind of sharing relationship with our franchisees, not sure it's going to happen any time soon. I like the ideas that you went through, K-Cups, some form of bottled coffee, I think, were your words. There could be other forms of coffee. I think international is very interesting. I'm not quite sure what GMCR is going to do internationally, but we're pretty close with them. They've obviously got new leadership, so we'll continue to talk to them about international. It's interesting that ice cream already is in channel in some international markets. And that makes us think, are there some opportunities to go into channel with various Dunkin' products internationally? But we've only really started thinking about that. We've done nothing about it. So summing all that up, I don't see, in the short term, our position changing. We watch it with interest. And as some of us were talking last night, the whole coffee space is going through some change, with JAB's consolidation of Caribou and Peet's, Starbucks continue to move forward, you've got McDonald's doing coffee in their stores in Canada, et cetera, et cetera. So we keep thinking about it, but to be clear to everyone, our position is unchanged right now. And don't think when I say right now, that means it's going to change any time soon. John, do you want to say anymore than that?

John H. Costello

Yes. I think we clearly have the ability to develop all of the products that you're thinking about, but our #1 priority is driving profitable franchisee growth. And so our first 2 forays were K-Cups in the Dunkin' restaurants. You saw from what Bill mentioned, we went in to nonstore channel with the freezer bars, because that was a noncompeting project -- product that leveraged the BR brand that generated business for the increases for the BR ad fund. So I think one way to look about it is we really have the technology and the ability to develop whatever we want, but our #1 priority on both brands is driving profitable sales and ad fund growth for the restaurants.

Nigel Travis

Michael, one there. One more.

Grant A. Robinson - Robert W. Baird & Co. Incorporated, Research Division

Grant Robinson from Robert W Baird. I wanted to ask a quick question on the long-term guidance again, the revenue specifically, both the unit development targets for Dunkin' U.S. as well as international is increasing, but the revenue target, long term, was held. I just wanted to see if you can kind of comment on your thoughts there and whether or not it should be leaning towards the high end at this stage or kind of how you approach that.

Giorgio Minardi

Yes. So it's a good question and certainly, the revenue -- the development in the U.S. generates a lot of revenue for us as we bump that up. As we ran through the model, that tick-up in where we have our model out, we're still in that 6% to 8% range. And the question is, how long did it take us to get to 6%? So candidly, when we came out at the IPO 2 years ago, and we said the long term was 5%, certainly, back then, we never thought a year, 2 years later, we'd be upping it. Because at the high end of our guidance, which we kind of told you to go to now, we're at 5%. So we're comfortable with that 6% to 8%. Certainly, as you build your model at 6%, you're going to tick up further on that 6% to 8% towards the 8% rather than where you -- wherever you were before.

Nigel Travis

Okay. So Michael, and then we'll go to John after that.

Unknown Analyst

So Paul, I just wanted to follow up. You talked about, just a second ago, and maybe even levering up further to take advantage of lower rates. From a big-picture perspective, the last 12 to 24 months, your comfort level with leverage seems to be creeping further and further up since you've gone public. What -- how has that evolved and how are you thinking about it? Is it just what the market will bear? Is it how you think of your own business? Is it the rating agencies? Or are they -- so how do you think about it?

Paul C. Carbone

Yes. It's a good question. So a couple of things. One, I would say that when we were private, we were more highly leveraged. So this is actually a step-down from where we were. We think about it a couple of ways. One, I think we all, as a management team, get more and more comfortable with leverage and just knowing we have this permanent debt on the balance sheet, and certainly that we can, even during a downturn, as we go through our pressure testing -- so we did this with the board when we bought back the shares of, "What if Dunkin' has a negative 5 comp or a negative 10 comp? Can we still make the payments?" and the pressure testing works out nicely because of the model. As we think about -- so the market has said to us for probably the last 18 months, right, in general, the market, you can go higher, right? You can securitize the whole business like a domino, go to 7.5x, 8x, whatever it is. So what I would tell you is while we hear that, we don't react to what the market is telling us. That's -- it's interesting, but we don't react. What is kind of -- what we've been talking about, and we're in early stages is, if we're comfortable 4.5 to 5.5 and we're at 5.5 and then you work your way down to 4.5 and then you do a natural relever. I guess what I'm throwing out today is when we get down to that 4.5, might we relever to 6, and then naturally bring it back down to 4.5 to 5.5. So that one time, just because rates are so attractive, and if you run out the model, our intrinsic value of our stock versus the cost of debt and the optimal capital structure would certainly say we should be taking on some more debt, we should be buying back shares, and it's accretive to everyone, all shareholders.

Unknown Analyst

And what it -- is there a point, a stock price or a valuation where you say, "You know what, it makes sense for us to take on the debt. But we should be deploying this back to shareholders in a different form. Because the multiple on the stock is so expensive. It's not as accretive as it once was." Or you mechanically are just going to buy back stock because it's...

Paul C. Carbone

I think it's a good question. We think about this a lot. So there's 2 ways of giving it -- 2 big buckets, there's special dividends, right, or there is share buybacks. If you do a relevering, you get a big pot of money. The thing I like about share buybacks is it gives the shareholder both options, right? So if I do a special dividend, right, as you know, I'm forcing upon a taxable transaction on the person holding my shares. They may like that and they may not. If I do a share buyback, first off, every shareholder always has the option to sell, and they can synthetically generate a special dividend. If I'm going to buy back, I'll make up the numbers, 10% of my shares and they own 10% of the company, right, they could sell enough shares to maintain 10% after the share buyback and get that synthetic special dividend for themselves, right? They've monetized and they still own 10%. So I actually like the share buyback because it gives the shareholder the choice to choose a taxable event or not and choose what they want to do. They want the same number of shares and own more of Dunkin', or do they want to sell some down, receive the cash and own the same percent? That's kind of how we think about it.

Nigel Travis

Okay. I think John Ivankoe is next.

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

I mean, obviously, you're very loud and clear and consistent about what you do just to improve franchise-level economics. But one thing that you said in the context of that, related specifically to the DD Perks card. I mean, there are a couple things with this. I mean, firstly, you can imagine, in the near term, that the card might be beneficial to you, the franchise or to the customer, but the franchisee may have to make some amount of investment maybe year 1. I mean as whatever discounting or reward that may happen as a part of the card builds over time and the percentage of transactions on the card builds over time. So I just wanted to get your thought on that. I mean, is it possible for the franchisees to accept it, an investment in the card, if you will, in year 1, for what would presumably be significant growth in the longer term, a la Starbucks in the past 10 years? That's the first point. And then secondly, as the balance in that card presumably will grow over time, whether through preloaded mobile or on the card, what have you, have you communicated, articulated or thought about what you may do with some of those unredeemed gift card balances as, presumably, they grow over time as well?

John H. Costello

Yes. Question number one, is it possible for the franchisees to invest? The answer is absolutely yes, if we build a good business case. A good example is the digital menu boards, which are rolling out right now. We tested that thoroughly, built a very strong business case on what the return is on that investment, what the benefits are of that investment and the payback of that down to the months. And as a result, the franchisees are signing up to invest capital and putting those digital menu boards in. And in fact, we just finished a major sign-up period where we exceeded the targets that we set. Direct marketing is actually easier to measure the ROI on direct marketing than it is on something like digital menu boards because you got all the variables in the store. So we plan to grow the loyalty program very much on an ROI basis. And so I think, absolutely, as we build the case for that ROI and the payback, then we can build a good case for franchisees. And we have a very close partnership with the franchisees under Nigel's leadership. They know that we genuinely believe in driving their profitability. And whether it's store remodels, building new stores or investing in things like loyalty, they've shown the ability to invest when we build a good business case. In terms of the balances, the answer on that is no. We really don't have plans yet on those balances. We're focused right now on driving mobile downloads, building our database, and then with the offers that we're sending out, building ROIs, and we've kind of put on the table until later what we might do with those balances.

Nigel Travis

Okay. Who's next, please?

Grant A. Robinson - Robert W. Baird & Co. Incorporated, Research Division

Grant Robinson, again, from Baird. You talked about the 74 west and emerging units in 2012. I was wondering if you could perhaps talk about what that looks like over the next 2 to 3 years, how that might evolve and kind of what percent of the growth towards 6% is being driven from the west and emerging markets.

Paul C. Carbone

So maybe one of the stats we could share is in -- and I know it's in one of our investor decks, but if we look at SDA sales, so store development agreements, which is really future development, it's the pipeline, I believe 60% to 65% of those are being sold in west and emerging markets, right? So you get to a point where, in the future, you could see that flip and most of your growth will come from west and emerging. Now that being said, and you've all seen the chart leading to 15,000 stores. There's still 3,000 stores east of the Mississippi. Now that's a combination of established and emerging, because there are emerging markets. But you will see that grow over time, as you have. And it will become more and more important. Certainly, with Denver opening up, they'll open up at the end of this year. But we'll have more openings next year in '14, so that will become a bigger part, Salt Lake, things of that nature. So you'll see it grow. We don't have, necessarily, targets to say x percent by this year.

Unknown Analyst

Nigel, in the -- in your opening remarks, you talked about how corporate and franchisees don't always see eye to eye and that these meetings get loud and you're the loudest one. But others are screaming as well and it's productive. Just wondering, as you think about that -- I mean it seems like, right now, everything is moving very well for the system. I'm just wondering are there common themes or things that franchisees want that corporate doesn't want? Or where -- is there ever a point of we disagree on something or other, let alone, how you would then resolve that but...

Nigel Travis

Yes. I mean, it's funny enough. Right now, it's tough to think of any major issues that we're disagreeing on. It's often -- and I'll let Paul talk about this as well, it's often something another franchisee has done that we may either support or oppose, and then you get the counterview. I think all the big issues, we kind of tackled in the first couple of years. We redid the franchise agreement. We tackled the supply chain. I mean, I remember one in the early days. Obviously, I came -- 2 companies ago from Blockbuster. We used to have 52 windows a year. Now think about that, because you'd have a new release every week, so you had to change the whole new release wall. I got here and found we had 8 windows. I brought John in, and we had a big argument. Why should we move to 12? Think of all that work. I think if you went out and asked them now, "Should we have 12 windows a year?" you get 95% saying we should. So I think all the fundamental change aspects we got through is down to smaller issues. But I think the point I was trying to communicate earlier is, within the company, I don't run a hierarchical structure. I try to make very few decisions, because I like them to evolve at the right level. With the franchisees, it's not a relationship where we tell them what they're going to do. We won't get significant buy-in. Paul, can you think of any examples? Or Bill? Because we run the same kind of model in both places.

Paul E. Twohig

You briefly alluded to it. Probably the biggest thing right now is something one franchisee does that affects another, and usually, that's real estate. So as you -- in some of our established and core markets, the competition for sites is so great that first guy to the piece of real estate gets it, and then it's the -- there might be a controversy about who was closest, who should have it. That really is probably the biggest issue we have right now.

Nigel Travis

Yes, that's what I was thinking of as well.

Paul E. Twohig

And that's not a bad one. I can live with that.

Nigel Travis

Yes. I mean, the sort of thing you get is someone's being close to a territory. I mean, say that's their store and there's some stores over here that could be built, they kind of sit watching it. And this is in more in an existing market. So when someone else comes in and says, "I'm going to take all that territory out there and build quickly," it's that kind of issue that we have, and you got one saying, "Well, I've been sitting here. I was going to build those stores but not as quickly as this." It's actually a high-quality problem and then we debate it -- well, he debates it, but not me.

Unknown Executive

Nigel, as you mentioned, I think we knocked out a bunch of them in the first 2 years. If there's anything that pops up today is our franchisees are feeling success, and they want to move faster on certain items. And so I do have the same thing, where franchisees want to get to scoring on the reviews. So anybody held in compliance, we take to the woodsheds. So I do have a BAC that wants to push those types of issues, and they like that we're in the cake business again. So we're getting more kudos around driving different parts of the marketing calendar and driving our brand to a new level. So I think the hard part doesn't mean we don't have issues, but the in-fighting has stopped, and people are seeing we're on a common path. They just want to go faster and faster and faster, not a bad problem.

Nigel Travis

It is actually interesting, watching franchise politics at work. I mean, that -- from -- it's -- we're like a commentator on that, because they have these elections and everyone gets in election mode. So that's an interesting offset of all this as well. So you got a lot of people kind of getting ready for elections and grandstanding and taking positions because they're up for election. So that's part of it. Okay, I think we have a question over here with Jeff and then we'll go there after.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Just one more on the margin expansion, 150, 250 -- or 150 to 200 bps, I got it right that time. If you disaggregate that, roughly what percent of that's coming from G&A leverage? And what are the other big components of that? How should we think about that drivers of that 150 to 200?

Paul C. Carbone

It's a good question. I don't think I would sit here and get specific enough, because I think there's puts and takes there, 1 quarter or 1 year, right? So this year that we're in now, right, we're going to have more -- a lot of that leverage is going to come from ice cream margins, right? Because we're getting this one big pop, and we're going to invest in Giorgio's group, right? That $1.5 million of interest savings we're going to put into G&A. So I think there's puts and calls. I think it comes from a few different places, as we see -- because that's op margin, right, so it includes all those things. You saw depreciation go down, so I don't really have, in our mind, a long term, this is how it should breakout. Certainly, G&A leverage is the story here though, right? I mean, we sell contracts, right? We have people, and it's Paul's people and Bill and Giorgio that need to lever as we get more stores. But I will reiterate, as my cohorts here, Rich and the others of the corporate, Nigel keeps the thumb on us from corporate pretty hard, and it's the right thing to do. But we see it coming. What's that?

Nigel Travis

It's the first time you've actually recognized that.

Paul C. Carbone

Yes. But I didn't agree with you. I just said you keep the thumb of the...

Nigel Travis

You said it's the right thing to do.

Paul C. Carbone

That's true. But certainly, we see it coming from a couple of different places. But the G&A leverage is the story as you think about this business long term.

Nigel Travis

I think you said an interesting thing there. We've got this interest expense, and we decided to put $1.5 million, as you said, in international. We are taking a longer-term view of the business. We're not just about hitting the numbers this year, we want to make this business really sustainable. And I certainly, and I think most of my colleagues intend to be here for some time, so we want to build a better and better mousetrap as time goes on, and that means some investment, when we've got the money, in international, Dunkin' or Baskin. I mean, one of the reasons I think Bill's turned around that business is we, at board level, before we went public, made the decision one year to invest, what was it, $4.5 million in Baskin? And that was a pretty big decision at that time, but it's really paid off. And we keep looking for opportunities to support international in the same way. Someone back there, please?

Unknown Analyst

I wondered if you could talk a little bit more about the mobile app. It seems like that's a pretty big theme for the year and then I expect it to be a pretty big deal the next few years. So first, just wondered if you could talk about franchisee feedback, what they expect to come out of this, what they would like to see more of or less of, et cetera. And the second part of that, as it launches initially or as it has launched initially, do you expect to see more of a frequency traffic driver? Or do you see this more as a check builder over time?

John H. Costello

Yes, I'll address that. The franchisee reaction to the mobile app has been very, very positive. They see -- like anything, and part of it is, I think, we spent a lot of time with our HR training group and operations, making sure to educate the franchisees and educate the crew, because it is a change in payment. So there's always an apprehension about any kind of change like that, but the franchisee reaction to it has been very, very positive. They see from it the same kind of benefits that we see, and I'll kind of tie the answer with your second question about will it drive transactions or ticket. And the answer is it will drive both in both established and new markets. So an example might be in the northeast, where we have very, very high frequency in the morning, the mobile app can be used to build ticket in the morning or drive a second or a third visit in the rest of the day. In a newer market like Dallas, which is in the early to mid-stage of its development, we're using -- we can use the mobile app to drive frequency, build loyalty or drive the PM. So I think the mobile app is very powerful in driving both ticket and transactions in both the morning and rest of day and can be very, very efficient in driving incremental sales. I think the franchisees are excited about it from the business building potential. They're also excited about the tender aspects of it. There's a real power to encourage consumers to load up on their Dunkin' card. Because when people put more money on their card, they spend more. It goes back to the earlier question of, would they invest. So they like the idea of encouraging guests to load up. There's also a real efficiency. As I mentioned before, we don't do the broad-based discounting that a lot of our competitors do, but it is -- but we do, do targeted couponing against strategic objectives. And it's a lot less expensive to send a digital coupon or an email coupon compared to putting something through the mail. The same is true, Baskin is kind of teeing up next. And Bill talked about their number of members in the Birthday Club. And as we complete development with IT of the Baskin mobile app, the real potential of building even deeper one-to-one relationships with those 5 million Baskin Birthday Club members. And then shifting to Giorgio's business, several of you talked about the challenge of TV spending in newer markets when we only have a small number of stores. In those markets, digital and social and electronic marketing becomes more important as well. So very powerful in terms of building loyalty, increasing tender, saving tender costs and delivering marketing messages at a fraction of conventional tools. So as a result, the franchisee reaction to the mobile app has been very, very positive. And as you can see from the kind of growth rates we're getting, consumer acceptance has been very, very strong as well. So pretty broad based, which makes us pretty excited about it.

Nigel Travis

Okay. I think we've got time for one more question, Andy?

Andrew M. Barish - Jefferies & Company, Inc., Research Division

Let me do a quick 2-parter to keep John on the spot here. Can you give us an example of -- in product development, something that didn't work here in the last couple of years? And did it actually get into store? And then shifting quickly on -- just getting a sense of pipeline as you sign these new SDAs, particularly in the west. How do we think of the numbers we see in some of the releases in terms of a percentage of total possible development? Is there some broad brush strokes we should think about for a market like Denver, where you signed 4 people for 50 stores? I mean, that's -- Denver's probably a market where you can handle more than 50 stores, I would think. But just to...

Nigel Travis

Okay. So again, John to do the first question and then Paul the second, okay?

John H. Costello

Yes. So I was trying to share your failures with the world, so here you go. Yes, we did have one. We got very excited about PM snacking and the potential to develop PM products, and we got very excited about a product that we called breadsticks, which were essentially kind of similar to a consumer product called Hot Pockets, and we rolled that out nationally. And we rolled that out -- I remember the day we rolled it out nationally. We rolled it out nationally, and it sold poorly and created a lot of inventory left after that. My friend here [indiscernible] still has some. So if you're traveling to obscure towns around the world, you can probably still buy that product. But we got ahead of ourselves. And what happened is there were are a lot of trends towards snacking. The product tested very well, but I talked a little bit about our strategy of Familiar with a Twist, and it was a little too different. And we didn't -- and so we rolled it out too fast. And what happened is it sold very well in some areas, and it sold very poorly in the others. And what that did -- it was April of 2010, and what that did -- 2009 -- is we turned the spotlight back and said, "Let's make sure we don't get ahead of ourselves." And so we're hitting 69 out of 70, and the one that didn't work, we managed to expand nationally. And we learned the power of barter as a way to get rid of inventory on that. So -- but and we've had some in tests, but that was the only one that got nationally. And what's interesting, the issue now is not so much failures, and that was clearly -- was not a success, is the bar has been raised now that you can be a good product, but you need to break into -- you need to be good enough to get on the calendar. And so, yes, so that was the one big flop that we had, but we learned from it and tightened up our testing on it and have had a good ratio since then.

Nigel Travis

So Andy, you can always come to these meetings, because you keep them very honest and modest, okay? So Paul?

Paul E. Twohig

All right. Yes, regarding the SDAs. You're quite right. Denver certainly should have more than 40 or 50 stores. But like anything, as we sign the relationship agreement with these new franchisees, the SDA, it's maybe 10, 12 stores and each one of them is, let's see how that goes. And as they have success with those first 4 or 5, maybe we'll renew them to higher levels. So what you don't want to do is overwhelm a market too quickly, because you'd take all the air out of the market. And so we're going to go in, do 4 or 5 year 1, maybe 10 or 12 year 2, and just let a natural progression occur as you build out that market. And then at that point, if everybody performs, then we give them more opportunities to keep building out their SDA.

Nigel Travis

Okay. So we're going to have 2 or 3 more slides and then we're going to have a big finish. So can I thank the people who really are responsible for a lot of our success, getting the stock price to an all-time high again today? So can I thank everyone here who's my leadership team? Thank you.

Okay, right. So last 2 or 3 slides, and this is important stuff. Corporate governance is important to all of us. It's something that we all take seriously. I've actually been on boards -- public boards since '96 in the U.K. and the U.S., so I take this stuff very seriously. We've got a wonderful board. I was talking to some people last night. The board is absolutely incredible. They're some of the brightest people I've ever worked with. It's easily the best board I've ever been associated with. And I think it's a compliment to the people you've just seen, as well as the company, that our 3 private equity owners still have their senior representative on our board.

Now people like Mark Nunnelly from Bain, Sandra Horbach from Carlyle and Tony DiNovi from T.H. Lee, they've got plenty of things to do in life. They no longer own shares as a company. They chose to stay on our board. And I think that's great. And then it's balanced by other people we brought in. Raul Alverez, some people didn't realize this, he used to be the #2 guy at McDonald's. He has a great amount of international and operational experience from his days as the #2 guy at McDonald's. So we feel blessed with the board we have. It's a fairly small board. We have great active discussions, and we keep them up to date. And I really think, as it says there, their mix of expertise and experience has been important to the development of our business.

Executive compensation, yes, I'm very lucky. I received a lot of options, and it's certainly [indiscernible] the rest of us very focused on the options and the equity we've had, because it's important that we are aligned with your interests as investors. The -- I think that was demonstrated last year. Our first say-on-pay vote was about 99%. We've no reason to expect anything different at the annual meeting next week. So we think that we are completely aligned with shareholders, and we'll continue to manage our compensation structures in that way.

One thing, obviously, going from private to public, you have to make some changes, and we've adopted some ownership guidelines for all the senior leadership team. Mine is actually 6x my salary, which, I think, you'll find is at the high end of the CEO expectation. I'm very happy to commit to that. And as I say, the whole leadership team now has ownership expectations.

So with that, a couple of other things, I think, is important for you to focus on. I'm not going to go through in great detail, but we are a public company. We're a high-profile company and there's a lot going on. I talked about the foundation this morning. As I described, it's the glue between us and our franchisees, but it's important also that we are good citizens and we take note of the environment. As I say, I'm not going to go through all these in detail, but we do have 2 menus, Baskin-Robbins Right Choices and DD Smart, so I think they're terrific options for our consumers. If you didn't pick one up around the place, you'll find this green leaflet, which is about DD Smart. We have a large number of options for our consumers to buy. We've slightly expanded it with the turkey sausage sandwich. It's actually above the 300 calories, but that's, as John said earlier, that did very well in January, that's why we brought it back.

Obviously, we've got all kinds of debates and questions and issues in local jurisdictions about packaging. We're tackling that with both the foam cup and the pink spoon. I think we're making good progress in that area. And then obviously, we also have a responsibility in the area of sourcing and animal welfare, and we take care of that.

So that's an area that's very well looked after. We're about to bring out our second corporate responsibility report. The first one was 2 years ago, so watch out for that in the next couple of months.

So let's go through the summary of our playbook. Number one, if you go back in the 4 years that we've been here, and certainly the last 2 years as a public company, we've focused on our operations-driven culture, really driving significantly improved guest experience.

Number two, hopefully you've heard from Scott today about the supply chain. That goes right across the world, U.S. and international. We think we're a marketing and product innovation powerhouse, and if we didn't prove it today, we're not going to prove it any other time. Hopefully, you're going home nicely stuffed, as they say in England, and you had some idea of our innovation capabilities.

Our U.S. Dunkin' store economics are highly compelling, highly attractive, and that's why we have so many potential franchisees wanting to sign up.

Baskin U.S. is on the path to growth. I've been saying for a couple of years, we're getting close. We're nearly there. It's just in front of us right now.

And finally, our long-term growth vehicle is our 2 international businesses. And as Giorgio said, the most important one there is Baskin-Robbins.

So that's our playbook for growth. So we've talked about our playbook. We've laid it out to you. We feel we're on a very successful path. We intend to continue doing what we're doing. We enjoy what we're doing. But most of all, we enjoy the analogies for sports. So are you ready for some football? Are you ready for some football?


So ladies and gentlemen, we talked earlier today, or Jonathan talked about the fact that he enjoyed being associated with Dunkin'. We have a great partnership. And as part of that partnership, we have some good relationships. So ladies and gentlemen, Rob Gronkowski. Hey, Rob. Good to see you. So Rob, I think everyone's [indiscernible]. So how's the arm?

Rob Gronkowski

I was doing good. Just working out right now, throwing the ball around with all the receivers, all the other tight ends and, actually, just got out of a workout and came right here. So it's all going pretty well right now.

Nigel Travis

Now one thing that some people may not know, you actually have done some work for us certainly. I mean you've worked in a drive-through more than once.

Rob Gronkowski

Yes. I got a job when I retire. I'll be working the drive-through. I was pretty good at it. I made the news.

Nigel Travis

You did?

Rob Gronkowski

For working the drive-through, so that's pretty good.

Nigel Travis

So I guess, just a couple of topical questions. I mean, how do you feel about the season? How are you guys going to do?

Rob Gronkowski

I mean, as of right now, I mean you always feel like you're going to do well. And right now, it's kind of still early. All the rookies just got into town about 2 days ago. So they just started working out. I'm starting to meet them all. And when you really come together with the team is during training camp, so we started July 25th. And that will start the training camp off, that's when you start practicing full pads with the whole team and everything -- you'll see how everything plays out from there. But as of right now, I mean, we're looking pretty good.

Nigel Travis

And when we go into -- if we went into the locker room there, would they be drinking like you are, iced coffee or what do the guys drink?

Rob Gronkowski

Actually, yes there's a lot of players that drink iced coffee. Our kicker, Stephen Gostkowski, every single morning, he comes in with an iced coffee. So I know that. And he's -- and every Saturday during game week, the rookies -- a new rookie every week has to bring in doughnuts in. Everyone brings him like 12 cases of Dunkin' Donuts every Saturday. I mean, that's not what we're really supposed to be eating. But -- our trainer guy -- food guy, he gets kind of, "Hey, we should just cut down on the doughnuts." But no, they still bring them in, and we eat them all still.

Nigel Travis

So really, we should encourage Bill Belichik to turn over the roster more and get more rookies, okay?

Rob Gronkowski

Yes. I mean, it's a tradition. So if there's not enough rookies, there's not 16 rookies, a new rookie has to do it twice. So I did twice. It was funny.

Nigel Travis

So Rob, thank you very much for coming. We know you sort of came out, as you said, out of working out. And we appreciate you coming here today. And I think you've also done some signing for everyone.

Rob Gronkowski

Yes. I brought myself, personally, I brought 120 jerseys for everyone, signed. Actually, I didn't get them myself.

Nigel Travis

So ladies and gentlemen, Rob Gronkowski. Rob, well done. Thank you very much.

So I think Rob's agreed to do some pictures. Where? Over here, okay? So if you'd like a picture with Rob at the end, which is like in 1 minute, over in the corner, and we'll make sure you get the pictures.

So in conclusion, hopefully, you understand our playbook. Always pleased to see you. We're out on the road again tomorrow, talking to another bunch of investors. We're doing another webcast. Thank you for coming, and if we don't see you on the road, we'll see you again next year. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!