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Sonic Corp. (NASDAQ:SONC)

2013 Analyst Day

June 27, 2013 8:00 am ET

Executives

Claudia San Pedro - Vice President of Investor Relations & Communications and Treasurer

J. Clifford Hudson - Chairman, Chief Executive Officer and President

James Patrick O'Reilly - Chief Marketing Officer and Senior Vice President

James O’Reilly

Craig J. Miller - Chief Information Officer of Sonic Industries Services Inc and Senior Vice President of Sonic Industries Services Inc

Omar R. Janjua - Chief Restaurant Operations Officer

Stephen C. Vaughan - Chief Financial Officer and Executive Vice President

Clas Petersson - Vice President of Product & Packaging

Analysts

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Will Slabaugh - Stephens Inc., Research Division

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Karen Holthouse - Cowen and Company, LLC, Research Division

John S. Glass - Morgan Stanley, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Paul Westra - Stifel Financial Corp.

Keith Siegner - Crédit Suisse AG, Research Division

Claudia San Pedro

Good morning, and welcome to Sonic Corp.'s. 2013 Analyst Day. My name is Claudia San Pedro, and I'm VP of Investor Relations and we are very pleased to host our very first Analyst Day in New York City today. Our only regret is that we weren't able to bring our Pretzel Dog to you guys today, and so know that we will be enjoying them when we go back to Oklahoma but you can enjoy them if you choose to go to New Jersey or you always have Long Island, if you like. But today, we're here to really do a deep dive into all of our strategies and initiatives that we have going on. As you may know, just -- here you go. As you may know, we've been talking to you about over the past 12 to 18 months our multi-layered growth strategy and what layers drive solid earnings per share growth. And we've been talking about same-store sales, processing use of cash, so we'll not only give you more details about what's driving our growth today but what will be driving our growth over the next few years.

First, of course, there's always the cautionary statement. There are certain risks associated with forward-looking statements. We encourage you to read all of our SEC filings, 10-K and 10-Qs. So a little bit about today's program. We're going to open it up with giving a strategic overview from Cliff Hudson. Then we're going to do a deep dive from James O'Reilly, our Chief Marketing Officer, on same-store sales initiatives. So you'll be able to see a little bit of insight into when we look at media strategy, product pipeline, what that looks like and then our new digital technology. And then Omar Janjua who heads up our company drive-in operations but also systemwide operations, then going back to Cliff to really talking about unit growth. And as you know, that's something that, as we look at our multi-layered growth strategy, is one of the things that is on the tail end of -- as we look at everything we're implementing, that's going to be coming on board. And Steve Vaughan will round it out, talking about the ascending royalty growth rate and use of cash.

I do want to point out that in addition to the people speaking today, we do have other members of our senior management team. And that is Anita Vanderveer who's our VP of People who's been heading us. Our People initiatives, which Omar will allude to today. And Craig Miller who's our Chief Technology Officer and one of our main leads, obviously, behind not only the digital technology that you'll see today from a customer engagement perspective, but also on the POS side. And they will be available for questions and answers throughout. So Cliff Hudson will wrap it up at the end. Just briefly, we have allowed for, after each presentation, a few minutes for questions and answers for everyone.

With that, I'm happy to turn it over to Cliff Hudson, our Chairman, CEO and President.

J. Clifford Hudson

Thank you, Claudia. Thank you, Claudia. I appreciate the nice invitation, I appreciate all of your attendance today. Those of you with us last night, it was nice to have you with us. Those of you who weren't, I'm sorry you missed the drawing for the' '57 Corvette that was given away last night. It was quite a unique opportunity and sorry, you missed it. So at any rate, we're happy to be here with you today to talk about our favorite topic which, of course, is SONIC, and talk about the context of -- you have this 60 year old company but, in fact, the 21st century brand. And I think as we walk through that, you'll see both the new and the old that provides the basis for us saying that. The fact that all of our food is made-to-order, the manner in which the customer drives the process, the customer literally fits -- sets the timing of the process and I'll talk more about that in a few minutes. But it is what a consumer, what a customer has really come to expect in the 21st century and I think some of the initiatives, you see only in a physical way at the back of the room with our POPS program. But as we roll that out today and talk about how that's going to affect our business over the next several years, I think you'll see a wonderful blend of new and old and a brand that 60 years old and yet, at the same time, 60 years new and very much ready for the 21st century to continue its growth that we've seen over the last several decades.

88% of our system is franchised. That's probably widely understood. We've been in the franchising business all the years we've been in business, with a very good royalty stream associated with that and the sustainable benefit of that, we'll talk about more as we go through the day, the ascending royalty rate, which many of you are familiar with. Because we are in the franchising business, the flexible -- the capital means or a different process of franchise would be for an operator. And the consequence of that with the franchising business, the longstanding nature of the loyalty of the customers, strong consistent cash flow that has optimized shareholder value historically, will prospectively. And even with all of that, the strong base that we have, a very good sustained growth potential and opportunities that will dive into that as the presentation goes along this morning as well.

Our perspective about our brand is that it really is one of the most differentiated in the business. It's physically differentiated because of the drive-in concept, but that has other meaning to it as well. It's not just that it's physically different. It does offer a different opportunity for the customer, lure -- the customer pulls in and drives the process instead of going inside, with one of our competitors are waiting a drive through line. And having others determining the pace of your reviews of menu and placing your order, you determine that pace as the customer. This is, I think, what a customer -- our customers are much more akin to in terms of retail experiences today, and Sonic, I think, allied with that better than virtually all of our competitions.

From our viewpoint, the drive-in stall has always provided a nicer experience for an individual who wanted to take some time for a quiet lunch or quiet morning break but also for a family that goes through a drive-in. And with the initiatives we have underway, that experience being superior through a drive-through is going to be enhanced substantially, I think. With the made-to-order food, a diverse menu, drinks, and entrées would continue to drive that going forward. It's been through historically will continue to be true and then the individualized experience of a Carhop. Once again, personal interaction, personalized service, that really does strip us apart from our competition in a very positive way, set us apart from our competition and something it will continue to enhance going forward.

The physical layout, I suspect most of you have seen a Sonic Drive-In, but the physical layout of Sonic, very easily approachable and amenable to the personalized use by a customer, whether that drive-in, drive-thru or dining on our patio. But a concept that's been revised and refined over time that really in terms of what appeals to a customer substantially the same as it was decades ago.

Our menu is varied, which provides, I think, a number of positive to the customer, very positive in terms of number of options to the operator, very positive in the standpoint, particularly, profitability, as you can see, the frozen or fountain favorites that we offer virtually 40% of our sales and growing, particularly this summer, the ice cream piece is doing extremely well this summer. But a good, diverse menu that has hedged in many ways in terms of what's being promoted in the industry by our competitors, but also from a cost standpoint and, as I mentioned, the favorability of the drinks and ice cream are particularly a nice benefit for our operators. When you look at the -- how those products work across day parts and the other benefits to our operators leveraging fixed assets, leveraging labor and our ability to use that, not just the service delivery system but that very menu to appeal to people across broader day parts, and you could see how well distributed our business is across these 5-day parts, breakfast, lunch, afternoon, dinner and evening. And this weaves, of course, quite completely into the product development, and James O'Reilly will talk about later, the promotional activity that we have that James will talk about later. But again, a differentiator, both from an operational standpoint, consumer standpoint, but for you as an investor, a diversification to the approach of the business, I think, is a very positive thing.

Now in the last several years, as we have kind of worked through the recession to strengthen our business and rebuild the foundation, move our business to another level, we have strengthened, I think it's very clear to say, very -- we can say with good certainty because our customers tell us this. In the earlier part of this recession, focusing on improved service and bringing in the customers improved service simultaneously affecting in a positive way what's coming in the back door, the food, quality, pricing. So better service, better food quality, a different approach to pricing, ladder of pricing, adding of a value menu, our customers are, in fact, telling us that the value of what we are offering as the recession went on, the value of what we're offering was improving substantially. And then the modifications from a media standpoint and effective creative, again, strengthened our foundation, helping us promote those 5-day parts more effectively across the entire system. I'll talk more about that in a few minutes, the national media piece. All these elements coming together to really place our brand in a different position today than it was 4, 5 years ago, a fundamentally different position in terms of the strength and in terms of the leverage that we believe we can now get from that stronger foundation, very different position versus 4 years ago.

So for a long time, we've talked to you about a multi-layered growth strategy and we've talked about the elements that drive this. And how we can continue to drive our business going forward. So all of this pivots off of the same-store sales growth it has for a long time, but that continues to be the case. In a more recent past, we've talked to you about same-store sales growth, operating leverage that occurs with same-store sales, operating leverage at the store level, unit level, operating leverage for the company. And we've been achieving that in the recent past, in turn, really helping our cash flow which we've utilized for reduction of debt, capital investment, repurchase of stock. So this formula is one that we have used for a number of decades, really, more challenges through the recession in terms of effective implementation of this. But now, one of the -- what I -- we would hopefully show you today, a return to the utilization of all of these elements that, as we drive same-store sales now with where the business is, this will also help us bring on the return of that ascending royalty rate and new store development. So we'll walk through some of the details today, I'll do that a little later in the presentation. In terms of the development activity in the business which should give you confidence that as developments come together, their impacts on the EPS growth rate will be very impactful on a sustained basis just as they were for really a couple of decades before the recession.

We have a number of initiatives, we'll talk about those today. The various folks that are presenting will talk about the initiatives that will get the momentum going and sustain the momentum, whether we're talking about media initiatives, technology initiatives, development initiatives, all of those impact on each other, the positive impact each initiative has on the next, and the combination of them, the impact on our ascending royalty rates and, in turn, the cash generated. And as that occurs, how the momentum of our business continues to move in a very positive way. The combination of these factors, our view of our business going forward is, as we drive same-store sales in a very positive way, but it's moderate low single digits is what needs to be achieved in order to achieve a double-digit EPS growth rate. So what I'm talking about here is the contributors to that double-digit EPS growth rate that we have achieved in the recent past and we'll continue to. So the elements that make that up, this is not the comp that we're talking about. This is the contribution to that double-digit growth rate, same-store sales, operating leverage and it's contribution to that double-digit growth rate, new store development and where we see that going over the next 2, 3 and 4 years; its contribution to the double-digit EPS growth rate; the ascending royalty rate and the same for it, its contribution to the double-digit EPS growth rate; and of course, the effective use of free cash, with the repurchase of stock in particular and its contribution to the EPS growth rate. With the combination of these, yielding that double-digit growth rate that we have talked about, and then so as we get the momentum of our business going, this is -- I depicted earlier and will talk each presenter, they will dive into more detail on the elements that will drive that. As we get each of these elements going and each helping drive the other, the consequence will be this double-digit EPS growth rate and the contribution of each of these elements to that.

With that, I'm going to turn it over to our Chief Marketing Officer, James O'Reilly. James has been on board about 1.5 years now, and he's had a very positive impact on building staff, a very positive impact on building confidence of our operators and a very positive impact on our business. So I'm happy for him being part of our team and here today. So James?

James Patrick O'Reilly

Good morning, everyone. We're thrilled to be with you this morning to talk about my favorite brand, Sonic, Sonic Drive-in. I've got a lot to share with you. I really want to give you a sense of the key strategies driving all of our expectations around consistent, sustainable same-store sales growth in the coming years and the things that are behind that.

To start with, and picking up on one of the themes that Cliff introduced, Sonic, America's drive-in. Why is that so important? And why is that so valuable, not only to consumers but also to our operators? And the answer to that question is that, for Sonic Drive-In, the experience is a core part of what the consumer values. And we've researched this very thoroughly with our consumers and we have this idea that we call the Sonic code, which really is the 5 key things that make up the magic of the Sonic brand. And what are those 5 things? First, unique, distinctive food that people crave; our endless drink combinations, the variety of drinks that we have; the consumer's ability to customize, personalize their order, all the food is made-to-order that the consumer can choose how they want to order, prepare what they want on their burger, how they want their drinks prepared. The consumer says that the experience in the drive-in is magical and it's special to them and to their families. And our service platform which is the Carhop service or the drive-through service or the patio service is something that the consumer values. So why is this important? Well, I'd ask you. For how many brands do you think that -- would the consumer say that the experience is a core part of what they value in our industry. And the answer is not very many. For many brands in our industry, the experience itself is very, very functional. At Sonic, the experience is very important, highly valued by the consumer and highly distinctive and profitable for our operators. So our service platform is important, it complements our made-to-order food and our endless drink combinations. And that really is the magic of the Sonic brand. It's why we are different and special.

So I'm going to focus on 3 key areas, which are the -- really the 3 key pillars of our same-store growth, same-store sales growth strategies: brand image and brand awareness; menu innovation, our menu evolution; and finally, what we call 21st century customer engagement and the technology infrastructure that really drives the way we're investing to engage consumers in a contemporary way increasingly and increasingly in the coming years.

So let me start with brand image and brand awareness. And I want to start by talking about our advertising campaign. We call this lovingly the "Two Guys" campaign and it features 2 improv comedians that we have been working with, 3 years. And one of the things that's unique about this campaign is its unique ability to drive sales across all 5 of our business day parts, breakfast, lunch, afternoon, dinner and evening. And one of the things that makes it work so hard for the Sonic brand is the fact that as soon as this campaign comes on the air, you know who the advertising is for. And that is the sign of a good campaign. That the minute you see it, you know who the advertising is for and that works with our Sonic -- with Sonic's advertising because consumers immediately are aware as soon as they see the two guys sitting in the car, and the consistency with which we execute that campaign, who the advertising is for. And not only do we believe the advertising is good. We know, from syndicated research, this is Ameritest's research, and we track our advertising scores every single week, that SONIC's advertising is some of the best advertising in QSR. Quantitatively, this is not our research. And so advertising is extremely effective because it's very highly branded and very, very persuasive to QSR customers. And we can tell that. So what I want to do now is to kind of compliment the kind of science side of this, just give you a little taste of Sonic advertising. I'm going to show you 6 commercials that run across all of our business day parts and give you a sense, if you haven't seen the advertising before, but I bet most of you have, if you haven't seen the advertising before how effectively this campaign works for all of our different product lines.

[Presentation]

James Patrick O'Reilly

So you can see the campaign has actually a very tight product message. It's wrapped up in a very interesting envelope for the consumer which is the humor of these two guys. And the other thing you'll notice is they're always talking about the product. The entire advertising campaign is completely focused on the product , but it's done in a way that's very funny as the consumer -- which is what makes the advertising so engaging, consumers love it.

Now one of the important things that complements this campaign and has made such a difference, especially this year and going forward in the coming years, is the shift that we've made in our media strategy. Now I'm just giving you a couple of years -- a year of history. Last year in 2012, this is the allocation of our media dollars among the different ways that we spend it. You can see that in 2012, we spent roughly 50% of our working media dollars on national television. But this year in 2013, where we spent 67% of our media dollars on national television. So we didn't spend more dollars. We really shifted the way our dollars were being spent across the Sonic system. And then we see prospectively looking forward into 2014, we begin to see an increase in investment in digital marketing as well. And I'll get into the initiatives that will really be driving that. But importantly, the shift in national advertising -- much increased national advertising has led to a 50% increase in our rating points, which is really a measure of impression to the consumer and a 28% increase in advertising awareness. And that's just in the first part of this year and the first 6 months of this year. And again, I would say this wasn't an increase in absolute spend. This was merely a change in the shift of our spend has led to significant increases in the number of consumers who are aware of Sonic advertising. That's very significant in our industry. As you know, the majority of marketing dollars in our industry are spent on television advertising. So this shift in strategy on media has led to many, many more consumers being aware of our advertising.

So now looking forward, I'm going to talk a little bit about our menu strategy and our menu highlights and give you a little look forward into some of the ways we are looking at evolving, improving our menu. And there are really 3 highlights to our strategy. The first one is our intent to really maintain our leadership in drinks. And Sonic, as I'll talk about, is viewed as the clear leader in the industry in drink variety and drink combinations and I'll talk about that. We seek to continue driving momentum in our frozen business, our ice cream business. And that's really based on the product superiority that Sonic possesses with it's Real Ice Cream platform and the innovation that, that provides us. And finally, our focus on entree quality and driving quality across this side of our food business that keep engaging the lunch and the dinner consumer more actively and increasing over time.

So let me talk about each of those things. The first thing, Sonic is America's leader in drink variety and drink customization. And just in 2013, Sonic increased its number of drink combinations from 400,000 to just over 1 million different drink combinations for consumers. And so there is an absolute clear and wide lead that Sonic possesses over our competitors in our ability to execute drink variety to our customers. And that gives our franchisees a huge lead and a huge opportunity to maximize their profitability in a business like this, spend, soft drinks, diet drinks, iced teas, slushes. And you can see one of the examples of that was our launch this year of our new freshly brewed iced tea platform. Now iced tea has been the fastest-growing beverage segment in quick service restaurants for the last couple of years. And Sonic's iced tea platform has freshly brewed, both black and green, with a wide, wide variety of flavors. And consumers have accepted this platform well. We're very encouraged by how it's performing. It's profitable for our operators and we see it growing in importance over time.

As we think about our ice cream business as well as our frozen business, we start with the fact that Sonic uses Real Ice Cream as the foundation of this product platform, which the majority of our competitors do not use. And that provides our operators with an advantage in their trade areas and consumers respond to our products. If you ever had our ice cream product, I'm sure you can tell the difference with their ice cream product because it's so delicious, consumers love it. But not only is it a great ice cream, it makes for a great, great innovation platform. As you can see, this new premium sundae platform that we launched in March called Molten Cake Sundaes. You saw the commercial for the Molten Cake Sundae? A dessert with the side of dessert because it's really a chocolate lava cake with an ice cream sundae sitting on top. It's wonderful. And in the summer, we're promoting currently, which is our 25 shake flavors based on our Real Ice Cream Milk Shake with all these incredible flavors. And that's an amazing variety. And we're offering 25 flavors of shakes in the category and that's a clear, clear statement of superiority on Sonic's -- for our Sonic operators and every one of our trade areas to have that kind of variety on such a high-quality product.

Looking at our entree business, I would say for you the message on our entree business. Our focus is purely on quality and raising the bar in quality at every single turn. And so you could see a couple of examples here that -- our relaunch of chicken sandwich platform which took place late last year, our new premium chicken sandwiches which is a whole-grain ciabatta bun, a low-fat mayonnaise and a totally improved chicken platform. This summer, we've rolled that out within a limited time only, Asiago Club Flavor, which is delicious. And then down below, we just launched this week our Pretzel Bun, which -- Pretzel Dog which uses a premium pretzel bun and standard hot dog flavors, and the consumers love the Pretzel Dog. And I hope you do get a chance to try that product. It's wonderful.

Our breakfast business is very distinct for a couple of reasons. One, all of our breakfast is made-to-order for our customer. Whether it's -- obviously, the drive-through, the drive-in and the patio. And our business is really based on our breakfast burrito business, which is the core of our breakfast platform. It's really, the tip of the spear of our breakfast business is our Breakfast Burrito. It's easy to assemble, it's quick to assemble, it holds extremely well for our operator and it tastes absolutely delicious. We've got lots of different ways the consumer can enjoy the Breakfast Burrito. And you can see what we can do with the Breakfast Burrito platform is pair different things with it to make it relevant to different kinds of customers and different kinds of occasions. So a couple of examples here, the Breakfast Burrito with the Cinnasnacks product, which is advertised just a minute ago. The Cinnasnack is a little cinnamon sweet roll pastry that we serve, it's delicious. We can pair it with our new branded Red Button Roast coffee which we'll be launching this coming August which is a branded coffee platform with a variety of flavors the consumer can add to their coffee which makes a great pairing for our Breakfast Burritos. And then finally, Breakfast Burritos are also a great platform for innovation as you can see a product that we're testing this summer which is a low-calorie, egg white Breakfast Burrito. That's a delicious Breakfast Burrito, lower in calories, higher in protein because it's made with egg whites. And so the breakfast business at Sonic is strong. It's valuable and growing. We're excited about it, and we've got a very, very simple platform to execute off of and grow with in Breakfast Burritos and all the different things we can do with them.

And finally, thinking about the menu, so this is a question I am asked very quickly, consumers do say in research that they would like to see Sonic look at and make some more healthy options available, make more options available. So we've actually done a lot in 2013 with our health strategy at Sonic and I wanted to give you a couple of examples of things that we've done this year to make Sonic more relevant to customers who want healthy options. So for example, the premium chicken sandwiches offer a grilled version, as I mentioned, with a low-fat mayonnaise. That's under 400 calories. We reconfigured our kids meal so it meets the definition of National Restaurant Association, Kids LiveWell designation, which is based on calories and other nutritional standards. And we make that the primary promoted feature of kids meal on our menu. We started communicating the number of light drink options. We have over 20,000 light drink options. We have more light drink options than most brands have drink options. Our ultimate iced tea initiative which makes consumers view iced tea to be healthier than soft drinks, and we have lots of low-calorie options in our iced tea platform. And finally, we've also started calling out on our menu what we call the Sonic Favorites which are all menu items that are below 450 calories. So we have done a lot of in 2013. We view this at the very beginning of this strategy that will continue to evolve on over time, including some of the products that we're testing now in end-market and I'll you give an example of one those in a moment.

So here's an example of -- just to give you, just a sample of our product pipeline. It's been a huge focus of our team within Sonic. It's building our product pipeline, building our test platform over the past few years. And just to give you a taste of what is some of the products that are testing just this summer, here's 4 of them that are testing this summer. And I chose these 4 to give you a sense of the breadth of innovation that we have in our pipeline. What you see in the top left is our Premium Chicken Salad Wraps which are made with chicken breast and salad ingredients. They come in 2 flavors, the Hickory and the Cali fresh which uses avocado. On the bottom left, you see a major initiative on our slush platform. Slush is a very, very profitable business, and you can see the -- our category consumers love slush and kids love slush so we have a very aggressive slush program here with lots of flavors, including cotton candy, and Nerds and jellybean and all kinds of great slush flavors. Up on the top right, you can see a great new ice cream product that we're testing this summer called the Waffle Cone Sundae. So it's not just a waffle cone with ice cream. It's a waffle cone with a sundae inside it that you can eat with a spoon and then eat the waffle cone after it. It's an incredible product. And then that down below, a new sandwich product that we're testing which builds off of our hotdog platform called the Flat Iron Sausage Sandwich which comes in 2 flavors. So we have a lot of products in test side. I wanted to show you these 4 which are actually in televised market test this summer across the country. And we test in multiple markets primarily with our franchisees.

So what I want to do now is move forward into the third element of our same-store sales and the growth pillars, and that's what we call 21st century customer engagement. And for those of you who are in the back of the room before we started the meeting this morning, you will see our new POPS technology. I'm going to describe what that is, the partnership that we have with Craig and his team and how we're using this initiative as part of our formula for driving consistent, same-store sales growth over time. So first, just to set this up. To give you a sense of how -- all these platforms and how they kind of play together. When you think about marketing, kind of 20th century marketing, you think about the importance of television. The television is still the dominant investment in our industry. It still makes up over 90% of marketing investment across all the brands an industry. And television plays an important role. As you can see, television makes the consumers aware of new brands, television increases the appeal of brands, television prompts you to try a new brand or a new product and it gives you information. But as you also know, consumers now use social platforms and mobile platforms as well when they're making brand and product decisions. So the social platforms, for example, down in the green here, socials help consumers share information about brands with other consumers. They -- social helps consumer read product reviews from unbiased reviewers or bloggers or moderators or food experts, and social's a great way to provide information and for consumers to get information that's unbiased from their peers. And then mobile, obviously, is used increasingly by consumers to help them find that information on the fly and it instantly connects them to the information that they want. So obviously, why is this important? Not only is it important for brands to connect with consumers across all of these platforms. But as you can probably tell, the way that we engage consumers on each of these types of platforms is a little bit different. So we invest in social, we invest in mobile and we invest in television and we have teams in place to do each of those things at Sonic in our group. So keeping that in mind and thinking about our digital platform and all the digital platforms that we have and we're investing in, our business strategy and our data cloud technology, they together form an integrated network which we call, Sonic Integrated Customer Engagement or Sonic ICE. I'm about to show you a little concept video with Sonic -- for Sonic ICE which will do a much better job illustrating to you the vision that we have and the work that we're currently doing to drive customer engagement with Sonic customers.

[Presentation]

James Patrick O'Reilly

So that is Sonic ICE. And what I'm going to do now is get -- take you a little bit deeper into this platform and how it works, why it's unique to Sonic and why we believe it has so much value to our business and to the profitability of our operators. But just to kind of recap what you saw, it's one integrated network driven by the data cloud that connects our social platforms and communications to our digital point of personalized service or POPS platform, which is a main platform at the stall and then the mobile platform which we have in development as well and I'll talk about.

So what I'm going to do is take you a little bit deeper into POPS and just kind of give you a bit of a sense of how it actually works and how it drives the results for our operators. So it's really purpose built to enhance the experience for the customer and really -- and differentiate the Sonic brand. It takes its information from the different platforms from the cloud, it takes its information from what's happening on the social platforms and on mobile, they communicate to the POPS unit and then they get messages to the consumer depending on the time of day or who this specific consumer is in 3 primary ways: suggestive selling, offering the consumer personalized rewards based on their behavior and then other brand engagement ways and content ways so we can engage the customer and some of the examples that we showed you in the video. And the ROI around this investment, we've been all pilot testing for over a year now. We're seeing very encouraging ROI on this investment and we've expanded our market testing on POPS and are now in 3 full markets with this in market test.

So what happens when the consumer pulls into the stall? The first thing they see is what we call our pre-roll video. And the consumers in the stall, before they push the button for about 2.5 minutes, we talk about that 11-minute time frame that's split up in all these different phases. So for the first 2.5 minutes, the consumer sees messaging that suggests things to them to order before they even press the red button. And one of the things that we're finding in our analysis is that consumers are buying what we're suggesting that they buy. So after the pre-order phase is finished, we get into the actual order and delivery phase, which is 3.5 minutes of the 11 minutes. Now in this case, after the consumer presses the red button, the first thing they get is order screen. And on the order screen, we're suggesting to the consumer things we'd like them to try. In the case of this example, there's 2 of our LTOs which we have televised at this time, our Popcorn Chicken and our Sweet Potato Tots. And so this drives the consumer towards purchasing things which we're promoting, which are highly differentiated. Now to give you an example of how it works, here's an example of a consumer who ordered a cheeseburger and what that immediately triggers through all of our algorithms is the trigger-suggestive sell for the cheeseburger. So you can see over on the left order confirmation so the consumer can track their order as they're making it and it's being read back to them on the left. And over on the right, the algorithms trigger suggestive sell for, again, whatever it is that they order. So in this case, the consumer ordered a cheeseburger, it suggests toppings for the cheeseburger and also it suggests that the consumer add Tots to their purchase as well. And these are all kind of a smart elements that drive the ROI on the initiative. So after the consumers placed their order, we get into the post-order phase which is about 5 minutes long. And during the post-order phase, we do a number of things in the post-order phase. We start suggesting things they could order while they're still there like a desert product, in this case, the Molten Cake Sundae. We also start messaging them near the end of that phase, what we call bounce back messages. In this case, just come back for breakfast. And this is to get the consumer aware that they should come back and try one of our great Breakfast Burritos the next time they come to Sonic. And so all this messaging is carefully timed. We researched all of it, and we track it and test to make sure the pacing of the messaging, the type of the messaging, is optimized and we continually continue to refine that. And it's a combination of those 3 main phases of the order which really are the backbone of the POPS experience, what we call the Point of Personalized Service for our customers.

Now to complement that, and you saw the role and the importance of the mobile platform and the way the mobile platform, the role that the mobile platform plays with consumers, they need to be able to access information instantly, they need to be able to use the mobile platform to order and pay and they can also the use the mobile platform to share value with their friends and to do something what's called mobile gifting, because they can gift to their friends from the mobile platform. We're launching our new mobile platform in October. It will be a standalone mobile platform and also connect to the POPS platform in our POPS markets. So just to give you kind of a short run throughout of the mobile platform itself and some of the key features that we have developing. Here's an example of the mobile app for a consumer, it's showing her all of her favorite restaurants, showing her some of the options, the things she can do with the mobile application, share it with her friends. And then we'll show you some of the things that the mobile platform can do. The one we're focusing on today is payment. So well, store value on the mobile platform and we'll show you in a demo after the meeting here, this is the way consumer would make an electronic payment, either directly to the POS or through the POPS system and this is an example of mobile payment and connecting to our POS. And showing the consumer back the order that they just placed and allowing them to pay wirelessly by connecting directly with our POS.

So that launches in October and as I mentioned, it connects with POPS and will connect with POPS in our POPS market. And so in the integration of these 3 major platforms, social, POPS and mobile, really are the key components of the SONIC ICE[ph] system.

And so when you think about the way they connect with each other, as I mentioned earlier, those 3 platforms connecting with each other and how they drive that messaging, ultimately they need to connect with the customer and what makes it so effective is the way that it connects with the customer in ways that are very specific to that customer. And so if you come in the morning and you've been to SONIC 3 times, and your friends comes in the afternoon and they've only been to SONIC once, they're going to have a different types of communication, they're be suggested different things, they are going to be rewarded in different ways. And so it really does, it really is able to connect with the consumer individually, reward the consumer in ways that reflect their behavior specifically. And we can set those rules and target those messages in ways that drive our profitability.

Now the investment behind this technology, and just to give you a quick sense of how that works and the experience the we're seeing in our market test, we view the investment in the POPS technology and the [indiscernible] retrofit for the drive-in which includes the capital improvements connected with that and the digital menu board examples of, which we have in the back is about $100,000 per drive-in and we're seeing, based on our experience and our testing, so far, about a 3 to 4-year payback on the investor for our operators. And I have -- and many of us on our team have personally talked to our franchisees repeatedly about the technology and this testing and we're finding the franchises are very excited about this investment and we have many franchisees who have already signed up to be part of our market testing because they are excited about this technology and they've seen what it's doing for SONIC in our pilot markets already. So we feel the enthusiasm and the momentum on this initiative is definitely growing in the SONIC system.

So in summary, just to wrap up the key messages here. Against our goal of driving consistent, sustainable, same-store sales growth, we have a proven advertising campaign, that's the leading advertising campaign in the industry, we've had a major shift in our media strategy which is driving significant increases in brand awareness and advertising awareness. We have a strong pipeline of new products and platforms which continues to grow and we believe the SONIC ICE system is a game changer for the SONIC brand. So just to recap, what Clifton said, we are a 21st century brand. So thanks for your time and I'm turning it over to -- oh, question-and-answer. Thank you.

Question-and-Answer Session

James O’Reilly

Questions?

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Matt DiFrisco, Lazard. Just quick question with respect to the test market's early indications. What have you seen as far as how many of the people that go up to a digital screen actually register. I saw in the back there was like a telephone number you put in and it says, "Hi, Susie, blah, blah, blah," and goes on. So in your test market, how many purchases, what percentage of the purchases have actually gone forward and registered?

James O’Reilly

Well, in the pilot market we've done on loyalty we're seeing a high percentage of people who are enrolling and we're actually just piloting our testing. POPS with loyalty now in our Pensacola market. So I'll know better in a couple of months on that. But so far, what we've seen are just our pilot markets in [indiscernible] a very good uptake on that. And one of the things we focus on with that interface is keeping it very simple. So you can literally sign up with your phone number and it will bounce you back a message, you can sign up quickly. So our focus is simplicity on that.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Then just one clarification. The 100K, was that just for POPS or is that POPS with the POS in the back of the house?

James O’Reilly

That is POPS with the -- some of the capital improvements on the retrofit, and that does not include POS.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Joe Buckley, Bank of America Merrill Lynch. The 11 minute, the timeframe, is that the current timeframe that people would spend in the stalls or is this along that in some way so you can communicate more...

James O’Reilly

That's about -- sorry, Joe. Sure, that's about average total time, keeping in mind the order and delivery part of that is 3.5 minutes. Then we have -- there's time before while they can sit and look at what's being messaged and then the time after where -- which is very, very unique to SONIC. In the traditional queue, we saw people kind of get their food and leave. But in the SONIC, we've talked about the importance of that experience and consumers actually will sit enjoy their meal for a time after. So 11 minutes is an average total time, the order and delivery phase in the middle is 3.5 minutes.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

So just to clarify, so the people get the food and drive off or do they stay and eat in the stall? And does the 11 minutes include that eating period?

James O’Reilly

Yes, the 11 minutes is for those people who sit and will sit and eat after the food is delivered to them. So about 5 minutes after food is delivered on average where consumers will sit and enjoy their meal.

Will Slabaugh - Stephens Inc., Research Division

Will Slabaugh from Stephens. Can you talk a little bit more about mobile, what that opportunity is, when you think that might be rolled out and in different ways to load dollars on to your mobile system?

James O’Reilly

Sure. First of all, the mobile opportunity for SONIC is the way that it integrates with everything else that we're doing. And one of the reasons that we have kind of made the choice to introduce our mobile platform in the time that we're doing it and the manner that we're doing it is so that integrates with ICE. So it connects with social and it connects with POPS. Other -- rather than just adjusting single standalone applications. Whereas the consumers can add value, the 2 primary ways consumers could add value to the mobile platform one would be by connecting it directly to a credit card or bank account. And other would be a -- so it could be a real-time transaction, other would be through a stored-value mechanism where they can actually add value to it like an electronic gift card. And our plan for launching our mobile platform is this coming October.

Will Slabaugh - Stephens Inc., Research Division

Is that true for your entire POPS platform? Do you expect that launch to start in October and then continue for X number of months or any time from there?

James O’Reilly

Sure. POPS is in testing now. So we piloted in one market for over a year last -- this past year. It's in 3 markets now or about 61 drive-ins, I believe, now and it's been -- that test market's now fully expanded. And so we see kind of expanding POPS into next year and maybe the year after as well. So POPS will roll out on a more progressive basis once the test markets are complete. The mobile application will start early. We'll have a lot of the functionality already and then as POPS rolls out into different markets, it will connect with POPS also.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Nicole Miller from Piper Jaffray. Is the incident of a second-order critical? And if so, what is the rate of the incident of the add-on after they order the main meal and they're seeing something else to order?

James O’Reilly

The incidence of the second-order is not critical to the ROI and the initiative, but it is accretive to the ROI. So we see that as we continuously get better at this and testing the different kinds of messages, Nicole, that we push out while the consumer's still there. We're finding incrementality there as well. So we really do view that more as upside to the initiative and I expect over time we'll get better and better at that.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Okay. And then final question for me. Can you talk about how this changes the dynamic of the information that you're receiving from your partner franchise locations? Does -- is this going to give you access to more of their results?

James O’Reilly

I don't think it changed that dynamic that drastically. We already have a fairly sophisticated polling system for that all out information. But this really changes the way information is processed and served back to the customer in a way that's much more targeted than really anyone else can do. And as I'm sure you can see by now, this isn't just a digital menu board. This is a full integrated business system that tailors its messaging to the consumer for their specific kind of day part and their behavior. So it's really more of a front end system, it is driven by our new POS but it really doesn't change fundamentally the information that we're gathering from our franchisees.

Karen Holthouse - Cowen and Company, LLC, Research Division

Karen Holthouse with Cowen and Company. We've seen a couple of other QSRs also talk about moving more of their media dollars to a national sort of buy and have also started to hear restaurants talk about add inflation as you walk in to the kind of the next buying season. How comfortable are you with maintaining your media waste on an absolute basis and then also relative to competitive set?

James O’Reilly

I'm comfortable. I'm comfortable. We're in the upfront season right now. We're very close to that process to negotiations that are taking place right now with the networks and I'm very comfortable with where we're going to end up next year.

John S. Glass - Morgan Stanley, Research Division

It's John Glass. Can you just talk about just wildly the 3% to 5% comp assumption? I think that was what Cliff laid out at the beginning. If that is the comp assumption, that would seem rather high to me just given where the industry is now, where the key competitors kind of make their assumptions. So how do you build up to the 3% to 5%? I know you've laid out the strategies as that is largely traffic driven, then maybe could you just provide some comfort around why you think 3% to 5% is the right way to go?

James O’Reilly

I think what we're saying is -- I think, we're saying is consistent low single-digit same-store sales.

J. Clifford Hudson

And what the 3% to 5% was, was the contribution to the EPS growth rate that comp would contribute 3% to 5% of that 15% to 20% EPS growth rate. That was not a 3% to 5% comp at store level.

John S. Glass - Morgan Stanley, Research Division

So the assumption would be more like 2% to 3%, or 1% to 3% range?

James O’Reilly

We're saying consistent single-digit same-store sales. And the elements that you've seen, it's really a multilayered. Really what you can see from all these different initiatives I laid out, really a multilayered approach to get into that low single-digit consistent performance.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Jeff Bernstein from Barclays. Just 2 questions. One, to follow-up on that ad spend. Seems like that's obviously been a big push from going national from the high-40s to the low-60s -- mid-60s to put up in next year's number seems to stabilize. They're actually come down a little bit. Still staying in that low to mid-60s. But would this big move and seeing the GRP increases, like, what's the pros and cons from going from 65 to 80 or 85? Why would that not be -- why would you not continue to push that? What would you lose out by not doing that perhaps?

James O’Reilly

Well, we think about the balance of national and local advertising in the SONIC system. Part of the reason for maintaining some local advertising on the SONIC brand is the fact that we have different levels of saturation in our business. We have what we call core markets and we also have developing and new markets. And so in our new markets, the media strategy is delivered to our new market. Significant, very significant increases in brand awareness and media. And in our core markets, we actually supplement the national buy with some of that local advertising to make sure that the core markets are also receiving, our more saturated markets are also receiving significant increases in media. So it really is a nature of the way the SONIC brand is penetrated differently across the country. So as -- the answer to your question is we look at that mix somewhat as a function of our different market types and needing to make sure we're delivering strong increases in every market type.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

And then just the chart where you guys show your mix of different products that you sell and obviously that's viewed as a competitive advantage. But the fountain and the snacks coupon, of that which is such a big piece of yours, have you seen, I mean, a number of the products you've shown, it seems like competitors are now jumping on that bandwagon, doing very similar whether it be the beverages with the blending of flavors or frozen drinks or the snacks and things like that. Like, what have you noticed in terms of your analysis of how your trends are trending and perhaps how you respond to something like that?

James O’Reilly

Well, what we've noticed, I mean, these are areas where -- especially snacks and beverages are areas where consumers view SONIC as the leader in the industry. So obviously our approach to this is to maintain the leadership so we see what's happening in the industry, we see that our competitors are interested in these kinds of products and so we drive further ahead. So we'll do -- we do iced tea in a way that the competition has not done iced tea. We do slushes in the way that the competition has never done slushes, we're even doing milkshakes in a way with 25 flavors that we think it's difficult for our competitors to replicate. So we are -- our strategy in these areas of beverages and snacks is very much to stay in the lead.

Unknown Analyst

Jake Miller[ph], Fino. The ads you run are really fantastic. I'm curious when you don’t run the ads, what's in the impact on comps?

James O’Reilly

We run the ad, we run advertising continuously throughout the year.

Unknown Analyst

I'll clarify. The "Two Guys" ads specifically. Because they've been on, they've been off, they've been on.

James O’Reilly

So what I can tell you is that before -- part of the decision to bring the advertising campaign back involves talking to consumers about the campaign. And did they -- was there awareness of "Two Guys" and did they kind of want them to come back. And what we found was from a consumer standpoint, "Two Guys" has latent awareness and latent appeal, which means consumers still knew who the "Two Guys" were even after the campaign had come off and we knew from our research that they would've -- they wanted them to come back and they have received the campaign very well. So there are many, many things that contribute to the same-store sales performance, the economy, what's happening in the industry and advertising and other marketing drivers. So I wouldn't necessarily just tie it to one thing but I would tell you that the consumers have received the campaign very well.

Unknown Analyst

I wouldn't tie it to one thing either, but what has been the impact, we can make...

James O’Reilly

You can see our performance since we put the campaign back on the air, we see our performance has been consistent, and we expect -- and looking forward, we expect this to stay consistent.

Unknown Analyst

When I think about those ads, they're great for introducing new products. But I'm curious, when you design them is your goal to drive new customers, drive existing customers to buy more or is it just to remind your existing customers to revisit? Given all the new products and given the results in comps, it really feels like you're marketing towards your existing customers, reminding them to go back to SONIC, and I'm not sure how it drives new traffic.

James O’Reilly

Well, most consumers, in our trade areas, most consumers have tried SONIC already. So to a greater lesser extent, most of what we're doing is getting, asking consumers or encouraging consumers to use SONIC more often. I mean, the kind of average ride, the average ride statistics on the SONIC brand in almost every one of our trade areas is very high. Meaning, almost every one in our trade area has tried us already. So across the different things that we promote and talk about, we're encouraging consumers to come back more often.

Unknown Analyst

So the advertising's really to stand still? You need that advertising just to achieve what you have?

James O’Reilly

I don’t view it that way. What I really view it is to roll the advertising, is to encourage our consumers to use us more often than they have been using us and giving them different reasons to do that. Whether it be in the morning, lunch, afternoon dinner or evening.

J. Clifford Hudson

Probably one of the bigger impacts with the "Two Guys", so I -- James came on board as we are in the process of returning the "Two Guys". So I'll take him off the hook on the period of time where we didn't have the "Two Guys" and then the impact. The biggest impact of -- the clearest way to state that, is it's not quantitative. So our business is built across these 5-day parts. When we want away from the "Two Guys", the consequence was the lack of recognition of the creative. So I haven't got the consumer accustomed to that, with a different creative. And as they were not familiar with the new creative, we then didn't have the leverage for creative across multiple day parts. So we came on with the creative execution that was focused on a product. So you might -- it might be an ice cream product but you didn't get breakfast and drinks and dinner leveraged from that. Part of the reason for going back to the "Two Guys", yes, the recognition, the fun element of it for the brand, but the fact that we can do the "Two Guys" and so it starts, you get the media recognition, engagement from the consumer and then you can go from that introduction, the "Two Guys," to any product in the day part. So let's just say in a 3 or 4 month quarter, if we run 4 different commercials in a 3 or 4 month period, they all get that level of recognition because of the "Two Guys" whereas if we moved away from that, which we did at one point move away from it, and try to have an execution on a product promotion, in a triple month period, you may be running 3 or 4 different commercials and no one of which gets a leverage from another. And the consequence was the ad awareness dropped considerably and it hurt our sales, and it hurt our day part strategy. By coming back to the "Two Guys", ad awareness went up and sales and traffic went up. So that was a big driver and the benefit to the nature of the creative. I don’t know if that helps, I hope it does. It certainly helped us.

Paul Westra - Stifel Financial Corp.

It's Paul Westra at Stifel. I wonder if you can clarify the timing of what you mentioned. The timing of the POPS official rollout, how long you think that can take to install? You mentioned mobile's October '13, of this year, I mean, October 2013. How long will that come out? And maybe later on, you mentioned POS, that these systems work with existing POS, that you might need to upgrade POS as well. What is not -- what does the new POS system that's going to do that the old ones won't?

James O’Reilly

I can give you some of that.

J. Clifford Hudson

After this. We'll drop the POS and it's impact.

James O’Reilly

Actually, we'll leave it. If we can, we'll talk to POS question. But so POP has gone from a 1 market pilot test to a 3 market full-scale test which is now in 61 stores. We'll run that test for a number of months, we'll evaluate those results. We're obviously confident about the initiative based on what we've seen so far and then we believe we'll start progressively expanding if we see that kind of happening next year. The mobile application will launch on its own this coming fall. It will have electronic payment capabilities, stored value capability and it will also already be kind of pre-developed to work with POPS in our POPS test market. So when mobile launches across the country we'll also begin testing its connectivity to POPS in the POPS test markets as well. So that when POPS rolls out, it rolls out with a connected mobile platform.

Paul Westra - Stifel Financial Corp.

One last question in the data. You're going to supplement or integrate other third-party data like MasterCard and so you can get even more information about the consumer or is that just 2 parts down the road?

James O’Reilly

At the moment, that's not really necessary, it's part of what I've been showing you, so we haven't evaluated that yet.

Keith Siegner - Crédit Suisse AG, Research Division

Keith Siegner from Credit Suisse. Just a follow-up question on the point you made earlier. You're very comfortable, you said, with your ability to grow impressions on the media going forward. What does that mean? Can you grow above system sales growth from here? And to put that in perspective, the last 2 years, fiscal '12 and fiscal '13 with the change in partners, what's been the growth in the impression those years?

James O’Reilly

Yes. The question was tied to, I believe, the young lady. The question had to do with expecting a level of media inflation are we still comfortable growing our impressions next year? My answer was yes, I'm comfortable with that. It's primarily a function of our partner that we shifted to Zenith here in New York who, as you know, is one of the largest media buying groups in the country. And so, as a result of our partnership with Zenith, their ability to negotiate and buy on our behalf guided by our strategies and the data that I'm seeing through the negotiations which are ongoing right now, there's the basis for me saying uncomfortable we can continue to grow impressions.

Keith Siegner - Crédit Suisse AG, Research Division

So the impression growth the last 2 years, roughly how much was that is growing?

James O’Reilly

Well, I showed you a, so far, what we're projecting for this year, a 50% increase in GRPs. And that's what we've seen this year and so we're looking at now planning for next year. But what we've seen this year is a 50% increase in GRPs.

Keith Siegner - Crédit Suisse AG, Research Division

One other question then. Obviously, these new products are an exciting call to action, it has been there for the strategy going forward. What's been the product mix on some of these new products or LTOs, how has that changed and how should we think about their contribution to the sales, to the product mix going forward?

James O’Reilly

Well, they definitely play a role in -- they are part of our multilayered strategy to deliver our consistent performance. So we can see, depending on the kind of product and the day part, we can see the way they contribute to the performance of the day part. And the answer is partly scaled to the size of the day part. Cliff did show you our product mix overall and what we see is every time we do a new product, we'll see it contributing to that portion of our sales in a positive way. So without giving you the specific numbers, I can tell you that we can see when we've got product is tested successfully in market with television and we roll it out nationally we can see a contribution to that portion of our business. So it all plays a role.

Craig J. Miller

James, there's a couple of questions on data that I just wanted to clarify. Craig Miller, Chief Information Officer, and so it was one question around information that we gather for -- from our franchisees. Today, we gather that information even before we had POPS into this equation. So we get a detailed information for all stores every single day. I think the second question was our credit card data. We also include credit card data today in a very integrated analytical environment. So all of that information we gather today POPS, mobile all of the technology, that James talked about is an addition to it. And so we'll be gathering on top of all of what I just described we'll be getting all consumer type of behavior data which will then just enhance what type of analytics we could provide or look at.

Unknown Attendee

[indiscernible] Sure. Just to repeat. $100,000 investment for POPS seems kind of high. I'm curious, is that already included in the new reduced lower smaller box investment cost? Then again $100,000 for 46 menu boards, I would think it's over $2,000 a menu board, is that being well received by the franchised community given that's pretty large?

J. Clifford Hudson

Okay. Here we go. So the $100,000, Matt, that includes some additional items over and above the POPS. We do expect the POPS will add some incremental cost over and above the menu houses that we have today, so the 8 50 small building prototype may go up a little bit as we put POPS in new drive-ins. But the $100,000 included some other elements that would be more associated with the retrofits so not with the new drive-ins. Just some painting, what I'd call more of maintenance CapEx type items. The POPS is about 75,000. Add on to that, just a little bit, you've got -- and Craig sounds like you're going to, too. There are kind of 3 initiatives that will be rolled out over roughly a 3-year period. Could be slightly longer than that. But you get the POPS, you get the POS and you've got some trade dress elements -- upgrades that are needed with some deferred maintenance and many of these stores. So as you go into the way James laid that out, the trade dress elements and the upgrade that the customer perceives is the exterior piece. POPS and some work on premises. That's upwards of $100,000. It could vary somewhat by store and sometimes it would be less than $100,000 with POPS and a trade dress element. So it's broken that down with the exterior piece. We'll do the POS separately here in a moment. But the POS's clear interior doesn't have a trade dress piece to it. And Matt, to your question, the fact is we have laid this out to our far franchise leadership and we've laid out for them the anticipated return on investment. And we're at a period of time in our brand's development, so the middle of the last decade, we did a retrofit. I'll talk some more in a few minutes about what our developing markets because they opened in the late 90's. In the last decade, they didn't do that retrofit so they don't have that new look. So we have some trade dress elements that need to be addressed. This POPS -- our customer surveys show the positive reaction of our customers when they come on premises is they see these new POP units. And so over the next 3 and 5 years, we'll be talking to our operators about POP, some trade dress elements, more minor and in essence this becomes a retrofit for this decade. Actually, lower cost than a retrofit would ordinarily be and yet not just a trade dress piece, it's a customer engagement piece. It's far different from any retrofit we've done. So I don't know if that's helpful in terms of the perspective, but these are the elements in this decade that we will be requiring from that investment standpoint. One thing to add, Matt, is it's in regards to how franchisees are looking at this. The total cost, and again as we talk about [indiscernible] that varies depending on how many stalls, anywhere from 18 up to 35 or 40. But right now the franchisees, as they look at a couple of things, they're faced with having to replace menu housings. It's part of the retrofit. They're faced with having to replace the pay systems, which are 8 years old and we need to upgrade those. And so, those 2 items along with what they're seeing in terms of the benefits in the pilot stores, they're very encouraged in seeing the ROI and the investment is really going to pay off. So the investment they have today is about 15%. Even if they didn't put Thompson, they're still looking at least a 50% to 60% of that cost in capital without any of the benefits that POPS brings along with it. So just to make it perfectly clear, I hope, on the new store, don't add the $75,000 to the 8 50 today because some of it are being incurred in the menu housing to pay systems. So it will probably be in the neighborhood of $35,000 incremental.

Unknown Attendee

Sorry, one more though. Just that, how do you calculate the 3 to 4 year payback? Is that all sales less than -- do you have to get, like, an 8% less to get that payback? Or is there some savings and labor you're calculating and not payback as well? So is it a margin benefit or is it a sales benefit?

J. Clifford Hudson

Well, there's a combination of a after sales lift, the flow through, we also are computing kind of a year 2 and a year 3 benefit from that, from these additional items that we'll be rolling out going forward.

Unknown Attendee

Okay. So accumulative sales lift of, let's say 8%, just to make the math simple at 40% flow through gives you like a 3 to 4 year payback, right? Is that...

J. Clifford Hudson

Well, I'm not going to get into quantifying at this point in time but it is based on a multiple year sales lift.

Unknown Attendee

Just one follow-up there. So to tie this to maybe a little bit to the union growth, I mean, the number is a little bit higher than maybe I expected about what this might cost and could this type of capital commitment to operate this system be potentially influencing the franchisee's decision to open the units or not? I mean...

J. Clifford Hudson

Well, really, what I'd like to be equipped is knowing that he's got a section on development and we'll walk through how he believes this will impact by different market types. So if we can defer that question to them, that would be good.

Unknown Executive

So now, with that, we will proceed to Omar Janjua who will give us a little bit more of an update on our great people and profit initiatives on the POS systems. And then after the Q&A with Omar, we'll proceed to a break.

Omar R. Janjua

All right. Good morning. I'm going to talk to you a little about our people initiatives as well as our POS impact on our margins. So from a people standpoint, you all know that the affordable health care is fastly approaching and we're taking the high road, as a brand, to ensure that we are the employer of choice by offering benefits to our full time employees. So that's going to be a key focus for us. We're going to offset that with some strategic pricing that we have been testing and that, in turn, will drive our ability to attract talent to drive a 5-day part. So our approach is very simple: Back to basic staffing, training and retention. And very excited to share with you from a staffing standpoint. We have been on an employment branding campaign. Much more robust and dynamic interface to attract the 24th century employee. The other thing that we have embarked on is a hiring management system, which is all electronic and it tracks employees that apply, we can move applications from one store to the other, it gives the operator an ability to assess employees before they are hired for every level so that we can upgrade the tenant at all levels as well. So that goes -- both those systems are replaced on the company side and we are testing them on the franchise side as we speak. We have the plan to integrate that into the entire franchise system in the next year. From a training standpoint, also excited to share with you that we have gone electronic from an hourly employee as well as management training standpoint. We have mobile app now that is going to be rolled out in September to access, given access to all the management folks so that they can access our operation manual as well as LTO products, spec chart on their iPhone or Android phone. So we are really fastly approaching the electronic age from a training standpoint. And then from a retention standpoint, our goal is to be the employer of choice and create a culture where people feel appreciated and want to stay with us. So let me talk a little bit about the Affordable Care Act. We believe that this can be a win-win situation for us and all our franchisees. We have engaged a third-party that is helping our franchises model the cost of this as they look at the organization. We have meetings with our franchisees, several webinars. So the goal is really inform because I think there is a lot of confusion and contradicting information about this in the industry. So we continue to align our folks on the facts and then we're using a third-party to model the cost so that they understand what that looks like for 2014. In terms of the cost for company drive-ins, we're looking at range from $4,500 to $6,500 per store and as I mentioned earlier, we have been testing a strategic pricing plan that will help us offset the -- that we'll be sharing at a later time. The franchise cost will be somewhere in that range, maybe slightly higher, depending on whether the franchise he offers benefits to the management currently or not. From a technology standpoint, very exciting stuff. Lot of you, I talked to last night about POS and then supply chain management. So from a POS standpoint, we are about 20 years behind in the industry in terms of functionality and the ability to guest analysis and key insights into a level recognition, as well as inventory management and labor scheduling system. We believe it's going to enhance our customer experience, and also provide us tools to improve our margins both on food and labor. And then most importantly, we'll be able to recognize our revenue in a much more robust way, on a daily basis on every store. And then this is going to be integrated with a supply chain network above-store so that essentially we will know exactly what the inventory levels are in our stores and have an intelligent system to project demand based on our forecast. So let me talk about each of these elements. From a customer service standpoint, the order taking interface that we currently have is very antiquated. It takes about 2 weeks to train a new employee on taking orders on the switch board and this essentially is a touch screen interface, very intuitive. The menu will bucket it by category because you need to find which leads to better order activity and faster order taking speed. And we are testing 2 systems currently: A system from Radiant1[ph] from Micros 5x5[ph] and several of our company stores' plan is to go to 5 store next month and then implement a market in August. And then proceed with the system wide implementation but from a customer experience standpoint, it really enable s the frontline employee to take the order faster and more accurate, in a more accurate way. From a food cost standpoint, the central number system of the POS is going to be the sales forecasting beat[ph]. So essentially the system will project the sales forecast based on history and then the operator can adjust the that based on an LTO or seasonality, et cetera, whatever's going on in the trade area, which will then enable the system to suggest an order. So essentially, today what happens is the partner or the manager actually builds an order for ordering their food in paper based on gut-feel and some sort of a business intelligence. But this system will enable the restaurant managers to have more specific scientific data that projects what the order should be and then they will have the ability to change it or alter it so we believe that, that will help the days in inventory in our system, actually reducing it so that our waste and obsolescence are minimized. It will also enable a kitchen production fire[ph] system. So today we don't have any such thing. The cooks in the back of the house that are making our sandwiches will be able to see a screen that will tell them by hour -- actually, by half hour how much product to produce. So how many burgers, how many chicken sandwiches, how many orders of tots, so they're proactively producing the stuff so that our speed of service and product quality is optimized. From a inventory system, our current order matic and NT[ph] POS only gives the ability to do inventory once a week and you cannot see your variances until the next business day, which really gets in the way of proactive action on variances. So this system will provide us realtime inventory so if you have an issue with, say, ice cream or hamburgers, et cetera, you'll be able to do an inventory intraday and the system will tell you where you stand, versus ideal food cost. And then this will be integrated with the above store supply chain management system that so that we can upload the ending inventory in all the stores and the distributors will know how much to order to ship for the following weeks. So food and paper cost optimization will benefit greatly from this POS.

On the label side, our current system does not project transaction-based labor schedulers. This system will give us the ability to visually see where we have gaps in terms of efficiency, as well as customer service by position. And so the manager will be able to add or subtract people to optimize both those things. It will be based on -- the labor hours will be based on allocation of sales by day parts and as you know, we have a 5-day part, so we have to be much more careful and prescriptive about how we schedule our folks to optimize the service. And then it will also give us real-time label analysis. So looking at how many people have taken breaks, who has gone over their scheduled shift, how much overtime are we paying everyday. So all those things that we currently do not have access to on a real-time basis, the manager will be unable to see.

From a revenue recognition standpoint, really the big feature here is fraud protection. So currently, if you suspect that there is an issue with your revenue recognition in the store, the partner essentially has to print several reports and try to dissect if there's a trend or an issue in a particular day part or a particular day. This will, the system will give an alert if there is -- if they detect an aberration in the data. And provide all exception according to the partner on a daily basis. So essentially freeing them up to do other things and focus on the key opportunity.

And from above store standpoint, currently we do not have the functionality to get inventory variances at the market level or a DML level, pricing information, a lot of manual work that is being done. And the system will be connected, will be able to upload that at the above-store level and get that information real-time. So that we can make intelligent decisions. One other point I want to make here is currently, whenever we change pricing with new LTOs or new manus, it's a manual process which leads to errors. So a partner actually has to manually key in prices of different products and they make mistakes. And so when a customer comes to the store with a coupon, there is higher level of error associated with a discount on a particular price. This will automate that, will download pricing and discounts into the store so that frees up the partner from doing that as well. And it will also give us the most insight. So I think somebody asked about mix on different promotions, we'll be able to see that realtime and see what our mix is under a certain product in a particular DML or the entire nation.

So our plan is, as I mentioned, pilot testing it currently, plan is to go company-wide on [indiscernible] in October to February and have that done in the first half of fiscal '14. With a limited franchise implementation, probably folks that are on our technology concept, as well as all new drive inns that we opened will get the new POS and then a full-scale system rollout starting in March of next year over 3 years. So we expect most of the impact on the companies side in the second half of fiscal '14 and definitely in the first half of the fiscal '15 with the POS.

so a little bit about supply chain. So we have been testing and implementing now above-store supply chain management system, which will essentially link our suppliers to our distributors, as well as upload the information from our stores, and it will enable us to have more intelligent promotional planning. So we've been testing the software from Oracle, called the mantra, which is a demand forecasting system. And currently, their entire process is manual. Again, new promotions, new products are forecasted manually, which leads to errors, too much or too less. We are not able to optimize the amount of products by DCs. We are not able to move product as rapidly between DCs based on mix in different parts of the country, so that will enable us to do all of that. And then, more importantly, we'll be able to upload the ending inventory in our stores, so we have a better understanding and intelligence on where to move product to. Very excited about this. This is going full scale by August of this year. So we're on the finishing stages of putting this together.

Capital investment and ROI. So POS has a lot of pull for this, $25,000 to $30,000 estimated cost depending on whether the store needs sound system, which is our headset system to communicate with the consumer. We expect to see margin improvement of about 100 to 200 basis points, depending on how well the store performs today and the ability to really garner the benefits on food and label. And estimated ROI is very high, payback within 2 years. So a lot of excitement in the system about POS and its implementation and impact on the business.

So in summary, we expect the following breakdown of our margin improvement. On food and paper, anywhere from 75 to 150 basis points. Label, you can see slightly less and then the impact on service times, some suggested selling improvement in order accuracy, which leads to less discounting and less deletes and voids will help us recognize more revenue rapidly. So very excited about the impact of all of this. As you can see, our margin performance, these are company drivers the last 3 years. We have had sequential improvement in margins from 13.3% to our projected 14.5% to 15%, end of the fiscal year. And we expect to get to 16% and 17% in the next 2 years with this technology and supply chain management system.

So that's all I have to -- from a presentation standpoint. I'd be happy to take any questions.

Omar R. Janjua

Yes?

Unknown Attendee

Whenever you think about that long-term goal of 16% to 17%, over the next, you should be close to 15%. You're outlining how you can get 200 basis points just from a cost perspective. And so I'm thinking about, over the next couple of years, as you're saying for sales, give you operating leverage, why that 17% might not be a little bit conservative?

Omar R. Janjua

Yes. So our guidance has been 14% to 20% EPS growth with low single-digit sales. So we feel confident that we can deliver the 16% to 17% in the next couple of years and go from there.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Joe Buckley, BofA Merrill. You talked about sort of proactive production or anticipatory production, so are you moving -- or this is just to move you a little bit away from the cook-to-order system that you currently have?

Omar R. Janjua

So currently, we have a made-to-order system. During busy periods, we do cook-and-hold. And so this will enable them to ensure that they're not holding excessive products too long, which impact the quality of the product. And also, have products ready to deliver when there is demand for it. So it will help the kitchen staff drive speed and quality at the same time.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

So are you doing some of this now, where you're cooking kind of in anticipation of orders?

Omar R. Janjua

Yes.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

So what you're saying is this would be a little bit more sophisticated?

Omar R. Janjua

This will be more sophisticated and more intelligent based on actual sales patterns and will definitely improve quality and speed as opposed to just speed, which we see today. Yes?

Unknown Analyst

Karen [indiscernible] from Cowen. You mentioned the potential benefits of getting rid of fraud throughout the system. How widespread do you actually think that is? Is there a risk of a spike in turnover and kind of associated training costs if -- as you root that out?

Omar R. Janjua

Yes. So clearly, there's a risk depending on the organization in the store on what that looks like. But most of our POS vendors, they use a range of 2% to 4% in terms of what they see in other companies when they roll out POS and definitely will impact turnover and some -- but that's good turnover. And given our hiring management system and implementation of that, we believe that will offset and actually elevate the talent that we're bringing in. So we don't expect any negative impact on our people but definitely, again, from a revenue recognition standpoint.

John S. Glass - Morgan Stanley, Research Division

It's John Glass. Would you mind just brining the slide back where you had the benefits? I got the food and paper and labor. There were some other pieces to it that went by quickly. What is the -- can you just frame what the 10 to 15 seconds in each of those brackets? Is it -- or it's just the total? You talked a little bit about it initially, but I don't know if I understood this fully?

Omar R. Janjua

Yes. So currently we have a keyboard, essentially that has 140 keys on it, but somewhere in that range. So if you are an order taker taking an order, and you haven't been working with us for several years, you have to navigate your -- through the keyboard to find the right key to key in the menu items, and if you have several menu items, it takes longer, then you have to actually find the discount key if there's a coupon attached with the transaction or whether it's half-priced or whatever. So we believe that with the intuitive order-taking interface, which is all touchscreen, bucketed by category, very visual, it's much faster to take the order and find the right coupon key quickly. That will enable the operator to reduce the order-taking time.

John S. Glass - Morgan Stanley, Research Division

Could you just break, so what is the current drive-thru service time? And what is the current stall time? And it was talked about earlier, could you break it down?

Omar R. Janjua

Yes. So our average, for drive-thru and stall runs from 2.5 to 3.5 minutes total time. And order-taking time is about 45 seconds to 1 minute.

Keith Siegner - Crédit Suisse AG, Research Division

Omar, Keith Siegner from Crédit Suisse. It's been a couple of years since we talked about the initial move from the carhops from a regular wage to a minimum tip wage. And then, just to shift the gears a little bit but same-store sales have been back to positive for 3 fiscal years now. What's the average server wage including tip? And how do you compare that to your peers? In other words, how has this worked out for the employees? Are they paid in line with above or below the competition? Just anything there would be helpful.

Omar R. Janjua

Yes. So as I look at the system, we have many companies using tip wage, some franchisees do not use tip wage. So if I was going to have a blended average for a carhop, it would be anywhere from $6 to $10 an hour depending on the shift that they were, how good they are with the consumer, et cetera. We're very competitive in terms of total wages and able to attract the right talent vis-à-vis casual diner, other table service concepts. So quite competitive and I don't feel that there is any issue from an employee standpoint.

Keith Siegner - Crédit Suisse AG, Research Division

Can I ask you a follow-up question on Karen's question about fraud. So is the opportunity to make sure that the franchisees are reporting sales correctly, or is the opportunity to reduce employee theft, or employees not charging customers because they're their friends or something to that...

Omar R. Janjua

We are pretty confident that the employees are -- or the franchisees are reporting sales correctly because we get that data today. Obviously, this will enable us to find more sales because there will be less fraud at the employee level. So to answer your question, it's a little bit of both but more to help the operator at the store level, optimize the sales of -- and impact the take-home pay in a bigger way. But we feel pretty good about our franchisees and their reporting of sales today. Okay. Thank you.

Claudia San Pedro

So if there are no other questions, we'll go ahead and take a break right now for about 15 minutes. And then, we come back, we'll do a bit of brief recap of the first couple of presentations and go directly into Cliff Hudson's presentation on unit growth.

[Break]

Claudia San Pedro

All right. Thank you for coming back. I want to talk a little about a few housekeeping items and then a little bit of a recap of what we've seen this morning so far. So on the housekeeping items. While the program was originally set to run from 8:00 to 2:00, I believe we will be done by lunch. And so we will have lunch here and that will give you an additional opportunity to meet with management, to also see demonstration of our new digital technology system, our menu board. But it also gives you an opportunity, if you are traveling in and out of you New York, to make appropriate travel arrangements, because I know there are some weather concerns out there.

In addition to that, while we weren't able to bring you our pretzel dogs, what we are able to bring you at lunch is our signature cherry lime-aid drink and our new freshly brewed green tea product. And so as soon as we end for lunch, immediately behind you, you'll see there will be a little Sonic drink bar there. So I -- we encourage you to try, if you haven't tried either one of those, we encourage you to try those.

Now a little bit about the recap that you've seen so far, I think. Again, as you know, we've talked a lot about, over the past few years, how we grow our brands, our business and how we optimize shareholder value to that multilayer growth strategy. And while we've laid out the initiatives from the same-store sales profit perspective and that use of cash, those 3 layers, what we haven't talked to you about previously is providing you some specific ranges for what contributions each of those layers will make to EPS growth. And so as you saw what Cliff laid out for you, that same-store sales will contribute 3% to 5% for earnings per share growth, that is something that I think provides everyone a level of -- as we look forward, that we've got confidence in the initiatives that we have in place and their ability to be able to contribute to strong, solid EPS growth over the next few years.

We will continue to provide, on an annual basis, our outlook for the year. That will comprise of positive same-store sales in the low single-digit range, margin improvement, but we also think it's important for you all to be able to see that strategic roadmap of what are the initiatives that are going to drive each of those layers, how will those layers contribute to our business and driving EPS growth. So as you look at that, we think that, that provides you with a sense of certainty as we go forward and what we have in place.

You heard from James, talking about our new digital menu board, POPS, point-of-personalized-service, that we're very excited about. What's exciting about that, and Cliff will more about this, is that, as you know, one of the distinct advantage of the Sonic brand is that unlike other brands, we have consistently, methodically, always reinvested back into the physical facility of our building. Every 10 years, we go through a retrofit and that's so important to ensure that you're maintaining your customer relevancy. What's exciting about this new system is that it not only serves as a physical retrofit but it also serves in a way that it will drive sales continuously going forward. And again, Cliff will talk about that. And that's a distinct advantage for us. And as you think about our system and the fact that our facilities are up-to-date, the fact that when we do a retrofit, whether it was 10 years ago or 20 years ago, our target is always to have it be at reasonable costs to our franchisees, usually about years worth of profit investment. So you're not going to see us coming out with any sort of capital investment that will be extraordinary for them. It's very reasonable and we always target a good payback period.

With respect to POS, what's very exciting about that is we expect to see a lot of margin improvement with respect to all of the food and packaging advantages we should be getting from both the POS and the supply chain management system. Those combined with improved sale and using that to offset some additional costs that we may have, give us the confidence that we'll be able to not only see improved margin improvement at the drive-in level but at the operating income level.

So right now, I'll turn it over to Cliff, so he can talk about a couple of the other components, and then Steve will go into to the ascending world to rate and use of cash.

J. Clifford Hudson

Okay. Thank you, Claudia. And I'm going to talk about an element of the business that is receiving a fair amount of focus these days appropriately so. Because as we've gone through a process of -- as we talk about -- or I talked about earlier in the presentation, in terms of stabilization of the business and movement of business, a very positive way, the other initiatives we have in place. The question comes up, "Gee, with all this territory, what about new stores and impact on the growth of the brand and growth and profitability of the company?"

Development has been a big part of our story, historically. And so you can see, since the beginning of the last decade, average growth rate for the system in terms of unit growth, about 4% of that period of time leveling out in the recession. And so, clearly, our objective as the franchisor is to continue to grow the brand not just from a systemwide sales standpoint but from a unit outlook standpoint, because the positive impact on the brand was brand penetration by market.

So I'm going to talk about how we see -- why we're more optimistic today than we were 1 and 2 years ago and the processes we've put in place. What I don't expect by the time I've completed this, that you're going to -- you will say, necessarily, although, I'd be happy for you to say, you may not say, in '14, '15, this is exact number of stores. The questions are coming to us is what is our confidence and the basis for that confidence that '14 will be greater than '13, '15 will be greater than '14. We'll get back to the percentage of 2% to 3% growth rate that will be a nice contributor to the growth of the brand, the growth and the profitability of our business.

So let me talk about some of the elements from our standpoint, our real contributors and kind of reigniting that growth rate projected, prospectively. One is the improve same-store sales that we have experienced, a positive contributor to the operators, optimism about the business and the potential for sustaining that. Their pockets are in different place. So store-level sales and related profitability over the last several years, a very positive contributor to sales and profit at the store level. In addition to that, because of improving profit store level, improved unit level economics, that moved to a different level than they were 3 years ago. And along the line -- along the same time, we have reengineered the building to reduce some costs from the building to help return our investment for a new store opening.

We've also shifted dollars, reallocated dollars to a more national media, which has in turn helped all markets. So those are first elements and talk to you about return on investment for an individual store. My pitch to you, and I'm confident from a franchisee standpoint, the shifting of dollars for the national media has a sense of really lowering the risk for all markets instead of -- and as it relates to new unit development and the sustained elements in terms of pushing out for new mediums with those dollars now in the national fund, as James referred to earlier, will allow us some continued benefit of this on a broader basis.

The investments in sales and profit technology initiatives will also have a positive impact in terms of -- particularly new franchisees coming into the system, they're saying, "Look, we want to see these systems are in place." And this is a confidence builder from our viewpoint and new store development and new markets. Since these dynamics have shifted in this way, we also began to add senior-level talent to our development function within our company, and I'll talk about that more in a few minutes. And we have refined our development approach to a market-by-market attitude and orientation. So the pre-recession, there might have been much more of a work than we had developed, who is interested in opening stores. Given the maturity of the brand in our core markets, the different circumstance franchisees are in a developing market, the greenfield nature of many new markets, we are of the view that our strategy has to fit those circumstances. And so we, in fact, have that strategy by market to regenerate, or as we say here, reignite sales growth or unit development growth by market, and thus, for system and for the brand.

Now this is, in a way, much with the earlier presentation, this is intended to say, this is why we have increased confidence that we can get this moving, and we are in fact seeing that. So from your standpoint, your reaction, of course, is well, fine, show us the store opening. And that's a different issue versus us saying we've laid this foundation. So this question came up in our conference call earlier this week, as we released financial information for the quarter ended May, and some reflection on this on our part, well, how do we give you confidence that the picture looks different today versus a year ago. I can walk through all of these, but then it has to translate to store openings. So one of the ways we thought we should look at that would be, if we've told you, looking in this summer quarter, where we're expecting -- for the openings in the summer quarter, we're seeing 25 to 30 new stores for the year, then the question comes up, what happened to something north of 30? And did those stores evaporate? Or is it just a timing issue? And they fall into the first fiscal quarter of next fiscal year, fiscal '14. So this is intended to say to you the latter, and that is it's a timing issue in terms of the opening of these. If you look at the fourth fiscal quarter of last year versus this year of fiscal '12 versus fiscal '13, fourth quarter, both cases, we see the openings roughly the same in both of those quarters. But a year ago, the first quarter of fiscal '13, we only opened 1 store. And as you can see, the pipeline for this fall is much improved. And in terms of the activity in which we've been engaged in the last several years to try and drive that, we see that activity, and I'll refer that -- I'll give you more data about that in a moment, in terms of new store commitments that have been made either for single stores or multiunit, and the building of that '12, '13, '14 that we see. Obviously, some of that is projected but it is because of current activity that we see that, particularly as it relates to '13. But as you can see, this is not a flat picture. Looking into the first quarter, it's a substantial step up in these 2 quarters, 6-month period, in terms of rate of development. And you should see that then going forward in terms of comparative improvement quarter-by-quarter.

Now one the things, as I mentioned, that is affecting this and potentially in all markets, is an election of a franchisee, whether they want to do this value engineering, smaller building that we put in place. So reducing cost by obviously a couple of hundred thousand bucks in terms of the cost of the building, it's also smaller footprint for the land. So this has enabled a number of things in terms of the potential impact on the business. So let me spend a minute just talking about that.

This, with the improved sales and profitability of the average store, obviously, positively impacts return on investment. It has other consequences, because we are more likely to pursue markets that we would have left alone just a few years ago. Meaning, in our core markets, we might have bypassed a small town. But now, by looking at lower cost of the building but a smaller footprint, so if you reduce the cost of building and reduce the cost of the real estate, another way to reduce the cost of real estate is go to a market that's less expensive. You may be looking at the metropolitan area, where the real estate is $400,000 or $500,000, you may be able to go -- and in fact, this is what occurs, go to a smaller town where with the reduced size building, you may be looking at real estate that's $100,000 or less. And so suddenly, the economics of performance on this shift dramatically, if you can look at making good money out of $1 million of sales instead of having to think about $1.4 million. And I'll give you some examples of where this has occurred the more recent past. But with improved franchise unit economics, using average unit volume for the system and the cash flow that we're experiencing, with this smaller building, we're getting a high-teens return on investment. And in fact, with some of the profit initiatives that Omar lined up earlier, we should be looking at this in the 20% and more in terms of potential return on investment for the new unit.

So the opportunity for positive impact with the continued initiatives that we have, the smaller building, that base element should be very positive in terms of potential franchisees and existing franchisees looking to new store development. Now this is a critical part of our strategy for the next several years, and so we are focusing on this intently and heavily. You can look at it as a contributor to our growth in royalty. We look at it with an added level of import and complexity for our business. We've talked a number of times the last number of months about this shift to dollars in the system marketing fund.

Historically, if you look at a core market -- something I've got a little pointer here but it's not showing up on the screen, if you look in our core market and a core market wanting to grow its advertising, add a few more stores, take up an advertising contribution rate in the local co-op, but you reach a point of some level of saturation in the core market in terms of number of units and the amount of money you're spending where moving that needle becomes more problematic. So the way we've helped those core markets move the needle, of course, is to move the dollars -- more dollars to the system marketing fund and buy advertising more efficiently in a way that drives gross rating points or the rate at which customers and potential customers are seeing the advertising. So the objective here isn't just to grow a Dallas or a Houston or an Oklahoma City with greater funds, it is to grow the system fund with greater funds. And now, development begins to play a much more significant role there. But think about this, this way, to the extent of core market, and core markets account for about 75% of the sales of our system, so core market gets the positive same-store sales. It's a very nice contributor to the system marketing fund, and this in turn, of course, as those sales grow and the system marketing fund grows, has a positive impact on the whole system but it has a positive impact on core markets in terms of continuing to contribute to growth and positive same-store sales.

At the same time, as that system marketing fund is growing, it has very positive impact on developing a new market. And in many ways, the disproportionately positive impact because these make up 25% of the sales in the system. So as the same-store sales for the whole system contribute to the system marketing fund, these developing and new markets get a disproportionately positive impact, but everyone shares in the impact.

Now as developing and new markets grow same-store sales and they see their unit economics improve, the likelihood of developing new stores in those new and developing markets really substantially increases, particularly greenfield markets that are wide open for development for our brand as opposed to a developing market that may have 1 or 2 franchisees that are already in the market and the market has to be developed more selectively because of the market penetration that already exists. But as those same-store sales grow and new units grow, the impact on the marketing -- system marketing fund is quantitative and predictable as those things occur but they effected the whole system. So in a way that we didn't have, let's say, 5 years ago, 3 years ago, the way we didn't have, the system really is much more tied to the growth of this system fund, meaning the Sonic system, much more tied to growth in the system fund than it has been historically, but all stores across the system, including new unit growth in new and developing markets has a positive impact on the entire system in a way it didn't have just 2 and 3 years ago. So we see the critical importance of this. You see it from the standpoint of the growth in earnings and it is a critical contributor to that. We see it from the standpoint of its importance on growth of the brand across the system. And hopefully, this depiction gives you the reason for why we have that sense of view of the importance of it.

So this is not -- this is something in which we are focusing quite intensely and intentionally, and in fact, putting in place plans by market for continued growth. The increased focus on this from a leadership standpoint, we have senior talents on the franchise sales side and on the franchise development side. Bob Frankie came to us, probably 1.5 years ago, and he's now focused on franchise sales. And Mike Gallagher -- Bob came to us, most of his career was with McDonald's. Mike Gallagher came to us, it was -- last about 10 years experience with Arby's. Bob focusing on sales, Mike overseeing the development processes. But it is a combined effort of sales and the development process combined with 2 individuals, Eddie Seyrock [ph] and Drew Ricker [ph], who averaged 16, 17 years with our company. And those 2 individuals, Drew and Eddie, oversee east and west, the system is split up in that way. They oversee the business processes and the relationship with franchisees on a general basis in their respective markets, east and west. And so they coordinate, they know what each franchise group is looking at and thinking about from a standpoint of its own growth plans. What are their organization's needs or desires. What are their capabilities? So Drew and Eddie are working on these elements, and then coordinating with Bob Frankie and Mike Gallagher, in terms of specific development by market and by franchise group and including new franchisees coming to system. So this is intended to show you, at a senior-level, how we shifted additional resources and additional focus in this area. It doesn't go to staffing at all, which is also a level of increased expenditure for us in the recent past and will continue to be an area of growth and focus for us.

So the base improving, very different foundation versus 1 and 2 years ago. An increased importance on this for us because of the impact on the media piece, which affects the whole system. Additional talent on board to begin focusing on this. And then, a different process that we're utilizing in terms of thinking about how we grow market by market, and market type by market type. So I made a reference a few minutes ago to how we will think about this in core markets that are a much more saturated, much higher level of saturation, brand penetration versus developing our new markets. So you think about a core market and what's the nature of the challenge. In part, it might have been, a couple of years ago, the cost of new investment and what's happening from the sales and profit standpoint. So we begin to remedy that. The increased national media really helping growth and awareness, including in our core markets, driving traffic, driving sales. And then, in addition, this new building prototype, allowing us to begin looking at small towns that we were not looking at 2 and 3 years ago in our core market. So this gives us an opportunity to go to a market where the brand recognition is 100%. The brand usage may be there but not in that town, when they travel somewhere else that they use Sonic, with the brand awareness in a small town in Texas, a small town in Oklahoma, brand awareness is 100%, but the usage is not that great. So I'll give you an example of a store actually developed in the town of Shaddock, Oklahoma, with, I guess, like 2,500 people in Western Oklahoma. And because of the reengineering of the building and a smaller town, the ability to get the store opened for less than $1 million is very real, the non-land investment here were $760,000. If I recall correctly, I think the land was less than $100,000. So the franchisee gets into the business for an amount much less than we have been looking at 2 or 3 years ago. On a state highway in Western Oklahoma, its first year sales were $1.25 million. So this is someone -- clearly, in terms of the sales, the capitalization ratio, much better than a one-to-one ratio and he's a happy camper. So this gives us -- this is not a -- this is a town we would not have gone into 5 years ago with the small building. Makes us think a play without places like Shaddock and places like Valliant. I didn't know -- I've never heard of them. So in spite of living in that area, a country mile or almost a mile away. So Valliant, Oklahoma, a non-land investment, $770,000 with our first year of operations or estimated first year because they haven't been opened 12 months but the rate at which they are experiencing business in the first number of months open, $1.3 million.

So again, a site we would not have gone to 3 to 5 years ago, but this is a repetitive approach in our core markets. I'm giving you isolated examples, so that you see that it's real. But I'm also telling you this is a repetitive focus we have in core markets to go back and mine small towns that do not have Sonic drive-ins may -- and preferably account

[Audio Gap]

this is going to employ 35 people in your town.

When you ask them what's the regulatory process, you're usually looking at the regulatory process. I mean, the ease of getting a store opened, the speed and ease of getting a store opened in a small town in these core markets, there is no comparison to what we have come to expect, and that's our problem areas for the complexity and the time involved in new store development. I think that Valliant store was opened -- when we approved them, they were opened in 90 days or something. I mean, it was extraordinary how quickly they built this thing and the sales just exploded on this small state highway in Southeastern Oklahoma.

So the opportunity for repeating this is real. We have a lot of sites we have a lot of small towns identified and we're going after those town at a time, in our core markets, and they will continue to produce good results, I'm confident.

So that's the approach in core markets in addition to some conventional development in core markets, but you can see the attack on small towns in particular. In new markets, the challenge might be lack of brand awareness, certainly limited brand penetration. Media levels not where they needed to be in order for someone to say, look, I don't want to go 2 months in the wintertime with very limited media. It makes my -- risk of opening the store a lot tougher. I need to be able to sustain sales and profit. And you haven't presented a picture that I can be confident of that. And by the way, the cost is such that I've got to do $1.4 million, et cetera, in order to make this thing work. So what's the solution? Increase national media to reduce that risk substantially in these markets. Move sales and profits momentum-wise and have initiatives coming behind the experience that we've had initiatives that Omar laid out earlier, that James laid out earlier, that will continue to drive a different level of engagement and a different experience. So we heightened that differentiation versus our competition, focusing on new franchisees in many of these markets and use of the small building prototype, which really will shift the risk altogether. So you're looking at some newer markets where we have done just this in the more recent past. Looking to Southern California, the lower land -- the lower physical facility investment and the first year of sales, with that store similarly near here on Long Island, North Babylon. The cost of the first -- the cost of the, I should say, the non-land investment, first year of sales. The other detail I would give you about North Babylon, it's actually into its third year now. And with the national media increase in calendar 2013, that store is a positive comp versus second year. So as you know, in our business, you get this big rise in the first year, you have negative in the second year inevitably because of the newness has worn off. This store has continued to operate at the very high level in its second year of operation. Now in its third year of operation, it is positive, it is comping positive versus second year. And I'm confident this is no small part because of the national media impact. So strategy to address these by new markets, very much focusing on new folks coming into the system as well. We've announced in the recent past, the redevelopment agreement upstate New York, Rochester, and new development agreement in Southern California, and you will continue to hear about those over time.

In our so-called developing markets, markets that you -- by and large came into our system in the '90s, where we have some brand awareness, some brand market penetration from an outlet standpoint. But not a mature market, not a core market by any means, lots of development potential, but some challenges from a sales and profit momentum standpoint. So what is the nature the challenge been? It's been very much about having sustained growth in sales and profit and make sure that there's sufficient ROI in those markets. The solution, some of that are sounding familiar but there's a different wrinkle here. I think, at our developing markets, we'll take a different approach versus what we do at new markets. These are markets where it did have a good number of stores opened in the '90s, in the earlier part of the last decade. And so our focus discussion earlier about trade dress investment on premises, these are stores, because they didn't go through the retrofit in the last decade, they're going to need slightly more trade dress investment in the next 2 or 3 years. So we have put such a program together and are -- on their early stages of implementation. Increased national media. Worked to drive sales and profits with initiatives. Some lined up earlier but these markets with the modified retrofit. And then, new store development relying on the smaller building prototype. Denver is a market where with the new media looking to this particularly impact as the fiscal year had progressed. But this fiscal year, 2013, positive comps, Tampa, Florida, positive comps as well. Virginia Beach, Virginia, positive comps. And the new media continues to help this. So a very positive momentum in some of these developing markets. Then, in turn, we'll be focusing on for new store development with a strategy that is appropriate for that market type and the effect and the aggregate to get the pipeline moving, you saw on that earlier slide, get the pipeline moving in a positive fashion and begin to build that development activity versus prior years.

The opportunity from a market penetration standpoint is a very real one. Our south central states, of course, have a high degree of market penetration but the opportunity for continuing to grow that market penetration in our core states is real because of this reduce-sized building and smaller town approach. So really, in all types of markets, we believe we have development capability that we weren't seeing 2 and 3 years ago, and we are now actively working to sell area development agreements in new markets with new franchisees and actively working with existing franchisees in developing markets for this investment, a series of investments we talked about. And we are actively working at core markets for the identification of small secondary markets, and then pursuing those actively. We're not just simply identifying them and then talking someone, do you want to do this? We are actively pursuing those small towns, including offering them to franchisees, offering them to existing operators in our system who may operate one store. But if they are not a franchisee, to become a single unit operator, we're taking a very different much more aggressive approach in these smaller towns than we have historically.

So as you think about the unit growth rate and think about this over the next several fiscal years, just looking at it from a calendar year standpoint because I think this how you will start seeing the rate of this pickup when we turn this on and start focusing on it, there is an 18 to 24-month period before we really start seeing big impact from this focus just because of the development timeline. But looking at calender '14, you will see us focusing on our core markets with the strategy I laid out here just a few moments ago.

With new markets, you will see us working to sell those to existing or new franchisees and we are in the midst of that now, and you saw one announced last year week for Rochester. The same thing then for moving to newer markets, where we do not have market penetration, going to those, doing the planning for them and begin marketing greenfield markets, you might say. The developing markets will come along slightly later, because the objective with those is to go back in and do the capital investment by store, get sales momentum going in those stores, get profit momentum going, and then look to, with our existing operators in those markets or new folks if we need to, get new development going in those core markets.

So one of the things that you should take away from this discussion, particularly if you compare a developing market to a core market, or developing market to a new market, we have to ask a question, and I think you should be thinking about the question in this context, is the company, is the brand at a point in time and a place, where they can look to their operators across the system and say, are you willing to commit additional capital for expansion of the brand to grow sales and profitability in the business in which you operate today? Now that understandably takes the first form of new store development. But in fact, our franchisees are also looking at significant development in the next several years as a very -- various initiatives that you've seen today, POS, POPS, the capital investment that they're going to be putting in place in those stores is the -- is and will be significant over the next several years. One of the questions that comes up informally, and actually, I think it may have come up expressively in one of the earlier question-and-answer sessions was, does the pipeline of capital investment that you're asking franchisee to look at, will this have a negative impact on new store development? So the answer is not a yes and no sort of answers you might expect. Why do I say -- why do I answer that, that way? Well, because the periods I've been with the company, I've watched these same cycles in our business before. And so what do I look to, to answer that. The late '90s, we asked the franchisees to do a capital infusion or capital investment in their existing stores in the form of a retrofit. Simultaneously, with that retrofit, we also put up new menus, we brought in our frozen favorites program. We asked our franchisees to start spending more money on marketing. What we saw was, with the retrofit, with the marketing of frozen, we found -- we saw average unit volume grow dramatically and we saw average unit of sales grow dramatically in '97, '98, '99. In about a 3.5-year period, we retrofitted the entire system. All capital expenditures to the individual operator. So you got to ask yourself, well, did that slow new store development? The answer was no. The increased performance at the store level and the growth and profitability, in fact, assisted in the explosion of new store development. So it may seem counterintuitive, i.e. they've got to put money out, won't it slow them elsewhere. It may seem counterintuitive. But the fact is, as these initiatives work, the franchisee has a new problem. What am I going to do with all this cash. And so the consequence is they're having success with their existing business, they turn back around and put it into the business, and on that case, in the late '90s, in the form of new store development. Same thing happened until the recession was existing in new franchisees. The rollout of a new retrofit. The rollout of POPS. The roll out -- no, not POPS, PAYS. The rollout of our credit card payment system. The national media shift to the earlier part of the last decade. Store level sales up. Store level profits up. And though they were spending money on a retrofit and technology, i.e. the PAYS system. What we saw was new store development pick up dramatically. Now that's no guarantee of what's going to happen in the next several years. What I'm trying to say to you is we do -- we have communicated to our franchisees, this is what you're going to need to spend. We've laid that out for them with our franchise leadership quite explicitly. And we've also told them, with this trade dress elements, the POPS and some deferred maintenance that they would spend as part of this process. We've also said to them, we will work with you for that. In essence to be some deferred maintenance, you're going to have to do some new menu houses anyway, across the system, they've kind of run their time. You're going to have to do something about credit card payment processes anyway. So they're looking at spending for those replacements, what, $30,000 to $40,000 to replace those elements, even if we didn't do POPS. And even if we weren't requiring other elements of capital investment, they're going to spend $30,000, $40,000 to replace those things in the next couple of years regardless. So as we come to them and say, for an amount less than 1x annual profit, and $30,000 or $40,000 you're going to spend anyway, come in with POPS that will be a gift that keeps on giving with the program element that will pay off not just year one but different kinds of engagement the entire ICE, Integrated Customer Engagement initiative, the gift that keeps on giving, not onetime with a retrofit but different kind of engagement on a sustained basis for less than 1 year's profit, $30,000 to $40,000 you're going to spend anyway, the whole thing is $100,000. This is not the impediment that it may appear at the outset. And the history proves us right and these things do work. In fact, it will mean operators across the system to have more cash and look back to the brand for continuing growth to the business. So we'll see how that plays out over the next several years. And we'll be talking to those operators about growth of their business as they have increased levels of success.

When we look at the incremental store commitments that have occurred in the last couple of years, these are '12 actual, '13, '14 projected, the pace of things that we see what we project for fiscal '14, fiscal '13 is almost over, these are incremental store commitments to anything that was already in the pipeline. This is existing or new franchisees that may commit to one store or they may commit to multiple stores. So this isn't looking to agreements or type of agreements, these are store -- incremental store commitments that occurred during that period of time. And the takeaway you should get here, the takeaway you should have here is as these initiatives come down to the pipe and you get better sales, better profitability, better awareness of the small building prototype, better awareness of the focus on type of development by market, more awareness with the growth in media -- not -- in the media allocation and the affect in terms of customer awareness of advertising. What you should takeaway here is growing the level of commitment of new and existing franchisees incremental to the pipeline. So I can't stand here today and say to you, this is the number of stores that will open this same quarter a year from now. We will put together and have the plan to do so but my objective today is to say to you, the foundation is different, the process is different, the confidence level is different, the pipeline is beginning to build, the staffing we put in place is different and those things should continue to have very positive impact as we have the focus, and the focus isn't just about growing more sales, the growth -- the focus is on growing the brand, so the media piece continues to have the same impact. As we know, when I look at a market, our biggest single market like, Dallas Texas, I know we've got to grow that system marketing fund to help Dallas grow. And that wasn't true 5 and 10 years ago. So the importance and the upside -- so Joe, I see you're turning your head a little bit, it was partly true 5 and 10 years ago. But 5 and 10 years ago, Dallas could just opened some more stores. Dallas could say, we're going to take our contribution rate from 3 to 4, et cetera. But this is the biggest payoff they're getting. The shift in dollars to the national cable. And now we need to grow that from a systemwide standpoint. The need is there but the opportunity is enormous. So this is why we're focusing on this because it will have an enormously positive impact on our business and the pipeline is shifting, I think, in a very positive way to help drive that.

So that's the picture that I think is very different versus 12 and 18 months ago. And in terms of the production of this and getting the 2% to 3% growth rate, you get to wait and see it over time and it builds your confidence that the numbers will pick up and the questions will be fewer 12 and 24 months from now than they were last Monday.

So I'm happy to -- I think at this point, that's my last slide in this section. I'm happy to pause for a minute and answer any questions. And then, I'll turn it over to Steve Vaughan. John?

John S. Glass - Morgan Stanley, Research Division

First, just to make sure I understand the numbers you're talking about, so on the 2% of the franchise system would be something like 60 stores next year and maybe as many as 100 stores a year in '15, if that -- I just want to make sure that math is right. Is that a net or a gross number you're thinking about?

J. Clifford Hudson

Well, the number in terms of commitment is gross, not net, one. Two, even as you compare -- let's say, we opened 30 stores and we closed 30 stores, that can have the appearance of being a net nothing. But in fact, the average sales that we get from a new store versus when we close is almost a 2:1 ratio. So if there is net no difference in store count, we actually come out ahead with higher sales in the new stores opened and a newer license agreement with a higher royalty rate. So that's a little bit beyond your question you're asking. But even a neutral store count piece actually benefits us as a franchisor and benefits the system.

John S. Glass - Morgan Stanley, Research Division

Okay. And then, just following up, what are the -- some of the promises of Sonic over time was that you had Florida, you had Southern California, markets that were naturally amenable to the brand, right, with warm weather? And its development -- so can you talk about what the impediments are in developing those markets? Are those focuses in this next round at all, you talked about San Diego, but can you talk about those more broadly?

J. Clifford Hudson

Yes. Yes. So the fact is, those east and west markets, we do have more focus on those now than we had 10 years ago. The national cable is helping us very significantly. Also, the quality of some of the people we've brought to the system more recently are -- and by that, I mean, last several years, not 12 months, I think, is playing a very positive role there. California, in particular, is a very difficult place to develop. And so we have some strong franchise groups there, but both the expense and the trouble, I mean, that they -- so we go to Valliant, Oklahoma and that store opens -- we go -- we check that often, they had that store open in 90 days. Now, people own the land but they moved out. What we've got, I mean, we got Southern California franchisees that works for 3 years to get a store opened. And it is an extraordinary challenge in many markets. I'm not saying some elements of that aren't valuable and valid. I'm not questioning the philosophy behind it and some of the practical impact.

So historically, we could have done a better job of filling out the market from a franchisee candidate standpoint, but the difference, I think, in place -- is very much in place now is the smaller building element reducing the risk of getting into the business and the national media really should be a real game changer. And as a matter of fact, that's -- these things have contributed to the more recent commitment that you've seen some publicity come out on Southern California development. So we will focus on the next several years -- those are tough, they're tough markets, but we will focus on it for continued new store development in a way we weren't 10 years ago.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Jeff Bernstein. Just 2 things, one to follow-up on that question. So that I know you talked over the past 5 years, those 450-unit openings. It sounds like that's been a gross number and you've perhaps closed 200 and some odd so it nets out to be a couple of hundred units over the past 5 years. Is that a reasonable assumption for how we should think about the next -- so if you're saying getting from 2% to 3% unit growth, that sounds like a gross number. So if you've got the 3% on 3,000, you'd be pushing 100 stores a year. Should we be assuming half of those -- that it gets half offset and then the net is only 50? I mean I understand what you're saying about one-for-one swap is still good for SONIC, in terms of the number of boxes, should we be assuming that closure rate is the same is that going to go down and this is going up and, therefore, it gets better and better?

J. Clifford Hudson

Yes. Go ahead, Steve, jump in. He will come on. He should -- can we get the mic on. Okay, there we go.

Stephen C. Vaughan

Jeffrey, one thing I would add is just during the recession, I think the closure rate, even though it, for SONIC, never got inordinately high. As you would expect, the closure rate was higher than we would expect going forward as the overall economy improves. So one of the points I would make is that the closure rate we experienced the last 5 years, I wouldn't expect that to be the case for the next 5 years. I expect it to be lower.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Okay, but the 2% to 3% number, that's purely a growth offset by whatever might the closure rate be? And you don't have any insights into 20-year terms coming due, like what you're estimate might be for closures?

Stephen C. Vaughan

Well, we think it will be lower than it has been in the last 5 years, which, it's been around 1% or probably be in that range, maybe on the lower end of that.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Got it. And, Cliff, you had mentioned -- well, on the slide you showed earlier, it looked like you're now 88% franchised. That was up, I guess, a jump meaningfully from what was 80% back in '08. It seems like that was the path you had taken and your peers are doing the same thing. I was wondering over the next 5 years, I think with all the work you're doing here, some people might say hold onto your company-operated stores or own more company-operated stores versus some of your peers going the other way, so which is it?

J. Clifford Hudson

Yes. Well, Omar and Jeff Carper and a number of folks here are focusing and a lot of folks are focusing on our owned stores have done a very good job of getting that return to average unit volume that is something more similar to what we are seeing before the recession. With the investments that we're talking about making, by and large, we should get a very positive impact on our owned stores in the next 1, well, next 1, 2 or 3 years. So we do not have a view that says, look 88% is unnecessarily high, 12% is unnecessarily high for company-owned stores, let's bring that further down. The job that you saw in terms of the reduction in company stores increasing in franchise in the early part of the recession really was mostly because of the a couple of specific transactions in which we sold markets and groups of stores for a whole variety of reasons. So we don't have the perspective going forward to substantially change that. However, the larger part of the pipeline that you'll see going forward in terms of signing up new franchisees as an example. The pipeline for new store development will be, substantially, franchise development. We have some company development occurring today, these are in core markets and it is limited. So the intention is with a pipeline that we are building, it will be, well, greatest share of it and over time, more than 90% of it, will be franchised. And so you may see that percentage shift not radically and not materially not because of a transaction, but just because of the mix shift over time.

Yes, Joe?

Unknown Analyst

A question. Could you talk about the experience in the new markets for the last 4, 5 years. When those franchisees open, they probably have some new development commitments. Have they executed against those commitments over the last 4 or 5 years in the new markets?

J. Clifford Hudson

So to a considerable degree, deals signed in the '03, '04, '05 timeframe, new franchisees, new markets. So in the '02 to '04 timeframe, we did shift dollars somewhat to national media. So let's say in '02, I'm saying in '02, maybe 1/4 of our advertising was national media and 3/4 have been local. By '04 it was 50-50. And so as we increased then the amount of advertising on national television, '04, '05, '06 -- '03, '04, '05, it was growing from '02 to '04 than national is growing. So '04 and '05 we started seeing a lot more new development agreements. So '05, '06, '07, '08 we got a fair amount of number -- new openings in new markets with new franchisees. So 2 things occurring there. One is, in second or third year falloff of some sales and profitability and some insecurity, specific as the SONIC, but also the insecurity of the broader economic picture for the country. In fact, we saw many defaults, additional store openings by those franchisees with area development agreements in new markets. That being said, we have also a number of very good success stories and continuing success stories in our highest volume openings in the history of our system have occurred in new markets, New York, Massachusetts, and in those cases, continue to operate successfully at very high levels and sufficient profitability levels with good ROI. My suggestion, Joe, would be that this national media that we have at this point, now more than $100 million being spent on national media, should be a so, so maybe here's a different way to say this, looking at a specific store, I think I said this earlier, actually, the Long Island store, North Babylon, third year of operations -- the second year, huge opening volume, second year falling -- first year, big opening volume; second year, falling off, a very common trend, but then the question for the franchisee is do I continue down after it? Now into the third year of operation, the 25th, 26th, 27th month, positive comps, single-digit but nice positive comps versus second year. So the dynamic you're suggesting has been problematic for new store developments because of the challenges of those new markets and yet, I think the experience that we're seeing now should create more optimism, smaller building, less expensive to get into it. 12 months out of the year, we say to our new franchisees in new markets, you will get 12 months out of the year of advertising. Every quarter you'll get multiple daypart promotion every quarter. And so the risk for you is substantially different versus 3 years ago. And so we'll regenerate that pipeline. I answered more than you asked, but I think I answered your question. We've seen -- versus what we've signed back in '04 and '05, we have seen openings and defaults in terms of sustained openings.

Unknown Analyst

And just sort of somewhat related question, I guess. Have you considered doing company investments to see markets with the intent to franchise them or re-franchise them?

J. Clifford Hudson

So we are doing company investment in a seed sort of fashion, but it differs perhaps from what you described. As an example, that smaller building in the smaller markets, we did the first of those. Secondly, to find, to look at markets in our core states that are secondary markets, we've identified those markets and we're moving very aggressively and in some cases, talking to franchisees about buying the store, but we're going ahead and acquiring the property and move it. Now this is not a widespread practice on development, generally, but it is intended to say to our franchisees, we believe in this initiative, we see that the smaller building works and we're picking markets and we're moving against it. I think a week -- I think this Monday, we opened, and we intend to operate this one, is it Jamestown? Jamestown, Tennessee, which is -- what's the population of Jamestown? Really? 1,200? I'm sure it's a state highway. So smaller buildings, smaller lot, the whole bit, open Monday. I probably shouldn't tell it. The sales are, well, it could be a very good return on investment in its first year better than any other small building stuff I've shown you today. So that's one we own though. And so it's to go into a market in Tennessee and say to our franchisees, let's get this going, we're putting our money up, you need to get going. And we'll start selecting the size and building to kind of encourage that behavior. We've not done that in any new markets and really don't currently have an intent to do so.

Unknown Analyst

Cliff, question about that slide that you have up right now with the store commitments. I just want understand it. Is that then saying you had -- you left FY '12 with 49 store commitments and you forecast to leave FY '13 with 75 store commitments? Or are those the ones that you signed up that were supposed to be opened in those calendar years?

J. Clifford Hudson

I think the answer is neither, either one of your scenarios. These are incremental store commitments that may have been a multiunit agreement over a multiyear implementation fees or it may have been someone coming in and saying, look, next year, I want this small town and that small state and I'll open it by April. But in each case, by year, they are the incremental store commitments and they are -- there's no definition to this in terms of time. Could be 1 year for a single store, could be 2 years for a single store and it could be a 5-store deal, that's a 5-year commitment. But that's -- what we're trying to show you is the beginning of the building of the pipeline in terms of franchisees committing to incremental sites year-by-year.

Unknown Analyst

Incremental sites? Or is that the pipeline?

J. Clifford Hudson

No, it's not the pipeline. It's incremental sites.

Unknown Analyst

So if I think of the mid-30 number that you're guiding to sort of FY '13 or 30 stores call it, that 49 is what supports and drives it?

J. Clifford Hudson

For?

Unknown Analyst

For FY '13?

J. Clifford Hudson

Well, some for this year and/or for the picture I've showed you earlier, the fourth quarter, first quarter, a step up. Some of that will be in those numbers, yes.

Unknown Analyst

Okay. And then just I'm trying to understand how to model sort of the royalty rate and looking at the success of the return, it's great for the franchisee of the smaller box. But if you start getting stores coming in at $1.2 million or a little lower, they're great returns, but they're coming in at lower volumes, how should we think about that as a -- with your ascending royalty rate, that's perhaps a lower volume than maybe downtown Dallas rolling in? Is the newer version commitment or the newer royalty contract that they signed the franchise contract offset and is a positive to the overall mix of your $3.8 million, $3.7 million royalty or is it adjoining on it?

J. Clifford Hudson

Well, I may give you one initial answer and let -- Steve is about a jump in on that in his presentation that will come next in terms of the functionality -- a function of the royalty agreement. But I guess the first thing that I would offer, Matt, would be if the smaller building in the lower risk development yields development that would not have occurred otherwise, it's a win for the brand, it's a win for the franchisor, it's a win for the investor. And I do believe that, that's going to happen a lot. So I mean, the very reason we're doing it is to encourage -- is to reverse the rate of new store development. So beyond that, in terms of impact, I'll let Steve, an hour later, to get into the...

Stephen C. Vaughan

Well I would just say, we haven't seen these town openings be below our system average. So I think what you'll see is because they are opening up under the current form of license agreement, they would still be -- even if they didn't open up to 1.3 million, 1.4 million that the average new store opens up at, if they open up at 1.1 million, it will still be accreted to the overall royalty rate.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

I just wanted to ask a question about the small town sites you talked about. I think they were in the core markets. I know there was a projection of first-year sales, can you tell us how long they have been opened so we can ground the assessment of that projection?

J. Clifford Hudson

You want to talk those by site or...

Stephen C. Vaughan

Yes. Shattuck, Oklahoma, the first one that Cliff showed, opened up last summer, so it's got, I think, 10 or 11 months of sales. So it's pretty much actual sales figure. The second store, Valliant, I believe, opened up late fall or winter. So it's been open about 6 or 7 months. So we -- but what we did as we looked at those first year numbers, we took their current run rate, annualized out what we look at the -- we project the first 12 months sales. So it's not as if we're taking the first month and then multiplying it times 12. It's a number that, I think, is probably pretty sustainable.

J. Clifford Hudson

The first one, we opened has now been opened 1.5 years to 2 years. The first small...

Stephen C. Vaughan

The one in [indiscernible] Oklahoma that the company actually opened.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Okay. And then the second part, in the developing markets, you showed comps being up in 3 different markets. I'm wondering, I just don't know the store count off the top of my head, that they would be as a percentage of total. So if I'm thinking about the comp and there's 3 developing markets that are positive above where the numbers are. What's going on in other markets that are flat to down?

J. Clifford Hudson

Well, the developing markets, the picture for developing markets, first of all, developing markets make up 20% of the sales of the system, so even if they are ahead of the system, they're -- it's about -- it's disproportionately small impact on system same-store sales of systemwide sales, either one. But -- so you're talking about a market where we've had some brand presence for 15 years, maybe more. So a market where we've had some brand presence but not good market penetration. So the usage is not like a core market. So when you come on with this, it may not be the question you're asking, but when some of you come on with a national cable, as we have this calendar year, with the degree that we have, the consequence for a developing market, in some ways, is it's the best. In terms of impact, it's the best scenario because it's a lower AUV and -- but you also have some presence in the marketplace. And so as you start getting greater presence because of the advertising, the developing markets are going to disproportionately positive impact versus core and new markets. Now, what the challenge is -- I mean, I guess, I shouldn't view that as a challenge, they're all getting positive impact. And so depending on the period of time you look at, okay, not March, but the period of time, April, May, June, as this is taking hold more and the weight step up and you get the cumulative effect of 6 months of the national advertising as opposed to 3 months and so on. As we've moved into those periods -- so if a core market has a higher AUV, its percentage comp may not be as high, but it is definitely benefiting from the national cable piece. And depending on the time period you look at, it's also been positive. But not as -- perhaps not as positive as the selected developing market, which has a lower AUV, but is getting big benefit from this sudden infusion of advertising dollars. So it doesn't necessarily mean that somebody's got to be negative, but the waiting, for smaller AUV, the waiting in the system is different. So I don't know if I'm answering your question. It doesn't mean it's always got to be negative in order for the percentage for the system to be smaller.

Stephen C. Vaughan

Well, and just to build on that, Nicole. Our developing markets have actually been our strong -- as the 3 market types to push showed, they've been the strongest performing market type, really, over the last 18 months or so. So I think you can take some comfort in the fact that while they may have a lower AUV, the comp percentage has actually been higher than the other 2 market types.

J. Clifford Hudson

So the, I mean, in some ways that might be a concern. But in fact, it's a great story, because this is an opportunity: One, to get them to invest back in the existing business; and two, either existing franchisees or new franchisees to that market viewing it as a completely different risk versus years ago. Meaning, new store -- development of a new store in that market.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Do you have any sense of or what proportion of your franchisees are multi-concept operators? And do you have any sense of, over the last couple of years, as other QSRs have pretty aggressively been re-franchising, if they may have been diverting kind of capital expenditures from building new units to just opportunistic acquisitions of other concepts?

J. Clifford Hudson

Yes, that last part of your question in terms of impact on where they're looking at this is, I don't have any sense that, that's had a significant impact on our franchisees. The first part of your question, the historical base of our franchisees, historical base of our primary franchisee is multiunit operator, primarily in the SONIC business, and not, oftentimes, really not even in other business, much less a noncompetitive retail enterprise. So for the largest portion of our franchisees, the dynamic you've described doesn't come into play. More recently, some franchisees have other concepts, but I have to say off the top of my head, I don't really hear about that dynamic a lot. Not very often.

Unknown Analyst

What is the average age of your franchisees?

J. Clifford Hudson

Well, that's a good question. That's a real good -- that's almost a funny question, because to the extent somebody, we had a huge growth, I mean as the industry, we have a huge growth in our system in the 70s, in particular, system for mid-70s to early 80s was like quadrupled, 250 to 1,000 stores. So that means we've got a lot of franchisees that, if they're in their 30s, in the late 70s, they're not in their 30s anymore. So an aging population and yet at the same time. So Saturday, talking to one of our franchisees. His dad was one of the founders of our company. His dad is no longer living but he's in his early 50s and his 25-year-old son is in the business and his 27-year-old daughter's in the business. So age is, that's a funny -- the chair of our franchise advisory council is now 70, but his 40-year-old son is in the business and his 42-year-old daughter's in the business. So I don't know, I don't know how to answer your question. I mean, to the extent you've got an older population, the question is, do you have a second generation involved and, in some cases, we have third generations involved. So I think the challenge for us might be, over the next 5 years, are to those who don't have a second generation involved and what do -- how do we assist with some change in ownership and change in control to make sure there's not disruption of the business. This is something we are focused on and age, without second generation or third generation, is a big criteria for us focusing on. But I want to tell you, I should take your question and give you folks a positive about that. The number of successful franchisees we have in our system that badly want to acquire some more SONIC Drive-Ins, we got a bunch of those. So finding a buyer [indiscernible] is not going to be a problem. You have to figure out, what you're going to do? Go to a lot of negotiations and it's a life, it's a life cycle as well as the business cycle, so it's a painful process, but we're not short on franchisees that want to grow through acquisition. We are not short on that at all. That should .

[Audio Gap]

Okay, I'll turn it over to Steve Vaughan for the next presentation. You want the remote? Okay. Here, let me give my water bottle out there and put it down below.

Stephen C. Vaughan

Why don't we -- I'll just stay over here. Is this on? Okay. We'll go with this slide. I'd like to give a quick update on our ascending royalty rate and -- is this working now? Okay. And our use of cash. First of all, as Cliff just described, we are primarily a franchising business, so 88% franchised. That does provide us with a very stable and sustainable cash flow stream. We love the franchising business. The one thing that's unique about SONIC, and I'm going to give you some quantification of this, is our ascending royalty rate and the fact that, that adds an extra layer of growth on our earnings per share growth component. We have a lot of flexibility with our CapEx because of the 88% franchised nature of the business, throw off a lot of cash that allows us to fund CapEx as we decide to invest in initiatives out of our operating cash flow. And in other times, we may choose to take that free cash flow and invest it back in things like buying back stock to help drive earnings per share.

I want to talk little bit about the franchisee base, and really, I think is one of the huge assets for SONIC. Our top 10 franchisees have about 30 years of tenure with the brand. As Cliff mentioned, a lot of them do have second and, in some cases, third-generation coming on in the management of those groups. But -- so that experience with the brand and, really, just the well-capitalized nature of those franchisees, is pretty big. And I think the other kind of comfort you can take away is that group of 10 franchisees, over the last 6 years, opened 119 new units. So they are still engaged and growing within the brand.

The other areas that -- the top 100 franchisees operate about 81% of our units. So we have down here that the average franchisee operates 9 drive-ins, that we do focus on multiunit operators, that's really the kind of the core of SONIC's franchising business. So if you look at those top 100 that own 80% of the units, they have, on average, about 25 units. So again, from a capitalization perspective, from the infrastructure needed to grow and manage that business, we have a very strong franchisee base.

I want to talk little bit about the ascending royalty rate. I know there have been a lot of questions about that. James laid out the initiatives that we have to drive our same-store sales in that low single-digit range, which we've been targeting over time. So what we wanted to show you here is, based on that same-store sales growth, some of the development incentives that we have expiring from 2014 to 2017 and, recall back in '09, whenever we were kind of the depths of the recession, we began offering some incentives that basically gave our franchisees a 5-year royalty abatement. Those begin expiring in 2014. So we'll be getting that as a tailwind as they roll off. And then finally, the big license conversion, I've got a little more detail on that, but based on these factors here, low single-digit comps, the roll off of the incentives and the conversion that I'll give you little more detail on, we would expect to see our royalty rate grow by about 6 basis points from 13 to 14 and then a nice jump in 2015 with that license conversion of about 15 basis points. So by the end of 2015, we'd be close to the 4% overall royalty rate.

A little more detail on that license conversion. About 250 of those 850 drive-ins are in this category. It's called the number 5 and 5.2, so they're paying an average royalty rate of about 3.3%. Those agreements actually will renew to the newest form of license agreements, so the number 7. And they will begin paying 4.5%. Those units tend to be higher volumes than average units. So I know we've had some questions about what's the risk that these franchisees just walk away, they don't want to pay this higher rate. I think it comes from a couple of areas. Number 1, we primarily have multiunit operators. So the idea that you're going to -- you're operating 25 stores and you're going to just close 5 stores and walk away is very unlikely, and these tend to be very high-performing stores. So I think a high degree of confidence that you'll see a very high renewal rate. The other group of about 600 drive-ins on this conversion are the 5.5s. Those automatically rollover to a number 6 agreement. So about a 40-basis-point increase in rate on those drive-ins. And they are not coming out to the end of their term. Those are actually by contract that they executed back in 2007. They will roll over to this newer form of agreement. So I think, from our perspective, this will be combined roughly $5 million of revenue and it's pretty assured, I mean, relatively assured. So from a modeling perspective, you can take a lot of comfort out of the fact that this is going to happen in 2015.

I also want to talk little bit -- so you heard the initiatives that James talked about with pops/ice and then also with the POS. As we have done many times in the history of the company, we will take the lead in investing in these initiatives and demonstrate to our franchisees that they do work and put our capital to work upfront. So in 2013, I know many of you asked questions about why did that CapEx number go up? We are funding some of the pops testing right now, the development of pops and some of the development of POS. So that $37 million for this year includes some of that investment that we're making.

2014 will be a big investment year for our company drive-ins. I think from what we've laid out and shown you, we're very excited about that, but it will utilize pretty much the majority of our operating free cash flow that will be utilized in 2014 for these initiatives. We do expect to have very strong results in these initiatives. They should drive an EBITDA growth disproportionate to a year when we'd have lower CapEx. But we do expect to really, during 2014, almost double the amount of CapEx. Following 2014, you would expect to see that go back down to more of a level that we've had historically of $25 million to $30 million. But 2014 is a year of investment and, I think, a very exciting year for the company-owned group of stores.

So just talking a little bit more about in depth, the free cash flow and how we plan to use our cash. So this year, we'll generate $45 million to $50 million of free cash flow. We have reinvested about $35 million of that in buying back stock. Today, $35 million to $36 million. We do have an additional $18 million or so of share repurchase authorization. You may recall we had $40 million when we started out the year authorized, bumped that up to $55 million in August. So we still have that option on the table. And then in 2014, as I mentioned, we do expect to utilize our operating cash flow to fund these technology initiatives. As of the end of May, our trailing 12-month debt to EBITDA was about 3.2x, so we are nearing that 3x target level that we set for our debt to EBITDA figure. And I think that we had kind of laid that out to try to achieve that by 2014, very much on track to hit that date or sooner. From a share repurchase perspective, if you go back over the last, really, 21 months, we had bought back 20% -- or sorry 12% of our stock, $66 million of stock representing 12% of our outstanding shares as of the beginning of the time period. So, and again, that's been utilized at the same time we've been funding our CapEx and paying down debt. So I think from a cash flow perspective, very strong free cash flow.

And then finally, in case you missed it, on Monday morning, we did announce that we signed a commitment letter to refinance the $155 million prepayable portion of our debt. That existing debt today has a 5.4% interest rate, the new debt will have a 3.75% interest rate. So we'll save somewhere in the neighborhood of $2 million to $2.5 million of growth interest expense from that refinancing. In the fourth quarter, we will take a one-time charge related to the extinguishment of the old debt but this will be very accretive to earnings going forward. We are very excited about that.

I think that's kind of it for free cash flow and ascending royalty rate. Are there any questions that anyone has about that?

Stephen C. Vaughan

No questions. Okay. I thought somebody should we had a question. Matt?

Unknown Analyst

Just to clarify, it looks like then you're implying that you're suspending the share repurchase for FY '14 given the CapEx, and I would assume you're expecting operating cash flow to grow, but probably not to grow beyond really that CapEx number?

Stephen C. Vaughan

Well, we are not implying that, no. What we're seeing is basically we would use all of our operating cash flow in that CapEx. We do have about $50 million of cash on our balance sheet today, and so we still have that as an opportunity to deploy that cash in addition to that. As we reach our target of 3x debt to EBITDA, we will revisit what the appropriate debt level is. So I would not take that away that we won't be doing any share repurchases in 2014.

Unknown Analyst

Steve, it's John. I just want to make sure I understand your CapEx has this bubble in '14. You're saying back to $25 million to $30 million in '15 and beyond, maybe you can just -- why to just contain to that 1 year, everything gets done? And back in the years of $25 million to $30 million, you're only developing 1 or 2 or 3 company stores a year. So is that idea that since really no company development going forward? It's a little bit different about Cliff was talking, when you say you're just trying to seed some market, I just wanted to clarify that.

Stephen C. Vaughan

So a couple of things. One, we talked about having the company be a very small portion of our growth going forward will primarily be franchisee driven. We may end up doing 3 to 5 company units. A lot of it will really depend upon return on investment. Whether that number's $25 million or $30 million, it will -- the primary reason for the decline will be the investments in POS and pops, that will probably be in the neighborhood, somewhere between $30 million and $40 million depending on how many units we end up completing this year. So that's really the drop down. As we get into 2015 and '16 to the extent we decide to revise our business model, we could do that. But at this point in time, I would expect to see it back in the $25 million to $30 million range.

Unknown Analyst

And then what's your level of commitment from a shareholder return standpoint? Is all the excess cash then go right back to shareholders then buyback? Is that the policy we'll say in '15 and beyond? I know this is long range, but were talking about the long-range here. What's the role of the dividend play in that? How do you think about your flexibility going forward after this 1 year?

Stephen C. Vaughan

Yes. So currently, our strategy is really just to keep flexibility in terms of how we go about that. As you know, we don't have a dividend that we pay out. We've used that with share repurchases. I think one of the big benefits of having that flexibility is when initiatives like pops and POS come along, it gives us the kind of the maximum flexibility to fund those. We will continue to look to returning cash to shareholders through share buybacks going forward. I don't really want to give you a set amount, because I think it will really dependent our business about evolves take. Our #1 priority is always to reinvest back into the business, to the extent we can get a return on investment. So that will be the #1 priority and then share repurchases after that. Yes, Joe?

Unknown Analyst

Steve, a couple of questions on the CapEx. So the $69 million, does that anticipate that -- so what does it anticipate from a POS roll out in the company units and a pops roll out in the company units? At the end of fiscal '14, how much of that will be competed for each program?

Stephen C. Vaughan

Our plan would be to have that 100% rolled out to company drive-ins by the end of FY '14.

Unknown Analyst

So pops as well as the POS.

Stephen C. Vaughan

Pops and POS, yes.

Unknown Analyst

And then just thinking about your CapEx from a franchisee's perspective, what kind of capital commitment on a per drive-in basis would a franchisee have to make to kind of get to the same stage as the company stores will be at end of fiscal '14?

Stephen C. Vaughan

So on a per-store basis, we're estimating that the pops/kind of refreshing will be about $100,000. The POS will be $25,000 to $30,000. So you're looking at somewhere in the neighborhood of $125,000 to $130,000 is what we're assuming on our company drive-ins. As Cliff mentioned, in some cases, in like the developing market, where maybe they didn't do the last retrofit, that may be a little bit higher. If the store is a newer store, it may be a little bit lower. But that's kind of the average that we're assuming.

Stephen C. Vaughan

Nicole?

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Why is 3x leverage the right number?

Stephen C. Vaughan

Well, it's a number that we're comfortable with. We -- when you go back to about 5 or 6 years ago, we had higher leverage level, right? We were at about 4x to 4.5x leverage because of the free cash flow that we generate, we don't believe we need to be at 1x or 1.5x leveraged. We consistently evaluate this, talk about it as a management team with our board, but have decided that 3x is kind of a level that gives us the flexibility to do some other things from a CapEx perspective as it comes along. But it also appropriately utilizes the debt markets, which, as you know, are very favorable right now.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

I guess that's the context that was coming from some of your peers that are as franchised are more, are taking on more leverage, is that something you would consider?

Stephen C. Vaughan

It's something we definitely look at from time to time. It's not -- our view is, we want to have maximum flexibility to be able to do the things for the brand, to keep our brand healthy and growing. The debt markets won't always be as favorable as they are today and we feel like the 3x is kind of the right balance between maybe too much leverage and not enough leverage.

Any other questions? John, you have a question?

Unknown Analyst

Trying to tie this back to your 14% to 20% long-term earnings growth rate. The biggest piece of that free cash flow, the 4% to 5%, which we don't have. So it probably impacts next year as well as the year after since you can't buy stock back next year and that would impact. So do you think it will be below that 14% to 20% over the next 2 years or do you think the margin benefits you're going to get from some of the things you're doing now will kind of be over and then, therefore, it will be still in that 14% to 20% range?

Stephen C. Vaughan

No, I actually -- I think the 14% to 20% range is applicable for '14, '15 and beyond and there's a couple of reasons. One, we have $50 billion of cash on our balance sheet today, so that's going to be beneficial. We do have, in 2014, the tailwind of the refinancing that I would probably put that in the use of free cash bucket. It's really kind of a capital structure contribution to earnings per share growth. So again, I think, based on the things we've laid out today, there should be high confidence that, that 14% to 20% is achievable.

Any other questions? Okay. Are we...

Claudia San Pedro

I think there's one more question.

Stephen C. Vaughan

Another question, okay.

Unknown Analyst

I just want to see if you have any opportunities for additional asset sales, real estate sales to generate cash in the future?

Stephen C. Vaughan

Well, we did have in January or early in December, we had the franchisee that bought some real estate underlying some drive-ins that he was leasing from us that we had we franchised in '09. I guess that could happen prospectively. Our -- with the cash that we're throwing off, we're not actively looking to go out and raise additional cash through asset sales. Only to the extent that if that were to come along opportunistically, to help us grow the brand, we would consider it, but it's not that we're actively pursuing.

Yes, Matt?

Unknown Analyst

Would you do any financing for that 125k that might be burdened on the franchise side?

Stephen C. Vaughan

You know what, we would consider what we are actually doing is utilizing our balance sheet to help make sure that happens not in the form of direct financing, but what we did back in the last retrofit and the one prior to that is use some form of a partial guarantee to make sure that our franchisees do have access to capital and can make that happen. So we will do that again this time around, just not a direct financing.

All right, anything else? Okay.

Claudia San Pedro

Well, will that, I would say a few words before we turn it back over to Cliff for the summary. A couple of things that you've heard of now or that you've seen and heard from our senior management team is, one, from a unit growth perspective, what gives us the confidence that we will get back to 2% to 3% system growth. And that's not only based on commitments, but what causes those commitments? So improved same-store sales, improved profits, technology initiatives to drive the business going forward that we can engage the consumer in a unique way that no one else can. And so as we think about growing the brand for our franchisees, that gives them the confidence that they've got a great brand, not only for today, but for tomorrow. And as Cliff said, I think what's interesting about this retrofit is, again, one of the distinct advantages of SONIC, we've been reinvesting in our facilities over the past 20 years. We continue to do that. But unlike prior retrofits, this retrofit has the unique opportunity to engage the consumer in a way that not only engages them for 1 year with a physical refresh, but for years to come with a digital technology pieces, whether it's the social, whether it's the mobile.

We talked about national media and the importance of that. One thing that I don't want to get lost is the importance of having an innovative product pipeline and that can't get lost. A lot of people want to talk about importance of "Two Guys" coming back and how critical that was or the shift to national media. But we cannot underscore the importance of having a very strong product pipeline. At end of the day, our business is not only about engaging the consumer but providing very good, high-quality food. And a big part of that has been our product development team over the past year, so I want to make sure that we're able to recognize them. Because as you've seen, we've come out with very good products. And if you saw back starting in March of 2011 with the introduction of the 6" All Beef Hot Dogs, which were a great hit, how we continue to innovate on that front. On the drink front, freshly brewed green tea, which you'll have the opportunity to try in just a moment. Ice cream, the Summer of Shakes promotion. Clas Petersson has been with us a little over a year. I think since probably January of 2012. Mackenzie has been with us a lot longer, and her specialty really is drinks and ice cream. So these are 2 of our culinary experts, but I'll let James brag about them for a moment and talk to them.

James O’Reilly

Sure, so thank you. So just briefly, Clas has been a food guy his entire life, chef, restaurateur were, television celebrity in Sweden, moved to North America, has worked for some major blue-chip companies in their, leading their R&D functions. He's been with SONIC for about 2 years now, leading our R&D and packaging group. Mackenzie has been in the fast food business for a long time, SONIC for 5 years, and both of them have been contributing incredibly to the new products that we talked about this morning. So we just wanted to put some faces there and I also wanted to ask Clas just to tell you briefly what you'll be enjoying as your snack after this meeting.

Clas Petersson

Thanks. Nice to be here. Today we will present our signature drink, Cherry Limeade, for you. And we'll also like to take the opportunity to show you some tea. So we use to have Black Sea on the menu. And in April, we introduced green tea. So we're brewing green tea all day long in the stores and goes really good. So we have, at the same time, introduced 5 new flavors and they're all natural. And they are free from artificial coloring. So it's very nice for us to be able to take and we're proud to serve them. So you can pick a sweet one or you can pick one that we sweetened lightly with Splenda. So thanks.

Claudia San Pedro

We'd also like to thank John and Bridget which are behind us, please turn around. They are an important part of our digital technology initiative with pops, our point of personalized service, and they've been involved in the forefront. And as you know with any R&D effort, there are many prototypes that you go through and some of them aren't so pretty. So they've been in there from the beginning. And so it's nice to see the outcome we have today, which is a great product for you. And with that, I'll turn it back over to Cliff for the summary.

J. Clifford Hudson

There we go. There we go. You can hear that now? Good. Even I can hear it so. One of the little note I'd like to add, a little clarification of a number I gave earlier in question was what's the population of Jamestown, Tennessee. I said 1,200. I want to correct that, it's 1,900. So I don't want to be accused of exaggerating to make the point. So at any rate -- but good to see that opening in Jamestown, Tennessee. It's gone exceptionally well and I suspect we're going to have a great ROI on that store.

So hopefully one of the things that you can see as we've walked through this today, if you -- particularly, if you follow the company for a number of years, you can look at cycles of the business with multiyear initiatives and multiple initiatives that drive the business, move it forward. I made reference earlier to when the question came up about getting capital investment that's required caused development to slow? I made reference to the late 90s in which we had retrofit costs across the entire system, increased marketing expenditures, new daypart initiatives of new products, ice cream, drinks, et cetera. And we went through about a 5-year period with just enormous growth and average unit volume, average unit profitability, new sales growth, new store -- whether new store growth. And in the earlier part of the last decade we've shifted dollars to national media on a more limited scale, first a quarter and then half of what we were doing, so more limited to versus where we are now. But a shift in media allocation, the implementation of breakfast, the roll out of our PayEase [ph] program, so the customers could pay with credit cards. We again had a 3- or 4-year period with multiple initiatives staged through the system over time that had an enormous impact on average store sales, average store profitability and new store growth.

So hopefully one of the things we have conveyed to you today is that it is our management team's perspective, very much so mine, that we're focusing now on a multiyear period in which we will have multiple initiatives that we are confident will have a very positive impact on average store sales, average store profits and the wonderful thing about some of these initiatives, the ice and the pops piece, in particular, is a fundamentally different approach to engaging the customer and potential customers in a real 21st century digital communications sort of way. And I think it's a way that will separate us further versus a good part of our competition. So this will be a very fun process for those of us closest to the brand, a very fun process to see the implementation and the usage and I have no doubt it's going to go places that we aren't even imagining today, because the way consumers will use it and the organic nature of it over time. This is going to be a lot of fun. But the great thing is multiunit -- multiyear, multiple initiatives to grow sales, grow profits, expand the brand and a very focused effort from our standpoint, at this point, for new store development as well. So you can see the combination of these and looking at this slide, those that are a little bit more immediate in terms of beginning implementation and rollout, all having impact store level and brand level. And this is no small part. What gives us the confidence? As we look forward to the business, over the next several years, we don't see these as isolated initiatives. We see them as initiatives that help drive the success of other initiatives. And this one of the reasons why we go back to this flywheel sort of comparison of how media pipeline store level technology initiative can very much help other initiatives, the activities that are occurring, the investment in the technology helping drive traffic, helping drive sales, both helping drive new unit expansion, the combination of those elements driving our ascending royalty rate, the combination of all of them driving our cash and our opportunity for use of cash and, most specifically, as it relates to share repurchases. So our perspective is, we're entering into a several year cycle of this kind of multiple initiatives that help the success of other initiatives and will really take our business to a different place over time.

So this depiction that you've seen, the same-store sales growth and its contribution to this 14% to 20% EPS growth rate. Same-store sales helping drive operating leverage store level and corporate level. In turn, also now getting the development pipeline moving and growing dramatically over the next several years versus where it's been for the last 2 or 3, and that contribution to the EPS growth rate. The ascending royalty rate, we've had historically these initiatives causing that to move to a level it's not been in the last couple of years, and the consequence for us increasing cash levels over time and its contribution to that EPS growth rate, with the consequence being a 14% to 20% EPS growth rate on a sustained basis. So initiatives, we're very excited about as a company but very excited about for our brand and what it means for our average operator, because we think it's going to take us to a very different place over the next 5 years and it's going to be fun to participate in that along the way.

That is the end of our presentation today. I much appreciate all of you being here and participating in this. We'll be here for a while as we plan on being here a lot longer. So we're happy to continue to visit informally. It's hard for me to imagine there weren't any questions over my summary. But if we want to do that thing here in this -- with a formal environment, we can do Q&A, otherwise, Claudia, what are we doing? We're heading to the snacks and drinks, here, at the back of the room?

Claudia San Pedro

Yes, so lunch will be ready momentarily. And, as well, again invite you to come by and try our Cherry Limeades and green tea. With that, though, we do have some time for additional questions. If there aren't any questions, then we can go ahead and adjourn. All right.

J. Clifford Hudson

Okay. Thank you very much. Management will be around. We look forward to continue to visiting with you.

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